Experience rating is a tool that helps insurance companies set rates for workers’ compensation, state unemployment insurance (SUI), and other types of coverage. It looks at past claims and losses, and then adjusts your premium rate accordingly.
What you’ll learn
What you’ll learn
Key takeaways about experience rating
- Experience rating adjusts your insurance premiums based on your past loss experience
- Experience rating helps to determine rates for workers’ compensation, unemployment insurance, and other coverages
- The experience modification factor (EMF) plays a significant role in calculating your premium
- Maintaining a good loss experience through workplace safety and efficient claim management can help keep your experience rating low
Below, we’ll help you understand experience rating, how it is calculated, and why it is important for employers to pay attention to it. We’ll also discuss what affects your experience rating, including the experience modification factor and how changes in ownership can impact your rates. Finally, we’ll share strategies to keep your experience modifications low and explain how HR software can help manage these processes.
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 experience rating works in group insurance
When setting up health insurance, life insurance, and other group benefits, insurers often rely on experience rating to determine premium rates. This is especially common among larger organizations or companies that use level-funded plans.
Instead of looking at the general population, carriers look directly at your specific group’s past claims to calculate future risk. In a nutshell, it ensures your business pays a premium tied to the health of your workforce — rather than a generic industry benchmark.
OnPay’s Vice President of Insurance, Andrew Rothenberg, points out that demographic data heavily influences this math.
“Just like many industries, the cost of doing business usually goes up from year to year. Additionally, the age of employees is a large part of why these rates go up annually.”
— Andrew Rothenberg, OnPay's Vice President of Insurance
Here’s how group experience rating can impact your bottom line:
- Lower premiums for healthy teams: If your employees have low healthcare utilization and few major medical claims over the experience rating period, your carrier may reward you with lower premium rates
- Refund opportunities: If you use a level-funded framework and your team maintains a low loss ratio, you can accept some risk and potentially receive a refund at the end of a good year.
- Customized plan design support: Tracking your group’s historical claim patterns empowers you to proactively implement safety initiatives or wellness programs to curb future claims.
How is experience rating calculated?
Calculating experience rating involves two key steps:
- 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.
- 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.
Experience rating vs. community rating
Evaluating small business health insurance options? you’ll likely hear about a pricing model called community rating. Understanding the differences between these two methodologies makes good business sense.
| Pricing method | How rates are set | Best for | Key benefit |
| Experience rating | Based on your company’s actual past claims and unique loss history. | Mid-sized to larger businesses with stable workforces. | Potential for significant cost savings if claims remain low. |
| Community rating | Based on the average cost of care and risk pool in your specific geographic area. | Small businesses typically under 50 employees. | Rate predictability, as your individual team’s healthy year won’t be penalized by an isolated catastrophic claim. |
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.
Eligibility for experience modifications
Not all businesses are eligible for experience modifications. Typically, your state has eligibility factors, such as the size of your business, the industry in which you operate, and how long you have been in business. Many insurance programs require a minimum amount of payroll or a certain number of employees before an experience rating can be applied. The goal is to make sure that the data used in the calculation is statistically significant and over time, reflects true performance.
You may not receive a modification factor if you are a smaller business with limited loss experience. However, as your company grows and accumulates more data, you can benefit from a well-managed experience rating.
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.
Perfect for small business
“OnPay is the perfect payroll system for my small business. It’s super fast and easy to run, and they handle all the tax payments and forms, so I don’t have any tax headaches. It’s very intuitive to use their system to set up employees, run payroll, run reports, and find tax documents. The few times when I’ve had questions, their customer service has been very responsive. I’m a huge fan of OnPay!”
— Tina Lawton, Gymlete, Inc.
Employers should understand how experience rating works
Managing experience rating and its many factors can seem like an uphill task. Fortunately, most modern HR and payroll software can simplify the process. Many offer pay-as-you-go workers’ compensation so that you can contribute as new hires come on board, keeping staff and the workplace safe as teams grow. In addition, most quality payroll software can withhold all of your employees’ state unemployment insurance payments; so that your business stays in good standing should you have to reduce headcount. As your business continues to grow, keeping experience rating on your mind can go a long way to improving safety and cutting costs!
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.