Workers Compensation Insurance and The E-Mod

| Business Insurance, Insurance education, Workers Compensation Insurance.

Workers compensation insurance is often the most expensive policy a business owner must purchase and the rating methodology can be difficult to understand.   The base premium is determined by a percentage rate times the payroll.  Employees are classified according to job duties, called the classification code.   Rates can vary in the extreme – as low as .25% for certain clerical workers to over 15% for high-risk occupation such as roofers and tree trimmers.  After the base rate is calculated, a myriad of modifying factors are applied such as scheduled credits or debits and increased employers liability premium.

Frequently the largest modifying factor – and the least understood – is the Experience Modifier, affectionately known as the E-Mod.   An E-Mod is a numerical factor that reflects a businesses individual loss (claim) experience.   A new venture buying their first workers compensation policy will have an E-Mod of 1.00, which means it has no effect on the overall premium.   An E-Mod of .80 indicates a 20% credit and 1.20 indicates a 20% debit.   Sounds fairly simple, right?  Unfortunately, this is where simple ends and the complicated math begins…

Experience Modifier Calculations

The data used to calculate an E-Mod is compiled by a workers compensation rating bureau.   In most states the rating bureau is NCCI (National Council on Compensation Insurance), however a number of states maintain their own bureaus but often share data with NCCI for multi-state employers.   To calculate the E-Mod, NCCI looks at premium and loss data for the oldest 3 of the last 4 four years.    The mathematical formula used to calculate the E-Mod is as follows:

A= Weight Factor
G = Ballast
I = Actual Primary Losses
H – Actual Incurred Losses
F = Actual Excess Losses (H-I)
E = Expected Primary Losses
D = Expected Incurred Losses
C = Expected Excess Losses (D-E)

Boiled down, this formula states that NCCI (or another bureau) will weigh the actual losses (claims) and reserves (expected future payments) of the business against expected losses and premium paid for the particular classification rating codes.  Using those numbers and a ballast and weighting factor, the E-Mod is derived.   It is important to understand that the E-Mod is NOT calculated by the insurance company.   Regardless of what insurer provides workers compensation to a business, the E-Mod factor will be applied to final rate.  In other words, the E-Mod follows the company not a particular insurance policy.

What the E-Mod Means to a Business Owner

Because the E-Mod can be either a debit or credit, there is a huge incentive for a business owner to be proactive in minimizing the number of claims and mitigating the total amount paid when an injury does occur.    Simply put, the E-Mod factor can dramatically lower the cost of workers compensation premiums for those willing to provide a safe working environment.  It can also raise workers compensation premiums to point of unaffordability.   Over the years, we have seen E-Mod factors as low as .54 (plumbing company  with an excellent safety training and incentive program) to a high of 1.79 (small auto repair business with an employee fatality).

While a business owner may not have any control over the base rates for their applicable classification codes they can, to a large degree, affect the E-Mod factor by controlling claims.   Our suggestions for minimizing claims and lower the E-Mod factor include the following:

  • Make safety a priority.   Establish a safety committee and develop a written, comprehensive safety program.  Hold regular meetings with employees and discuss injury prevention, ergonomics and proper use of tools and equipment.   Incentives work well such as an injury-free bonus program that rewards employees for collectively following safety procedures.
  • Mitigate losses.   Create a light-duty or return-to-work whenever possible.   Remember that workers compensation coverage includes payment for lost wages, not just medical bills.  The amount paid for lost wages (known as indemnity) generally adversely affects the E-Mod calculation much more than a medical only claim.
  • Utilize free resources.  Every workers compensation insurance company offers free safety training, posters, videos and other helpful advice to prevent claims.  Yet less than 10% of policyholders actually take advantage of those services.    Many states also offer free training and consultation.  In Nevada, for example, the Division of Industrial Relations has an entire staff (SCATS) that offers OSHA 10 and 30 training and free safety program consultation.
  • Review classification codes frequently.   Consult with your agent at least yearly about the role and job duties of employees.   Insurance companies have found that around 30% of all employees are misclassified and might be charged a rate higher than appropriate.

At Safeguard Insurance, we have years of experience providing workers compensation insurance to a variety of Nevada businesses.   We have access to a variety of A-rated insurance companies that offer competitive pricing and fantastic value-added loss control services.  Contact us today for a no-obligation review of your current workers compensation policy.