If you’re trying to rein in your workers’ compensation costs, your experience modification rate (EMR) is a good place to start. Your company’s EMR can play a major role in determining your insurance rates, and the actions you take may cause your EMR to increase or decrease.
What is an EMR rating?
The experience modification rate is sometimes called the x-mod or the experience factor. It’s a figure used in workers’ compensation premiums to determine a company’s rates and is based on your expected losses compared to your actual losses.
For example, imagine there are two roofing companies. The companies are in the same city, have the same number of workers and pay their employees the same amount, all of which means that their base workers’ compensation rates are the same. However, one of the roofing companies prioritizes safety and has very few on-the-job injuries, while the other roofing company has many worker injuries, including several serious ones. Most people would agree that the latter should pay more for workers’ compensation than the former – which is exactly what the experience modification rate ensures.
An experience modification rate of 1.0 indicates that the company has a loss history that is typical for its industry and size. An experience modification rate below 1.0 indicates that the company has a loss history that is better than the industry average, while an EMR above 1.0 indicates a loss history that is worse than average.
The EMR Insurance Cost Impact
Since workers’ compensation is regulated at the state level, calculations vary depending on the state. However, the basic formula looks at three factors:
- Payroll (divided by 100)
- Class code rate
- Experience modification rate (EMR)
Insurers multiply these three figures to determine a company’s workers’ compensation costs. Because payroll is included in this calculation, larger companies with higher payrolls tend to pay more for workers’ compensation than smaller companies. This also means that companies with higher-paid employees may pay more.
The class code rate is based on the level of risk associated with the work being carried out. Since some industries and jobs have a much higher risk of injury or illness, companies operating in these fields may have higher workers’ compensation rates. Finally, as previously mentioned, the experience modification rate is based on the company’s loss history.
Claims Frequency vs. Severity and Your Experience Rating
Your loss history is based on two factors: claims frequency and claims severity. Claims frequency tells you how often claims occur, while claims severity tells you how costly those claims are.
As an example, if the average workers’ comp claims frequency for companies of your size and industry is five per year and your company experiences 20 claims per year, your company would have a very high claims frequency. However, if all 20 of those claims were for very minor injuries that only required a single day away from work, your company would have a low claims severity, since the claims that did occur were for minor injuries.
On the other hand, if your company has one claim per year, you have a good claims frequency. But, if that claim was very severe with a high cost, your company would have high claims severity.
According to the National Council on Compensation Insurance, claims frequency matters more than claims severity when calculating a company’s experience modification rate. The reasoning behind this is that claims frequency tells you whether a company is maintaining safe practices, while claims severity is often down to chance. If you have a lot of small claims, you may have poor job site safety practices – meaning that it’s only a matter of time before a large claim occurs.
How to Improve Your EMR Score
Your EMR will typically be based on your prior three years of claims history, excluding the current year. If you have a bad year with a lot of employee injuries, expect workers’ compensation costs to increase and for this increase to last about three years. If you have fewer claims in the following years, your EMR (and your insurance costs) will typically improve. This means the best way to improve your EMR score is to reduce the frequency of injuries by promoting safe practices.
What is the EMR for new companies?
Since new companies don’t have a loss history, they don’t have an experience modification rate. They receive the neutral rate of 1.0, which will neither increase nor decrease their workers’ compensation premium. Once a company has been in business long enough for it to be possible to calculate an EMR, the insurer will apply this figure to premium calculations. A company usually needs three years of claim history for this to happen.
This means that new companies that promote safety might see their workers’ compensation premiums drop after three years, while companies with poor safety practices may face a big hike.
Promoting Safe Behavior
To reduce your workers’ compensation premiums, you need to lower your experience modification rate. To do that, you need to reduce the frequency of worksite injuries.
- Create an employee safety program. Identify hazards and develop plans to mitigate those hazards.
- Train your workers. Don’t assume that new workers know how to perform their work safely. Even if they’ve worked in similar roles before, you don’t know what safety practices (or lack thereof) they followed at their old worksites. Your experienced workers may also need occupational safety refreshers.
- Provide personal protective equipment – and make sure your workers use it. Personal protective equipment keeps workers safe, but only if workers use it correctly and consistently. Make sure workers have access to personal protective equipment that fits properly and train them on the correct usage.
- Learn from injuries and near misses. Treat safety incidents as learning opportunities. Assess each situation to determine the root cause and what you can do to prevent future injuries.
- Prioritize employee retention. Research from Travelers found that 35 percent of workplace injuries occur during an employee’s first year on the job. If you have high employee turnover, you may also have a higher injury rate because so many of your workers are inexperienced.
- Build a culture of safety. Safety policies mean nothing if workers don’t follow them during day-to-day operations. Risks are higher when workers feel pressured to cut corners in order to meet tight deadlines or when managers and senior workers set a poor example by not using personal protective equipment. Build a strong culture of safety from the top down.
Do you need help bringing your experience modification rate down? Higginbotham can support your safety and loss control efforts and help you make the most of your commercial insurance coverage. Talk to one of our workers’ comp specialists to learn more.
