Upcoming Change in Experience Modification Factors

NCCI computes the experience modifiers (also known as X-Mods, mods, and EMRs) used on Workers Compensation insurance policies in a majority of states in the U.S. and these modifiers directly impact the insurance premiums paid by employers.

For example, an experience modifier of 1.25 means an employer is paying a 25% surcharge for Workers Compensation insurance. A modifier of .75 translates to a 25% credit.

Experience modifiers are calculated using losses and payroll information from past Workers Compensation insurance policies, but NCCI (and other independent rating bureaus) apply a complicated formula to this data. One important aspect of this formula is that it discounts the impact of large individual claims, so that, for example, five claims of $20,000 each would have a greater impact on a modifier than a single claim of $100,000.

But starting in 2013, NCCI plans to begin changing how much of a single claims gets fully counted in the experience rating formula. The net effect will be that employers with low claims histories will get modifiers lower than would have been the case under the current formula. But employers with some expensive claims in their history will see modifiers higher than would have been the case under the current rating plan.

This will be an issue not just for those employers who see higher modifiers--and thus higher premium charges for Workers Comp insurance. It will be an even greater issue for those in the construction business, as a modifier of 1.00 is required to bid on many projects. With a modifier higher than 1.00, many contractors will find themselves locked out of even bidding on important projects. So employers who were just under that threshold of 1.00 may well find that their new modifier exceeds 1.00, even though no change in the safety of their operations has occurred.

This change in experience rating by NCCI may well create significant problems for many contractors, and likely will make careful review of experience modification factor calculations more important than ever.

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ABOUT THE AUTHOR: Edward J. Priz, CPCU, APA
Edward J. Priz is President of Advanced Insurance Management LLC. He is a consultant, author, and expert witness on Workers Compensation insurance premiums, audits, classifications, and experience modifiers.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.