In this article, you’ll learn everything about the Experience Modification Rate (EMR). You’ll find out how it can increase or decrease your costs, how to lower your EMR, and more. We have also covered how to calculate the EMR safety rating for your business.
Much like DART and TRIR, EMR is a lagging indicator that gives you insight into your injury rates. Unlike the other two metrics, however, it affects your bottom line directly. We put together this guide to help you improve your EMR safety rating and, in turn, cut your payroll costs.
What is Experience Modification Rate (EMR) to Your Company?
Insurance companies use the Experience Modification Rate (EMR) to establish future risk and set your company’s premiums. The default average EMR is 1.0 and the insurer uses this as a guide to assess your company’s risk and calculate your premiums.
EMR impacts your insurance cost, but it’s one factor you can control by improving your safety culture at work. If you know how to calculate your EMR, also known as “e-mod”, you can include positive factors that may lower your premium. Conversely, a high EMR can hurt the profitability of a business.
How EMR Affects Workers’ Comp Costs
With the industry-standard EMR at 1.0, you’ll find that workers’ comp costs increase as you stray above that number and reduce as you dip below it. Here’s an example to illustrate what will happen.
| Example Let’s say the 2020 workers’ comp was $100 at 1.0 EMR for an employee in the 1016 job class. Now if the EMR increases to 1.2 in 2021, the workers’ compensation for that class will rise to $120. The downside is that a higher EMR will stack up and affect the whole payroll, but the opposite is also true. A lower EMR will also affect the whole payroll. Injury claims from previous years are also a factor that is included to calculate the EMR for any business. |
Most states use the rating calculator from the National Council on Compensation Insurance (NCCI), but in some states, your local rating bureau issues the rating calculation. The number of workers’ compensation claims will generate your EMR, so if you had more than the industry average number of claims, that will increase your score and, therefore, your workers’ comp costs.
Keep in mind that an EMR rating is mandatory. If your company meets NCCI’s requirements for your state, an EMR will be calculated and applied. Insurance providers cannot modify this score.
New Employers Vs. Existing Employers
New employers have an EMR of 1.0 for the first three full years of trading. After that, the compiled data will be enough to determine the company’s EMR and compare it to the rest of the industry.
Therefore, new employers have an opportunity to start operations on the right foot and register three years of minimal compensation claims to see a drop in their premiums.
Of course, if they have more than the industry standard during that time, their premiums will rise after three years.
For existing employers, the rate depends on the last three full years. If the rate is high, they’ll have to work hard to bring down that average and reduce their workers’ comp costs.
How Your EMR is Calculated
Several elements make up the EMR safety rating. They are:
| A | Gross payroll figure for the full 12-month financial year. |
| B | Job Classification Rate. This will be issued by the NCCI in most states, but some states have their own codes. You will find that most workers in the same industry tend to have the same code, but you should check to make sure. |
| C | Discounts, Penalties, and Assessments, given as a percentage at the final stage of your premium. Discounts could be given as a result of running health and safety programs, penalties could relate to OSHA fines and other penalties. |
| D | Actual Loss, found by adding up Actual Primary Loss and Actual Excess Loss. |
| E | Actual Primary Loss, which includes claims below $17,000, weighed in full. |
| F | Actual Excess Loss, which includes claims above $17,000, but weighed at a discounted rate to shift the emphasis on businesses with many small claims, rather than one or two outlying large claims. |
| G | Expected Primary Loss, which is your Expected Losses multiplied by your D-ratio. |
| H | Expected Excess Loss, which is your Expected Loss minus your Actual Primary Loss |
| I | Expected Loss Rate (ELR), which depends on the average for that job class. |
| J | D-ratio, also known as the Discount Ratio, is the ratio of Primary Expected Losses added to a discounted value of Primary Losses and then divided by the total Expected Losses. |
| K | Expected Loss. You find this by multiplying your payroll by your ELR (I) and then dividing by 100. |
| L | Actual Rate, found by adding the Actual Primary Loss (E) to the Actual Excess Loss (F) and multiplying by the Expected Excess Loss (H). |
| M | Expected Rate, found by adding the Expected Primary Loss (G) to the Expected Excess Loss (H) and then multiplying by the Expected Excess Loss (H) too. |
Now you can find your EMR with this calculation:
- Actual Rate (L) / Expected Rate (M)
Who Determines Experience Ratings?
