Workers’ Compensation Experience Modifications: How They Work and What You Need to Know
March 14, 2018 | Ryan Kagarakis
Isn’t workers’ compensation experience rating fun?! Employers with workers’ compensation coverage understand that claims can inflate their rates. Visa versa, the absence of claims usually leads to lower rates. The more payroll an employer has the higher their premium generally is. The workers’ compensation insurance providers are in the money making business and the rates they provide are based on the profitability of an account and their history of claims. Further complicating the matter, the Workers’ Compensation Insurance Rating Bureau (WCIRB) provides an Experience Modification rate based on the employer’s history that further impacts what they pay.
The WCIRB calculates the experience modification rates by looking at the payroll and claim history from the past four years. The bureau does not consider the expiring term as it has not been completed yet so for ease of use in this article years 2, 3, and 4 are the timeframe for determining the modification rate. For example, a 2018 modification would not consider the 2017 policy and it would use 2014, 2015, 2016 for their calculations. The WCIRB uses the audited payroll from each of the years within the rating period to calculate what the expected losses SHOULD be. Injuries do happen so there is an expectation that any business can incur a claim which varies by classification code.
The more payroll an employer has the more losses they are expected to have. If the employer has very few claims or none at all their modification will be lower than industry average resulting in more credits applied to the policy.
The goal for every employer should be to keep employees safe and have very few claims if any. The reward for doing this is paying less for workers’ compensation rates, a legally required coverage which can often be one of the highest expenses in the monthly budget.
Here are some things to know about experience modifications:
The experience modification is reevaluated every year that an employer is eligible and is effective for the upcoming policy term.
In 2018 the qualifying threshold to be eligible for an experience modification is total expected losses of $10,300 for the 3 year rating period.
Expenses such as attorney costs to do not count against the employer for the experience modification calculation.
Experience modifications effective 1/1/2019 will exclude the first $250 of every medical claim from the calculation.
Particularly in construction, the experience modification rate is important to the overall competitiveness and profitability of a business. It is critical that employers who qualify discuss their experience modification with their insurance broker every year in advance of the renewal. Checking the experience modification for accuracy can help avoid higher rates if the bureau made a mistake. Furthermore, forecasting the modification can help prepare the employer of potential changes in rate for an upcoming term. Knowing how the experience modification works, and what to expect in the upcoming year will give the employer a better idea of what they will be paying in workers’ compensation rates and will better let them know if adjustments are needed when calculating labor costs for bids.
Commercial Insurance Broker at Brown & Brown Inc.
Phone: 916.625.4616 | Direct Fax: 800.761.6733