What is experience rating?
Experience rating is a tool used by insurance companies to determine the cost of workers compensation based on the characteristics of an employer or particular risk. It is used to predict the likelihood of an employer developing a loss experience that is better or worse than the average in any given category, and the likelihood that the employer will file a claim. Experience Modification Rates, or EMRs, are used by insurers to predict how “risky” a company is based on past incidents compared to similar businesses. This number directly impacts a company’s insurance premium.
Employers are grouped into certain classifications based on the type of work they perform. Businesses within the same classification are grouped together, and the losses of each company are averaged together to obtain an average cost for worker’s compensation and employers liability insurance. Businesses within the same classification will obviously have differences in loss rates and claims, so experience rating is used to account for the difference between companies. To calculate an Experience Rate, a given employer will be compared to the average employer in the same classification.
In the construction industry, loss records refer to OSHA citations and recordable incidents, including injuries and deaths. Loss frequency is generally calculated to be more significant than loss severity. For example, a business with one loss totaling a high amount will have a lower EMR than a business with several losses at low amounts.
All companies begin with an EMR of 1. If a company’s history shows that its risk for loss is low, the EMR will be lowered. If the risk is determined to be high, the number will be raised. An EMR of one means that your risk is equal to other similar businesses. EMRs are a three year average. Changes in EMRs may result in higher or lower premiums, so companies have an incentive to keep their EMRs as low as possible.
How will experience rating affect your business?
High EMRs negatively impact both your insurance premiums and prospects of working with other businesses.
Increased insurance premiums is one of the most obvious ways that a high EMR can negatively impact a company. Insurers determine how much a company will pay by multiplying its EMR by the manual premium. (The manual premium is calculated by multiplying a company’s annual payroll by the workers’ compensation rate per $100).
Not only does a high EMR increase the costs of insurance premiums, it can also limit business opportunities by signaling that the company in question is likely to experience safety incidents. An EMR below one is a common safety requirements for bidding high profile work.
Experience rating can be used to encourage employers to reduce risks and hazards within the workplace.
ESR’s role in your EMR
Experience rating promotes occupational health and safety through providing a financial incentive to prevent loss and minimize risk. ESR works to lower our clients EMRs through developing comprehensive safety programs that keep employee safe, delivering training to ensure workers are able to identify hazards and work safely, and by managing any incidents that may occur.