How Your Experience Mod is Calculated

A company's experience modification rate (EMR) is a number that reflects their history of workers' compensation claims and their safety record. It is used by insurance carriers to calculate the company's workers' compensation premium. Here's a closer look at the formula used to determine a company's experience modification rate:

The Formula for Calculating EMR:

The formula used to calculate a company's experience modification rate (EMR) is based on the following factors:

Actual Losses: The actual losses incurred by the company in the most recent three-year period.

Expected Losses: The expected losses for the industry based on the size of the company and the type of work performed.

Experience Rating Adjustment Factor: This factor adjusts the EMR to reflect the size of the company's payroll and the degree to which it differs from the average payroll for the industry.

The formula for calculating the EMR is:

EMR = Actual Losses / Expected Losses x Experience Rating Adjustment Factor

For example, if a company's actual losses over the most recent three-year period are $100,000, and the expected losses for the industry for that period are $50,000, the company's loss ratio would be 2.0. If the experience rating adjustment factor is 1.0, the company's EMR would be 2.0. This means that the company's workers' compensation premium would be twice the amount of a company with a 1.0 EMR.

To put it simply, an EMR is a number that compares your Workers Comp experience to ‘average.’ A number above 1 is worse than average and a number below 1 is better than average. Your Workers Comp premium is multiplied by that number, so it has a direct effect on the premium you pay. Companies can improve their EMR by implementing safety programs, developing a return-to-work program, reporting claims promptly, and working with a knowledgeable insurance broker. By reducing their actual losses and improving their safety record, companies can reduce their EMR and lower their workers' compensation premiums.

How to Choose the Right Broker

There aren’t a shortage of insurance brokers in this country; over 36,000 independent agencies to be precise. With all of those options it can be a daunting task to determine who to trust with managing your company’s insurance and risk management. Non-renewals, rate hikes, denied claims are all consequences of choosing incorrectly. Here are a few considerations:

Do they have expertise in your industry?

Insurance policies are a promise and your broker’s job is to make sure that promise is crafted in a way that serves your best interest. More importantly, when it is time to cash in on that promise, they need to ensure that it is fulfilled completely and fairly. A broker with expertise in your industry knows the right coverages to include, the wrong ones that you don’t need, and how to solve the claims issues that are likely to arise. For example, I met with a flooring company who was paying about 10% of their annual premium on Product Recall insurance but due to the way the coverage was written and how the flooring industry operates; they would never be able to collect under that coverage and were wasting 10% a year.

Do they understand your company?

Perhaps more important than understanding your industry at large; your broker needs to deeply understand your company. Are they familiar with your operations, your strategy, your culture, and your mission? In order to be effective as your representative to the marketplace, your broker needs to be deeply knowledgeable about all aspects of your business. The party with access to more information wins any negotiation and when your broker is knowledgeable about your company then you can be confident that they are successfully negotiating on your behalf.

Do they provide concrete answers?

Admittedly, there can be a lot of gray area when deciphering insurance coverage and many brokers smartly tread with caution when discussing hypothetical claim scenarios. However there is a difference between navigating the nuance and giving a non-answer. Insurance coverage has existed here since before we were a country and much of the gray area has been litigated and adjudicated on in the past 250 years. You want a broker who leans on their in-depth understanding of the policy, as well as any relevant case law to provide you with actionable answers to your questions. A broker who is able to do that can also successfully advocate on your behalf when that hypothetical becomes a reality. For example, one of our insureds had a claim denied under the Product Recall exclusion in their General Liability policy. Because we’ve researched these hypotheticals, we were able to successfully argue that coverage exists by pointing to prior litigation around a similar scenario and got the carrier to cover the claim.

Do they have the proper infrastructure to service your account?

I am always surprised by how many prospects ask about our ability to issue Certificates of Insurance. Certificates of Insurance are a snapshot of your company’s insurance policies and take less than 5 minutes to produce but even so many clients have shared how they were a source of frustration with their old broker. When deciding on a broker find out what their process for issuing COIs is and if that fits with how your organization operates. Does a dedicated rep handle them? Do the requests go to a general mailbox? Do you issue them yourself through an online portal? Besides COIs it is important to find out who the service team is and their workload. Will your account be serviced by a back office team elsewhere or will there be a dedicated account manager? Will your business be another number or a valued client? These are important questions to help you understand the service level that you will be receiving.