Even though workers compensation insurance is a federal mandate, there is some degree of latitude given to the individual states to determine how to manage it. Each state has an organization or governing body assigned to regulate its own workers compensation program.
The majority of the states work with a company called the National Council on Compensation Insurance (NCCI), which handles workers compensation in those states. A number of other states use alternate independent bureaus to govern workers compensation; these include California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Texas, and Wisconsin. In contrast, the states of Washington, Wyoming, North Dakota, and Ohio are “monopolistic,” which means that both insurance and claims management within those states are handled by the state governments themselves.
No matter which approach your state has taken, one of the primary responsibilities of your state’s governing body is to issue an experience modification rating (or “e-mod rating”) to each business as an indication of risk. Your company’s e-mod rating, coupled with other factors, such as payroll information and classification codes, determine how insurance companies price workers compensation insurance for your specific business.
As a business owner or executive, paying close attention to your e-mod could potentially save your company thousands of dollars.
So how is a company’s e-mod factor calculated? It all comes down to claims.
Every company begins with a factor of 1.00. After three complete years of experience, a company’s e-mod factor will begin to go up or down based on the company’s claims history. An increase in the factor above 1.00 signifies the company is experiencing a higher-than-average claims experience. In contrast, a decrease in the factor below 1.00 means the company has claims that are lower than average. Accordingly, each bump or dip in a company’s e-mod is directly tied to the debit or credit it is receiving on workers compensation premiums.
For example, if your business’s e-mod rating is 1.23, then you are receiving a 23% debit (or increase) on your premiums. On the other hand, if your e-mod is 0.90, then you are receiving a 10% credit (or decrease) on your premiums. Keep in mind that if your e-mod is 1.23 and your competitor’s e-mod is 0.90, then that means your competition is paying about 33% less on their workers compensation premium for the same amount of payroll.
There are several other factors that are used in the e-mod calculation, such as the stabilizing value, total expected losses, the minimum mod point, the ballast, the frequency and severity mod point, as well as the frequency and severity loss factor. All of these are data points given to and used by the governing body that calculates your e-mod.
How does NCCI or other organizations receive this information? By law, workers compensation carriers are obligated to report data about each insured company’s workers compensation policy—including premium and claims payments—to your state’s governing body. Once this organization receives this information, it applies the received data to each company’s file based on the Employer Identification Number (EIN). An updated e-mod is calculated based on the company’s most current information. Credits or debits are then applied based on how well each company is doing.
As a business owner or executive, paying close attention to your e-mod could potentially save your company thousands of dollars. Likewise, ignoring your e-mod can cost you big. Also, many industries require knowing your e-mod factor before giving you work, so a high rating can lose you valuable jobs and growth opportunities. The e-mod factor is not set, managed, or altered in any way by your agent or insurance company.
Just like a personal credit rating directly impacts the rate on a loan, your company’s e-mod rating affects the price you’ll pay for workers compensation insurance. It is incumbent on any business owner or executive to do everything possible to improve the safety of the workplace and lower the company’s e-mod factor—thereby lowering insurance premiums and keeping employees safe. The good news is, there are programs that your risk manager can help you implement to both evaluate and mitigate the risks in your workplace.