What's an "e-mod"? Experience modification explained

An experience modification, commonly called an "e-mod," is an important factor used to adjust your
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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 modification rating (aka an EMR or e-mod) factor is a multiplier applied to the premium of a qualifying policy and is meant to provide an incentive for loss prevention. The e-mod represents either a credit or a debit that is applied to the premium before adjustments. If your company’s loss experience is more costly on average than another company’s loss experience in your industry, the result is a debit e-mod, or surcharge on your premium. If your company’s loss experience is less costly than the industry average, you will receive a credit e-mod, or discount on your premium. The same e-mod factor is applied to all businesses that share common majority ownership and will remain with a business even if the business is sold to another owner.

Who calculates e-mods?

The National Council on Compensation Insurance (NCCI) is the rating bureau responsible for collecting and analyzing workers’ compensation data in Colorado, among other states. It will determine rates for all class codes and calculate e-mod ratings. NCCI applies factors consistently to calculate each employer’s experience modification, regardless of which insurance company provides coverage. NCCI’s Experience Rating Plan is mandatory, so if an e-mod is calculated for a business, it must be applied to the business’s workers’ compensation policy. 

Who qualifies?

Every employer whose premium meets the premium eligibility threshold established by NCCI is eligible for an experience modification rating. Employers that do not meet the premium threshold to qualify for an e-mod will pay the basic industry rate for their coverage, net of any applicable adjustments from Pinnacol Assurance. NCCI updates the premium threshold annually. If you would like to know the current premium threshold and your eligibility, please contact your Pinnacol agent or underwriter.

What years are included in e-mod calculations?

E-mods are based on claims costs for a prior period. The experience period is generally based on three years of experience, though it could vary depending on several factors. An employer’s rating effective date determines the experience period. The three years used are the past three years prior to the rating effective date, not including the current policy period or the most recent policy period. The most recent policy period is considered an interval year and is excluded because ultimate claims costs and final premium amounts are not yet known at the time of e-mod calculation.

How is an e-mod calculated?

The e-mod is determined by comparing actual losses the customer experienced to the loss amounts NCCI expected during the experience period for the employer’s industry. The calculation factors in the size of a business as it relates to the amount of payroll paid during the experience period. This factor is important because a bigger business with more payroll is expected to have more claims than a business with fewer employees and less payroll. Businesses similar in size and industry are compared to one another. For example, an accounting firm would be compared to other accounting firms of similar size, and not to retail stores or home builders, since their exposures and expected losses are different.

The formula used by NCCI adjusts the actual loss amounts so that the frequency of claims holds greater weight than the severity of the claims. This is because the cost of a specific accident is statistically less predictable than the fact that the accident occurred. The accident itself matters more than the cost, so NCCI’s Experience Rating Plan gives greater weight to accident frequency than to accident severity. 

Is anything not included in the e-mod calculation?

Yes. Claims that are denied or non-compensable, claims with zero medical or indemnity costs and fully fraudulent claims are not included in the experience modification calculation. In Colorado, an e-mod is calculated using claims costs net of deductible. If the policy has a deductible, that amount will be subtracted from the cost of the claim before being used in the calculation. 

There is also a per-claim accident limitation set by NCCI per state. Large losses are less likely to occur and are so infrequent that including the entire portion of the loss beyond a certain level in the experience period reduces the predictive ability of NCCI’s Experience Rating Plan. One large loss does not imply a pattern of claim frequency, so a state accident limitation caps each individual loss or occurrence if multiple claims arise from the same incident. The state accident limitation amount differs by state and may change year over year. If you have questions about state accident limitations, please contact your Pinnacol agent or underwriter.

How can I keep my e-mod low?

A sound safety program, a return-to-work plan and loss prevention procedures will help to keep your e-mod low and effectively manage your workers’ compensation costs. Carrying a deductible may also positively impact your e-mod since Colorado is a net-of-deductible state. If you’d like to discuss that in more detail, please contact your Pinnacol agent or underwriter.

The following example compares two companies that 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 0.85, which results in a 15% discount on its workers’ compensation premium compared to other companies in the same industry. Because XYZ has a credit e-mod, the company only pays $0.85 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.
  • The ABC Company has an e-mod of 1.25. ABC pays 25% more for its workers’ compensation insurance than other companies in the same industry classification. For every dollar of insurance coverage received, ABC will pay $1.25.

Understanding how an e-mod is calculated and applied to your premium can help you determine if your company’s loss prevention efforts are effective and 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 Pinnacol agent or underwriter.

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