The most important factor in determining premiums for each employer is the ‘experience modifier’ (EM). Experience modifiers only apply to those employers fully insured for workers comp; self- insured businesses do not have experience modifiers.
Here’s the thing: if your small business is ‘super small’, with one or two people on the payroll, and the work isn’t risky, you probably don’t have an experience modifier associated with your workers comp policy. And that’s a very good thing, because you will be able to better forecast your expenses with a near static figure for workers’ comp insurance.
Yet, if you’re a small business owner with, say, 25 employees and you’re paying between $5-10K in premiums each year, it is likely that your policy has an experience modifier attached to it. Whether or not your policy has an experience modifier is different from policy to policy, and business to business—there is no widely accepted, objective threshold triggering experience modifier application.
The best news for new small business owners is that experience modifiers typically are not factored in your premiums until after three years of operation—that’s because there is not a sufficient history of claims to form a basis for a reasonable experience modification ratio.
The bad news is that once an experience modification rate is applied to your premium, your insurer may be able to apply that figure for up to three years. So, if you’ve had a history of worker injuries when the experience modifier is applied, you may find yourself stuck with a higher than average EM for the next several years.
How it Works
An experience modifier is a calculated figure that accounts for the history of occupational injuries with your business, and so a measure of future risk.
The experience modifier is a complex formula for calculating premiums, involving payroll projections, classification codes, rates, loss ratios, and claims history vs. the industry average. If your business has a higher claim average that the industry base rate, you’ll pay a higher premium. If not, you might even receive a credit or qualify for a premium discount.
Example: “Base Rate X EM X Payroll (per $100) +/- Adjustments = Premium
‘Adjustments’ are a combination of factors related to risk, so let’s explore those for a moment. The experience modifier accounts for the severity of claimed injuries experienced by your workforce, frequency of injuries, and the difference between the average expected injury loss for the industry and your claims history.
What it Costs Your Business
This is where issues with poor workplace safety, accidents, and resulting workers comp claims combine to lower your margins, potentially making your small business less profitable than it could be; this is true for all business covered by a comp insurance policy.
Example: Across all industries, the average experience modifier is 1.0, but because of accidents, your business is assigned by your insurer an experience modification rate of 1.3, okay? That would suggest that your workers’ comp insurance premiums may be as high as 30% above the premiums of your direct competitors. The additional expense of your workers comp insurance premium may be absorbed, which would lower your profit, or passed directly onto your customers as increases in the price for goods or services. Either way, the cost is real, it is there, and it makes your business less competitive than its peers, jeopardizing the long-term viability of your operation.
Yet, the opposite is also true; with effort and attention to incident prevention, businesses may drop premiums below 1.0, securing a competitive edge in comparison to industry peers.
What to Watch Out For...
Claims That Won’t Leave the Books
It is critical that you have an advocate working to close claims as expediently as possible, because having open claims when it comes time for your provider to recalculate your experience modifier may result in a substantial premium increase associated with a high modifier. Work to get claims closed before as quickly as you can to control your experience modifier. It is fair to ask insurers how long you can expect a claim to stay; insurers can provide you with estimates based on experience with injury types. That helps you know what to expect and what to look for, and trigger action when specific claim resolution has not met the given expectation.
High Claim Reserve Levels
Your insurance premium is designed to cover losses associated with payment of workers comp claims. In the event of an injury claim, your insurer may set what’s known as a ‘reserve’. That’s the highest total dollar amount your insurer anticipates any particular claim to cost them. In other words, it is a forecast, and it is important because claims are seldom reconciled for the full reserve amount. If reserves are not adjusted to reflect progress on claims, they can have a negative impact on your experience modifier by establishing a higher-than-actual-cost for the claims. It’s the right of employers to request a review of reserves with insurers, perhaps quarterly. This is a recommended best practice for protecting your EM.
Facts in Dispute
When working with any workers comp provider, it is critical to put your business in a position of leverage in the event that substantial differences in data create a problem. This requires detailed recordkeeping, diligent relationship building with both injured workers and claims managers, regular communication, and sound, internal program auditing. Two things to consider here: (1) fraud is real and it happens, and (2) people make mistakes. That’s why when facts are in dispute or the numbers seem off, you can stand up for yourself with accurate contrasting facts and figures, and make a case for resolution in your favor. Employers may consider inviting insurance carriers to educate them on fraud identification, and how insurers plan to protect employers from this risk.