Workers Compensation insurance covers employees who are injured or contract a work-related illness. Basically, it covers medical bills, rehabilitation costs, a portion of any lost wages and/or permanent physical impairment. Fundamentally, your Workers Comp premium is Payroll x Class Code premium rate x Experience Modification (E-Mod). Here we will unpack how your E-Mod is calculated and the major impact it has on your premium.
The E-Mod is determined by comparing your company’s Workers Compensation claims history against industry averages in order to predict the risk of future claims. The average E-Mod starting point is 1.0. It is important to realize that the comparison is very specific; that is, your claims history is benchmarked against employers in your state(s) who are in the same classification code as your business. If, for example, you are a roofer in Phoenix, your claims results are compared against other roofers in Arizona. If you are doing business in multiple states, your total results may be combined into one NCCI experience modification or, in a handful of states like California that create a state-specific experience modification, that only applies to premium in their state. This would result in the possibility of more than one experience modification to keep up with.
If your company has an E-Mod of .85, your claims history is better than the average 1.0 and is hopefully the positive result of your safety programs, Return-to-Work programs and other strategies you’ve implemented to help mitigate and reduce the potential for costly claims. If your E-Mod is 1.25, your company has experienced a higher level of claims than other employers in your industry in your state. There is some significant nuance to this, but with proper knowledge and strategy can be put to your advantage.
One Step Further: The Importance of the Minimum E-Mod Benchmark
Your “Minimum E-Mod” is a significant indicator of your potential for financial improvement. Your minimum or “loss-free” E-Mod is what your E-mod would be if you had $-0- claims for the three-year period that makes up your E-Mod.
Two basic statistical principles underlie the formula:
- 1) The larger the premium size, the more reliable the actual record is in predicting future losses. Integral to the plan is a credibility scale so that the actual historical record is given more weight/credibility as the size of the employer increases. Even the smallest employers have some credibility, but for practical purposes, it is necessary to have a premium threshold, or a minimum point, for eligibility.
- 2) The cost of an injury may vary over a very large range. Therefore, cost is less predictable than the fact that an injury occurred; to recognize and account for this, primary and excess loss components are used.
So, larger companies have a lower “Minimum E-Mod” starting point which is an advantage. However, larger companies are penalized for larger claims at a higher rate than smaller companies. This is a sliding scale, and you would want to know this number for your company.
What is the real value of knowing this number? Let’s say a CFO is satisfied with his experience modification of .84 because it is 16% better than the average. While that is true, if your “Minimum E-Mod” is .62 then there is still a 22% margin for improvement to think about. Without that context, you could miss opportunity for meaningful gains.
E-Mod calculations can be complicated for organizations to understand and manage. The Workers Compensation specialists at Strong Tower are available to analyze your E-Mod and show you where and how you can make improvements. We encourage you to take our quick online Intelligent Risk 365 quiz to see if you’re doing all you can to manage your E-Mod. You can also call us at 866-822-6774.
