Experience modification explained

An experience modification, commonly called an "e-mod," is an important factor used to adjust your workers’ compensation premium.

What is an experience modification factor?

An experience modifier (e-mod) is a multiplier applied to the premium of a qualifying policy and provides an incentive for loss prevention. The e-mod represents either a credit or debit that is applied to the premium before discounts. If your company’s loss experience is more costly on the average than other company’s loss experience in your industry, the result is a debit e-mod, or surcharge on premiums. If your company’s experience is less costly than the industry average, you will receive a credit e-mod, or discount, on your premium.

Who determines experience ratings?

The National Council on Compensation Insurance (NCCI), based in Florida, computes experience ratings for all businesses and industries in Colorado. The same factors are used to calculate each employer’s experience modification regardless of which insurance company provides coverage. The e-mod stays with the business even if the business is sold.

Who qualifies?

All employers whose premium before discounts averages $4,000 or more a year for a three-year period are eligible for an experience modification rating. Approximately 90 percent of workers’ compensation premium dollars come from experience rated policies. Employers with less than $4,000 in premium are not experience rated because of their low exposure to claims. Employers who do not qualify for e-mod pay the basic industry rate for their coverage, net of any applicable adjustments from Pinnacol Assurance.

What years are included in e-mod calculations?

E-mods are based on claims costs for a prior three-year period. An interval year is incorporated between the current year being rated and the three-year period. The interval year is the year previous to the current year and is excluded because ultimate claims costs and final premium amounts are not known for that year at the time the e-mod is being calculated.

How is an e-mod calculated?

  • The e-mod is determined by comparing actual losses to expected losses for the experience period based on the employer’s industry. In other words, clerical employees are compared only to other clerical employees, etc.
  • The number of man-hours worked is used to indicate the employer’s audited premium dollars, since an employer with 20 employees would be expected to have more claims than an employer with two employees. For example, a roofing business is only compared to other roofing companies with approximately the same gross premium amount. 
  • The formula adjusts the actual losses used so that frequency is given greater weight than the severity of an injury or illness. For example, six claims that occur over a three-year period totaling $20,000 have a greater impact against the e-mod than one claim in three years totaling $20,000. Again, both industry and business size are considered.
  • Claims with zero costs are not included in the experience modification calculation.

How can I lower my e-mod rating?

A sound safety program, a return-to-work plan and loss prevention procedures will lower your e-mod, and are crucial to helping you effectively manage your workers’ compensation costs. The following example compares two companies who perform the same services and employ the same number of workers:

XYZ Company

  • The XYZ Company has a strong safety program, a good claims history, and a low e-mod.
  • The XYZ Company has an e-mod of .85, which results in a 15 percent discount on their workers’ compensation premium compared to other companies in the same industry. Because XYZ has a credit e-mod, the company only pays $.85 for every dollar of coverage received.

ABC Company

  • The ABC Company has an inadequate safety program, a large number of claims/losses, and a high e-mod factor.
  • The ABC Company has an e-mod of 1.25. The ABC Company pays 25 percent more for their workers’ compensation insurance than other companies in the same industry classification. For every dollar of insurance coverage received, the ABC Company will pay $1.25.

Understanding how an e-mod is calculated and how it applies to your premium can help you determine if your company’s loss prevention efforts are effective or if there are further steps your company can take to lower the e-mod. For more information about e-mods and how to lower your workers’ compensation insurance costs, contact your agent or Pinnacol underwriter.