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How Does Experience Modification Affect Your Premium?

Insurance carriers use experience ratings to calculate premium.

If your business has had a higher-than-average rate of injury or illness, the words "experience modification" probably sound like nails on a chalkboard. If you don’t know what an experience modification is or how to influence it, keep reading! It is an important factor affecting your insurance costs and something employers should not ignore.

In order to understand what an experience modification ("ex mod") is, it's helpful to first understand how insurance works.  A basic idea of the workers’ compensation insurance market is that a group of businesses are sharing the risk of experiencing a loss. The losses of the entire group can be predicted with a fair degree of accuracy; however, it is not possible to predict which of the group members will actually have a loss. Because of this, the cost of insurance is apportioned to each member on the basis of average cost for the group. It is assumed that each member’s own experience will approximate the average. In reality, some company's loss records are much worse than average, and some are much better.

You are probably thinking, "If my loss record is better than average, I should get some sort of reward." You aren't alone on that idea.  Experience rating was created by state regulators to encourage workplace safety.  Your ex mod is determined by comparing the actual losses your business has during the experience rating period to the average expected losses for all members of your same industry classification (Actual Losses/Expected Losses = Experience Modification).  

You might also be wondering, "Are all claims equal?" No, they aren't.  Recognizing the difference between frequency and severity is fundamental to understanding experience rating.  While having one severe workplace injury can be a matter of chance, having a frequent occurrence of smaller workplace injuries is largely controllable.  A history of small but frequent injuries can indicate that a company might face larger ones in the future.  Therefore, a greater emphasis is placed on injury frequency when calculating the ex mod because it is a better measurement of management effectiveness.

The experience modification is applied to the starting premium which provides a company with its modified premium.  (Starting Premium X Experience Modification = Modified Premium)

If an employer’s loss record is better than the average, the employer will have an ex mod below 100%, or a credit. 

For example, if “Company A” has a starting premium of $50,000 and an ex mod of 75% (or .75) based on its loss record, the company would pay $37,500 in net premium. 

However, if that same company experienced a worse loss record than its industry classification average, it would have a higher ex mod, or a debit. If its ex mod was 125% (or 1.25), it would pay $62,500 in premium.

As you can see from this example, having a better-than-average loss record can give you a competitive advantage over other businesses in your industry classification.

How long do workplace accidents affect your ex mod?
The "experience rating" period is three policy years, excluding the most recent policy year (2012). That means the accidents your company experienced during your 2009, 2010 and 2011 policies are still factoring into your ex mod in 2013—and the accidents your company experiences this policy year (2013) will still factor into your ex mod for your policy in 2015, 2016 and 2017.

How can you lower your ex mod?
We want to emphasize this important point: The decisions you make have a significant impact on your ex mod. The next step is probably obvious—you must make safety a priority. By improving workplace safety, you can help lower the chance of injury or illness in your workplace. Over time, this reduction in claims can lead to a lower ex mod.

Of course, even in the safest workplace, accidents can still occur. The claim management services an insurance company provides will impact the ultimate cost of a claim, which is often the driving factor behind a high ex mod. 

Zenith's success is proven—for more than 30 years, Zenith has achieved a loss ratio 20 to 30 points better than the industry. Our specialized experience and resources can help you reduce your ex mod over time and ultimately improve your bottom line.

Additional Facts:
Experience rating doesn’t apply to every business. An employer qualifies for experience rating if its base premium exceeds a minimum set by its state.

In general, an employer must have been insured for at least two consecutive policy years to be experience-rated. Once you have an experience rating, it must be used in calculating your workers’ compensation premium.

States have varying rules that insurance companies must follow when calculating your experience rating.

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