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Commentary: How E-Mods Can Affect the Bottom Line

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If you don’t understand the definition of an “experience rating modification factor,” or e-mod, you are not alone. The e-mod is a critical part of many employers’ workers compensation insurance costs.

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While this article attempts to explain in simple terms how e-mods are determined, it does not include all the details that could affect your company’s individual e-mod. Many insurance carriers use basic business and industry classification codes developed by the National Council on Compensation Insurance (NCCI). Under the system, each employee is assigned a class code based on job description and risk of injury. Many employers have multiple class codes on their policies because not all employees do the same job.

For example, a construction company might employ office personnel, sales people and finish carpenters, all of whom face different workplace hazards and therefore, different class codes.

NCCI assigns each class code a loss cost (base rate) based on the collective loss experience of companies within that code. Once class codes are determined for your employees, your manual premium can be calculated by multiplying the carrier’s class code rate with the estimated payroll for that classification.

Premium Adjustments

With the manual premium determined, adjustments (discounts or surcharges) are made to reflect the individual characteristics of the policyholder and used to create the final premium. One such adjustment is the e-mod.

Like classifications, e-mods are calculated by NCCI. Employers must meet certain criteria to qualify for an e-mod. Generally, employers paying a $3,500 annual premium for two out of three years, or $7,000 in one year, are eligible. The e-mod calculation is generally based on the last three years’ losses and payroll per classification (excluding the most recent year).

E-mods are intended to predict an employer’s future losses by analyzing its past losses. Generally, the frequency of accidents has a greater impact on the e-mod calculation than the actual cost of the accidents.

For example, Company A has one loss of $100,000, and Company B has 20 losses of $2,000 each. Company A will probably have a lower e-mod than Company B. However, cost cannot be completely ignored in the calculation. To achieve this blend of frequency and cost, e-mods are “split rated.”

Split rating divides the actual costs of a claim into two buckets: (1) basic, or primary, and (2) excess. For each claim, the first $5,000 is primary. Any additional costs are excess. In the formula, the primary value is given more weight than the excess. In the example above, Company A’s primary value is $5,000 and Company B’s primary value is $40,000.

The expected losses are estimated and also split between the primary value bucket and the excess bucket. The actual losses are divided by the expected losses. The resulting number is the e-mod.

An employer with an e-mod below 1.00 has had less than expected losses druing the experience period. An employer with an e-mod above 1.00 has had losses that were more than expected compared to other employers in the same classification.
Here is a basic example of how the final premium is calculated. If Company 1 has an e-mod of .67, the final premium is $50,000 x .67 = $33,500. Company 2 has an e-mod of 1.71, the final premium is $50,000 x 1.71 = $85,500. That is a difference of $52,000.

An e-mod can be a reward for a good safety record or a penalty for a poor one. To keep your premiums and e-mod as low as possible, it is essential to create a safe workplace.

For more information on e-mods, contact your independent agent or visit NCCI’s website at www.ncci.com.

Greg Summerhays is the director of public relations at Workers Compensation Fund, which offers ongoing safety training. Visit www.wcfgroup.com for more information.

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