What is your EMR?
The experience modification rate (EMR), or e-mod, plays a pivotal role in determining the pricing strategy for workers’ compensation coverage. By comparing the actual loss experience of the company with the average, expected loss experience of a company with similar risk classifications, the EMR is used as a multiplier to increase or decrease the workers’ compensation premium calculation. The EMR of one (1) means the company is paying the industry average of workers’ compensation insurance premium. When the EMR is less than one (1) the company is paying less than industry average of workers’ compensation insurance premium, which is a good thing. When the EMR is more than one (1) the company is paying more than industry average of workers’ compensation insurance premium, which is a bad thing as it increases insurance costs. Generally, claims remain in the determination of the EMR for 4 years. For companies in sectors like construction or oil and gas, the e-mod also significantly impacts the bidding process and the awarding or not of projects.
Who will be affected?
In the 36 states where the National Council on Compensation Insurance (NCCI) governs the workers’ compensation system, such as West Virginia, substantial changes are on being implemented this year on a rolling basis. Pennsylvania, which operates with a distinct experience rating plan, has announced revisions to be effective 4/1/2024. Ohio, which operates a monopolistic workers’ compensation insurance system, is evaluating the proposed changes and will communicate its adoption decision in due course.
What Elements are Included in Determining the EMR?
Very basically, the elements in the algorithm used by insurance companies to determine the EMR for each company include the number of claims, severity of the claims, frequency of claims, amounts of primary costs, amounts of excess money, reserves amount, credibility, and loss limitations.
What are the key changes to the Pennsylvania experience rating plan?
Eligibility: An employer will be eligible for an experience rating at $5000 of payroll rather than the current $10,000. This means more small PA employers will now qualify for an experience rating.
Credibility: The range of credibility factors employed in the experience rating formula will shift from the current range of 28.3%-93.8% to 69%-97.4%. This expanded credibility range will place greater importance on the actual losses incurred by the employer within the experience rating formula.
Loss Limitation: Currently, the first $42,500 of any one accident is included 100% in the experience rating calculation. Anything over $42,500 is not included in the experience rating calculation. The new plan will move to a variable model that will use a schedule of 88 points to determine the loss limit. This loss limitation has is designed to shelter the impact of severity driven losses within the rating formula.
Swing Limits: Currently, the greatest an experience modification can change in any one year is +/-25%. Under the new plan, the swing limit will move to +/-40%. This change will increase the volatility of the e-mod as higher frequency and severity experience will both have a greater impact on the e-mod calculation.
Maximum Mod: A maximum mod calculation was introduced for all employers. This will be based on the expected losses which will vary per employer. The Maximum Mod helps prevent the mod from becoming excessively high due to one or more large losses that may not accurately reflect the overall loss experience. The Maximum Mod approach primarily benefits small risks while swing limits provides stability for all risks.
What are the key changes to the NCCI’s Experience Modification Factor for 2024?
While NCCI assures that these changes will have an overall “premium neutral” effect on the system, it’s important to note that the impact won’t be neutral for every business. There are two specific changes that are being made by NCCI only:
A transition from a nationwide primary/excess split point to a state-specific split point and implementation of state-specific split points.
A revision of the calculation of the state accident limitations.
State-specific Split Points
The split point plays a crucial role in the workers’ compensation experience rating formula. It represents the specific dollar threshold at which each claim is divided into two distinct components:
Primary— Comprising the expenses of each claim incurred below the split point.
Excess— Comprising the expenses of each claim incurred above the split point.
Primary costs are given full weight in the experience algorithm. Excess costs, on the other hand, receive only partial weight in the experience algorithm. For instance, if the split point stands at $15,000, a claim amounting to $50,000 would contribute $15,000 to the primary category and $35,000 to the excess category.
In the calculation of the EMR, primary losses carry more weight than excess losses. Consequently, primary losses have a more substantial impact on the EMR.
State Accident Limitations
The state-per-claim accident limitation (SAL) serves to mitigate the impact of significant claims on the EMR, as exceedingly large outlier claims are typically not indicative of future loss patterns.
The revised definition of the SAL results in lower caps across all states. This adjustment makes experience rating modifications less responsive to exceptionally large outlier claims while still maintaining their ability to predict future loss trends accurately.
It is projected that the EMRs for the majority of employers in states using the NCCI system for workers’ compensation ratings will undergo changes of less than +/-5%. This means that for some individual employers, their premiums could increase.
What are the Possible Results of These Changes?
With these changes to the EMR calculation, more Pennsylvania small employers will have an annual EMR, more small employers in the states governed by NCCI will receive an annual EMR, more emphasis will be placed by the insurance companies on the actual losses, there will be increased volatility with higher frequency and severity ratings which will increase the EMR, and higher primary losses will increase an employer’s EMR.
While NCCI assures that these changes will have an overall “premium neutral” effect on the
For more information and/or assistance, contact:
Wayne Vanderhoof CSP, CIT
Sr. Consultant/President
RJR Safety Inc.