Many employers have their workers’ compensation premiums adjusted according to their experience modification.
However, too many employers don’t understand how this number is calculated or how it affects their premiums.
“The experience modification is an adjustment that is made to the workers’ compensation insurance premiums of companies that meet or exceed a certain size level,” says Dennis Ianovale, a vice president with ECBM Insurance Brokers and Consultants. “If your annual premium is more than $3,000, an experience modification will be assigned.”
Smart Business spoke with Ianovale to learn more about the experience modification and how it affects your premiums.
Who calculates the experience modification, and how is it calculated?
Experience modifications are calculated by ratings bureaus set up to collect data from the insurance companies and promulgate rates. Most states use the National Council of Compensation Insurance (NCCI). Some states, including Delaware and Pennsylvania, have their own ratings bureaus.
The ratings bureau bases its calculations on the prior year’s payroll and losses against industry averages in similar workers’ compensation classifications. The computation takes into account a rolling four-year period, using the first three of the last four years.
The insurance company has a responsibility to report this information at least six months prior to the experience modification coming out.
How does the experience modification affect employers?
The experience modification adjusts the premium based upon past loss history. If the company performed better than average, it receives a credit against the standard premium. If its losses were higher than average, the premium is debited.
Obviously a higher-than-average loss history results in higher costs for the employer and can result in increasing its costs against those of its competition. Conversely, better-than-average loss experience reduces expenses, resulting in higher profitability. Because losses are, to a large extent, controllable, it is an area of overhead that you can manage.
Additionally, in some industries, primarily construction, the experience modification is increasingly being used as a benchmark of safety when a company is bidding jobs. It is common to have within the bid specifications a requirement that the bidding company have an experience modification under 1.0. If your experience modification is higher than 1.0, you’re not even allowed to bid the jobs.
What can employers do to keep their modification low?
The best way to keep your experience modification low is to prevent losses from happening in the first place. Here are some steps you can take to get there.
- First, develop a formal written safety program. The program should be designed to meet the needs of your particular industry and address many of the risks you face.
- Form a safety committee. A committee should have representatives from both management and the work force. The committee’s responsibility is to help identify problems and make recommendations, investigate loss causes and promote education of safe work habits. Some states, like Pennsylvania, have a credit for companies that meet the state Safety Committee guidelines.
- Have routine safety meetings with employees to talk about the exposures of that particular field. The more you talk about safety, the more committed you are to safety, and the more it will impact your employees.
- Understand that your corporate culture plays a big part in safety practices. Imbed safe work practices and a no-loss attitude in your company. If a loss does occur, investigate to uncover the root cause and take corrective action to prevent it from happening again. Treat near-misses the same as an accident or injury. It is critical that the message come from the top and that employees know that increasing safe work habits and reducing losses are important to the owners or senior management.
There are tremendous resources available and your broker should be able to guide you through the process.
Dennis Ianovale is a vice president with ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100 or email@example.com.