Key Takeaways
- Impact of Experience Modifier:
- Your experience modifier can significantly affect your workers’ compensation premium. Lower modifiers result in cheaper premiums.
- Worksheet Components:
- The experience rating worksheet contains crucial data, including business details, three-year history, class codes, claims, and the formula used for modifier calculation.
- ERA and Its Purpose:
- The Experience Rating Adjustment Rule (ERA) reduces the impact of medical-only losses in most states, encouraging employers to report all losses for accurate rating.
If you are a business that purchases workers compensation and typically spends more than $4,500 annually, you’ll receive an experience modifier that can alter your premium. Here’s the cheat sheet for the experience rating worksheet that will be used to calculate your experience modifier.
Essential Knowledge
- In workers’ compensation insurance, the experience rating influences how much you have to pay.
- The experience modifier is based on your 3 most recent policy periods and the data included such as payroll, job description and claims.
- The experience modifier is multiplied by your annual premium to raise or reduce it.
- The experience rating worksheet is calculated by your states rating bureau will detail how your company’s experience modifier was derived.
What Is The Experience Modifier?
The experience modifier (AKA the experience mod or x-mod) is a numeric factor that can change your annual premium for workers’ compensation. You want your mod to be as low as possible so your premium will be cheaper.
Who Issues The Experience Rating Worksheet?
Depending on where your company has employees determines who makes your experience mod.
If your business operates in the following states, then the National Council on Compensation Insurance (NCCI) generally calculates the experience mod.
If your business operates in the following states then each state will calculate the experience mod that applies to your business.
What Is On The Experience Rating Worksheet?
Below we’ll identify the key areas of the data on an experience rating worksheet. For the example below we’ll use the National Council on Compensation form which is the most dominant. The data contained on all reports is similar and can be cross referenced.
Account Summary Section
The summary section appears at the top of the experience rating worksheet. The subsections include:
- Risk name – The name of your business.
- Risk identification number – A 9-digit number the NCCI assigns your company.
- Rating effective date – When your modifier takes effect, which is the same as the anniversary rating date.
- Production date – When your modifier was calculated.
- State – If you operate in one state only, this will indicate that state. If you operate in multiple states, it will say interstate.
Experience Period
Your experience rating is calculated based on a three-year history of your payroll and losses.
Find out more about the experience period here.
Class Codes, Payroll, and Expected Losses
You’ll see class codes, payroll, and expected loss data on the left side of the worksheet. Claim information can be found on the right side.
Divide your payroll by 100 and then multiply it by the ELR to find your expected losses. The ELR data is unique to each year, state, and class code.
Primary vs. Excess Losses
If your business goes loss-free for many years, but then suddenly receives one large claim, it would be terrible if it severely impacted your experience mod. That’s why losses have been divided into two buckets for the calculation: primary loss and excess loss.
Loss Threshold
Most states have established a threshold to separate primary losses from excess ones. Any losses amounting up to this threshold count as primary losses. Losses that go over the threshold count as excess losses and carry far less weight in the calculation to reduce the impact of severe claims.
The NCCI uses a Discount Ratio (D-ratio) to determine what counts as primary losses. The primary loss is determined by multiplying your expected losses with this discount rate.
Claims & Actual Incurred Losses
In the last five columns, you’ll find the claims and losses your business has actually sustained. It might look something like this:
Claims Data
The claim can be either listed as a claim number (such as “112233”) or as a bundled group of claims (such as “NO.5”, which means 5 small claims were grouped together).
Small are typically combined if they are under $3,000 and involve the same kind of injury.
Injury Code and Status
The Injury Code (IJ) column indicates what type of claim was made. Each code corresponds to a different kind of injury claim. For example, an injury code “5” means a temporary disability claim.
The status shows whether the claim is still open (“O”) or closed (“F” for final).
Actual Incurred Losses
These losses are what your insurance company has paid or reserved in workers’ compensation benefits to injured workers on your behalf.
Actual Primary Losses
These losses represent how much of your total losses are considered primary losses.
Actual Incurred Loss – Actual Primary Loss = Actual Excess Loss
Experience Rating Formula
The last worksheet section shows the experience rating formula and values that were used to calculate your specific modifier.
Rating Factors
For the statistical calculations, two factors are used:
- Weight Factor – This determines how much of your actual excess losses are used in calculating the modifier. It increases as your company grows larger.
- Ballast – This serves to stabilize your modifier so that ideally, it doesn’t deviate too far from a 1.0 value.
Totals
This is the equation used to calculate the experience modifier:
Actual Losses ÷ Expected Losses = Experience Modifier
However, your actual and expected losses are adjusted before the mod is calculated.
Actual losses are the sum of:
- Actual Primary Losses – If the Experience Rating Adjustment applies in your state, only 30% of your medical-only claims will be included.
- Stabilizing Value – Multiply your expected excess losses by (1 – weight factor).
- Ratable Excess Losses – Multiply the weight factor by your actual excess losses.
Expected losses are the sum of:
- Expected Primary Losses – Your rating organization will give you this number.
- Stabilizing Value – Multiply your expected excess losses by (1 – weight factor).
- Ratable Excess Losses – Multiply the weight factor by your expected excess losses.
What Is The Experience Rating Adjustment Rule?
Experience rating adjustment (ERA) is a rule that applies to medical-only losses.
A medical-only loss (IJ code type 6) is a loss that doesn’t involve lost wages whatsoever.
Only 30% of a medical-only loss will be used to calculate your experience rating. The other 70% is ignored. If your business can work towards keeping claims medical-only, you can lessen their impact on your premium.
Exception: If the claim ultimately results in disability benefits being given to the injured worker, the ERA will not apply.
Which states apply the ERA?
Most states use the ERA to decrease how much medical-only claims affect premiums.
In 2023, the primary threshold for NCCI states is $18,000 to $18,500, depending on where you are at in the rating year update.
These following states have different thresholds:
- California: ERA does not apply, 100% of claim value is used up to a sliding threshold
- Colorado: ERA does not apply, 100% of claim value is used up to the threshold
- Delaware: ERA does not apply, 100% of claim value is used up to a sliding threshold
- Massachusetts: ERA does not apply, 100% of claim value is used up to the threshold
- Oregon: ERA does not apply, 100% of claim value is used up to the threshold
- Pennsylvania: 100% of the loss is used up to a threshold of $42,500
- Wisconsin: 100% of the loss is used up to the threshold of $18,000 as of 10/1/2022
Why does the ERA exist?
Lawmakers came up with the ERA in the late 90s to encourage employers to report all losses. In the past, many employers avoided reporting claims in the hopes of reducing their impact on the experience mod.
It’s natural for business owners to seek ways to pay less for their insurance. If you’re confused about experience ratings, feel free to reach out to our team at Mod Advisor to see how we can help you.