What is experience rating? Everything employers need to know

Definition and overview of experience rating

Experience rating is when an insurance company adjusts your insurance premium rates based on past claims and losses compared to industry-expected losses. Instead of using standard rates for everyone, insurers use your loss history to determine how much risk you pose. And that risk plays an important role in your premiums. But what does this mean? In a nutshell:

• A good loss experience can lower your insurance premium
• A poor loss experience can make your premium higher

Your experience rating applies over a defined time period, often called the experience rating period, during which your past claims are reviewed.

Experience ratings incentivize companies to improve safety and claim management because it financially benefits them. Now that we know the basics, let’s get more information on how the numbers come together.

How is experience rating calculated?

Calculating experience rating involves two key steps:

1. Insurers examine your loss experience during the experience rating period (often the past three years). They review the number and sizes of claims made during this period and compare this information with what is typical in your industry.
2. The insurer then applies an experience modification factor. The EMF ratio reflects your workers’ compensation loss experience compared to the industry average, which is set at 1.0. According to the Association of Governmental Risk Pools, an EMF below 1.0 means that your losses are less than average, typically resulting in a lower premium. An EMF above 1.0 indicates worse-than-average losses and usually leads to higher premiums.

The calculation is also influenced by your company’s payroll data, the type of work you do, and your risk management practices. The insurer adjusts the final premium based on the calculated experience rate.

This method rewards companies that have invested in workplace safety and effective claim management, while penalizing those with a higher loss experience.

Benefits of experience rating for employers

One main advantage of tracking experience rating is it incentivizes businesses to invest in safety and efficient claim management practices. Since a good safety record can lower their insurance premiums, employers are more likely to take steps to prevent accidents and injuries.

Another benefit is cost control. By basing premiums on actual loss experience, well run and high-performing businesses are typically rewarded with lower costs. Over time this system can lead to significant savings. Employers also benefit from increased risk awareness, which can contribute to a safer workplace.

Experience rating also helps to create a fair system. Instead of one-size-fits-all premiums, companies are charged based on their performance. Companies with better safety records enjoy lower rates, while those with poor records are encouraged to improve to qualify for more favorable rates.

Understanding experience modification factors

The experience modification factor is key to the experience rating process. It directly affects your premium rates.

What is an experience modification factor (EMF)?

The experience modification factor (also known as E-Mod) is a numerical value that reflects how your company’s loss experience compares to the expected industry average, which is benchmarked at a score of 1.0. Insurers calculate it using the number and cost of claims your business filed over the experience period.

Your experience modifier score will adjust your insurance premium. Companies with lower-than-average losses pay less, while those with higher-than-average losses pay more.

• For example, if your EMF is 0.8, your losses are 20 percent lower than the industry average, and you could be charged a lower-than-average premium
• On the other hand, if your EMF is 1.2, your losses are 20 percent higher than average, and you will likely face higher insurance costs

Moving on, let’s touch on which businesses qualify for E-Mod and other factors that can affect it.

Ownership changes and their impact on experience rating

Ownership changes, such as mergers, acquisitions, or changes in business structure, can impact your experience rating. When these changes occur, it can sometimes alter your loss experience history.

Mergers and acquisitions

When two companies merge or one company acquires another, insurers must consider the loss histories of both organizations. Insurers may review the combined loss experience over the experience period to determine a new EMF. This can sometimes lead to an increase or decrease in premiums, depending on how the loss experiences compare.

Change of business structure

Changes in your business’s structure, such as a shift from a sole proprietorship to a corporation, can also affect your experience rating. When a company undergoes a structural change, the insurer may need to reset the experience rating period. This means that your past loss experience may not fully carry over into the new structure, and you could see adjustments in your premium rates.

It is important to work closely with your insurance provider to understand how these changes will impact your experience rating.

Strategies for keeping experience modifications low

Maintaining a low experience modification factor is key to reducing your insurance premiums. Some strategies that can help you manage your experience rating effectively include the following:

Workplace safety initiatives

Investing in workplace safety is a great way to reduce loss experience. To achieve this, implement regular employee safety training, conduct routine safety audits, and encourage a workplace safety culture. Reducing accidents and injuries directly impacts loss experience and EMF. A safe work environment protects employees and helps lower insurance costs.

Claim management best practices

Efficient claim management is also essential. Work quickly and accurately to resolve claims  and establish procedures to handle incidents when they occur. Proper documentation and prompt accident reporting can reduce overall claim costs.

Regularly reviewing your claims data can also help identify trends and areas for improvement. These reviews allow you to take proactive steps in claims management, therefore minimizing the impact on your experience rating.

You should also stay informed about changes in regulations and best practices. This can include updates on how unemployment insurance works or changes in state-specific guidelines for SUI.