Understanding the factors that influence your workers’ compensation costs is crucial to managing your company’s financial health. One of the most significant determinants of workers’ comp premiums is the Experience Modification Rate (EMR).
This is part one of a three part series examining the Experience Modification Rate. For a more in-depth look at this most important Workers Comp rating factor, please see our other articles: Part Two (coming soon); Part Three (coming soon).
What is the Experience Modification Rate (EMR)?
The Experience Modification Rate, also known as the Experience Mod or EMR, is a crucial factor used by insurance companies to assess the likelihood of a business having workers’ compensation claims in the future. It is a numerical representation of a company’s historical workers’ comp claim experience in comparison to other businesses in the same industry and region. The EMR is expressed as a percentage that can either increase or decrease your workers’ comp premiums based on your claims history.
Why Should Business Owners Care About the Experience Modification Rate?
Business owners should care about their Experience Modification Rate for several compelling reasons:
- Impact on Premiums:
The EMR has a multiplier effect on your workers’ comp premiums. A higher EMR can lead to increased premiums, while a lower EMR can result in reduced premiums. This is particularly significant for businesses with worker’s comp premiums exceeding $25,000, as the EMR’s influence becomes more pronounced with larger premium amounts. - Cost Control:
Your Experience Modification Rate plays a pivotal role in determining your workers’ compensation costs. By understanding and managing your EMR effectively, you can gain greater control over your insurance expenses. - Competitiveness:
A low EMR can make your business more attractive to insurers and potentially lead to more competitive premium rates. This competitive advantage can positively impact your bottom line. - Avoidance of Surprises:
Knowing your EMR allows you to anticipate potential premium changes. Being aware of your business’s claims history and making efforts to improve safety and minimize claims can help avoid unexpected premium increases.
How the Experience Modification Rate Works
Let’s delve into a real-world example to understand how the Experience Modification Rate works:
Imagine a bar restaurant in Pennsylvania with a base premium of $12,538. The Experience Modification Rate listed on their policy is 138.9%. To calculate the adjusted premium, you multiply the base premium by the EMR percentage:
Adjusted Premium = Base Premium × EMR Percentage Adjusted Premium = $12,538 × 1.389 Adjusted Premium = $17,415
In this example, the EMR of 138.9% leads to an additional premium of almost $5,000. This 39% debit charge significantly impacts the overall cost of the workers’ compensation policy.
On the other hand, if the same business had an EMR of, say, 0.80 due to an excellent claims history, the adjusted premium would be:
Adjusted Premium = $12,538 × 0.80 Adjusted Premium = $10,030
This would result in a premium reduction of about $2,500 compared to the initial EMR example, showcasing the potential savings when managing claims effectively.
Conclusion
As a business owner, CFO or really anyone who works around Workplace Safety, understanding the Experience Modification Rate is paramount to control your workers’ compensation costs effectively. The EMR’s impact on premiums and competitiveness cannot be overstated, making it a critical aspect of your insurance strategy. By being proactive about safety, implementing risk management protocols, and minimizing claims, you can take charge of your Experience Modification Rate and safeguard your company’s financial stability. Stay tuned for the next two parts of this series, where we will explore how the EMR is calculated and specific steps to control and improve it.