The NCCI determines experience ratings in 35 states currently.
Eleven of the states are independent. They are:
- California
- Delaware
- Indiana
- Massachusetts
- Michigan
- Minnesota
- New Jersey
- New York
- North Carolina
- Pennsylvania
- Wisconsin
Another four states are called “monopolistic states”, which ban the use of private workers’ comp and run local government-operated schemes. They are Wyoming, Washington, Ohio, and North Dakota.
What is the Experience Rating Period?
The experience rating period is the number of years’ worth of data included in the calculation. It uses information from the last three full financial years, meaning that your premiums for the year beginning January 1, 2021, will comprise:
- January 1, 2017
- January 1, 2018
- January 1, 2019
They collect data over three years to find an average that is a reasonably accurate representation of your performance. It means you’re not adversely punished for an unusually bad year and that you don’t underpay because you have an outlying quiet year.
EMR Formula
Once you have the EMR formula, you can find your Experience Modification Rating. The formula looks like this, based on the elements listed above:
Actual Rate (L) = E + F x H
Expected Rate (M) = (G + H) x H
Experience Modification Rate = L / M
What is the Lowest EMR Rating Possible?
Since the EMR is calculated with so many variables, there isn’t a universal lowest rating. If you had no workers’ comp claims during the three-year experience rating period, you’ll achieve the lowest score with the above formula.
One way to lower your existing score is to implement a safety training program that stimulates employees to be mindful of their own safety. This will naturally reduce the number of accidents and your EMR rating in return. A Californian company, Nationwide Boiler, managed this feat in July 2017 by scoring 0.61.
To work out whether you are succeeding with your EMR, you need to look at the trending data. Scoring a 0.9 may be good in the industry’s context in which you work. However, if your last rating was 0.8, your trending safety record is getting worse and you need to address this.
How Can You Lower Your EMR?
It is important to lower your EMR because it can cut your costs significantly. At the same time, a high score can harm your competitiveness. If you have an EMR of 1.1 and similar companies of a similar size have a rating of 0.9, you will spend 20% more on your insurance premiums in your current policy. This allows the other companies to pass on discounts to their customers and undercut you, which shows why a lower EMR should be a matter of urgency for business owners.
Improving your workplace safety culture to ensure that you cut incidents and injuries is the major way to lower your EMR. The fewer claims workers make, the lower your premiums. Conducting daily toolbox talks, encouraging incident reporting, monitoring near misses, and other similar tactics can all help improve safety on site.
A back-to-work plan for injured employees will get them back into the workplace, and it can have a positive effect on your average EMR. These plans often include modifying their roles and adjusting their workstations to improve safety and provide accessibility.
You may also talk to your underwriter or insurance agent about adjusting your EMR in some situations. For example, if you take over a firm with a 0.8 EMR, the insurer may give you a 1.0 because you’re viewed as a new employer. Here, as long as you can prove that you are dedicated to maintaining the safety culture of the previous owner, you may have a case.
Experience Rating Frequently Asked Questions (FAQs)
EMR Vs MOD: What’s the Difference?
The EMR and the MOD are the same, MOD is simply short for ‘modification’. In California, the rating is referred to as an XMod, while some people call it an e-mod or experience modification factor.
How Long do Claims Affect Experience Ratings?
Claims affect your experience ratings for three financial years. This is because you calculate your EMR using three years’ records. Of course, if you have progressively fewer claims each year, your total number of claims reduces and your EMR lowers.
Does a Safety Program Reduce My EMR?
Implementing a safety program can help you achieve a lower EMR. Firstly, if it is successful, you will have fewer claims and therefore your EMR will go down. Secondly, you may receive credits from your insurer for launching a program, with more credits for more in-depth schemes. Implementing OSHA regulations will also help you avoid safety violations.
What’s The Difference Between Guaranteed Cost Vs Loss Sensitive?
A guaranteed loss workers’ compensation insurance policy works as you would usually expect — you pay a set cost and the insurance company takes the risk on them. However, some insurers offer loss-sensitive policies. In this case, you shoulder some risk, with the eventual premium determined by the number of losses you incur during the policy term.
Conclusion
With so much expense riding on your rating, it is vitally important to keep track of your EMR safety rating calculation. It can help you make your workplace safer, save money on each worker’s compensation insurance premium, and gain a competitive edge over your rivals.