Simply stated, an experience rating modification factor is a multiplier used to reduce or increase the premium of an individual workers’ compensation insurance policy based on the insured’s (policyholder’s) loss experience as compared to others doing similar work in the same state(s).
Other common names for an Experience Rating Modification Factor are:
The National Council on Compensation Insurance, Inc. (NCCI) manages the Experience Rating Plan Manual for Workers Compensation and Employers Liability Insurance, also referred to as the “Plan.”
The Plan is approved and authorized in 39 jurisdictions in the United States with NCCI calculating Experience Rating Modification Factors in most of them.
Where the Plan is approved, experience rating is mandatory for all employers meeting specific state premium levels.
The Plan uses formulas to measure and predict the claims experience of an insured as it relates to similar businesses.
Insurance companies report payroll and loss information to the Plan administrator (in this case we will use NCCI), and NCCI determines the “expected” number and value of losses of a myriad of types of businesses.
An individual policyholder’s actual experience is used to determine if it is the same, better, or worse than the “average” of comparable businesses.
According to the Plan, new businesses or those which have never purchased workers’ compensation insurance receive a “unified” modification factor (1.00).
After a business has maintained workers’ compensation coverage for a specified amount of time at a certain premium level, NCCI compares its experience to other similar businesses—if it’s average (about the same), a factor of 1.00 will be declared.
If the policyholder’s experience is better than comparable industries, a credit factor less than 1.00 (such as 0.90) will be promulgated.
Likewise, if losses are worse than the average, a debit factor more than 1.00 (such as 1.25) will be declared.
Using these three scenarios, here’s how premium might vary for the same insured depending upon the experience rating modification factor.
| Aaron’s Ambulance Service | Subject Premium = $150,000 |
| with 1.00 modification factor | Adjusted Premium = $150,000 |
| with 0.90 modification factor | Adjusted Premium = $135,500 |
| with 1.25 modification factor | Adjusted Premium = $187,500 |
The Plan’s experience rating formula reflects a few statistical basics.
One is the amount of payroll/size of the premium—the larger, the more predictable.
The number of claims is an important factor, as well. It’s easier to predict future claims based on a policyholder having had several than only a few or none.
There’s also the size of claims to contemplate. There are considerations for “limiting” the value of individual losses to account for the differences in claims values based on specific characteristics of the claim.
For example, long-term and possibly lifetime medical treatment and benefits of a 24-year-old employee may be much more than for a 62-year-old worker.
Similarly, treatment for the same broken bones of an otherwise healthy 30-year-old employee may cost much less than for a 67-year-old with several underlying health conditions. Therefore, the Plan allows more statistical weight to the frequency of claims than to the severity.
The bottom line—it’s important to understand a business may save money on its workers’ compensation premium by implementing policies, procedures, and practices to reduce the number and total value of claims.
Promoting a safer and healthier work environment, establishing safety programs, or introducing return-to-work protocols that improve on-the-job injury incidents can result in a lower experience rating modification factor and lower premiums.
It’s possible for the insured to significantly impact the annual cost of their workers’ compensation insurance, and ultimately their bottom line.
If you have questions about experience rating, contact an AIA professional. We’re ready and willing to help you find the answers you need.