Experience Modification Factor Calculations
The Experience Modification Factor calculations consist of four main areas.
As I mentioned in a prior post, your Workers Comp premium calculations include 34 steps. However, those are the steps just to calculate your Experience Modification factor, also referred to as an E-Mod or an X-Mod.To make a very long story short, there are four main elements that determine your E-Mod:
- total incurred
- claim frequency
- classification codes
- amount of payroll per classification code
The payrolls per classification code are the basis for what is referred to as “Expected Losses”
Why was the Total Incurred from the last post so important? The Expected Losses are divided by the “Actual Losses” to calculate your E-Mod. Actual Losses are derived from the claims’ total incurred. The lower the total incurred is, the lower your actual losses. The lower your actual losses, the lower the E-Mod.
An E-mod is calculated on the total incurred SIX months after the close of the policy period. If you have a January 1st renewal date, the State Rating Bureau or the NCCI will calculate your E-mod on 7/1. How can you be charged for premiums six months after your policy has ended? Actually, you aren’t, as Workers’ Compensation runs one year behind.
If your renewal is 1/1/08, your Experience Period is from 4/1/03 through 12/31/06. Any policies that started 4/1/03 and ended by 12/31/06 will have an effect on your 1/1/08 renewal for your 1/1/08 – 1/1/09 policy period. The Experience Period runs out on 6/30/07 at the close of the business day. Usually, If the reserves/total incurred are reduced by $1,000,000 on 7/1, that big chunk of $ will still show up on your E-Mod and eventually your premiums, even though it was reduced the next day.
I know this info is about exciting as watching grass grow, but it is cold hard cash we are talking about with your premiums. We will come back to the Experience Mod later. Whew! That was enough numbers for anyone to have to look at for some time.
Coming up next week:
- Monday – The Unregulated Part of Your Work Comp Insurance Premium – you and the government/Department of Insurance have no control over it, and it can kill your insurance budget. Only one person has control, and it is not your Workers Comp insurance agent.
- Tuesday – The Self-Insurance Phenomenon – shocking but true.
- Wednesday – The Main Errors We Find When Auditing Workers’ Compensation Policies
***Please note that any of the terms in this post or others can be found at https://cutcompcosts.com/ under the Definitions tab.
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