Understanding How Your Workers’ Compensation Experience Impacts Your Premium
Your workers’ compensation premium is based on a variety of factors, including the nature of your business; the size of your payroll; and your loss experience. In addition, every occupation has a class code that is based on that job’s level of risk. For example, a roofer faces a greater amount of risk than a computer programmer.
In Delaware, New Jersey, New York, and Pennsylvania, class codes are approved by independent, state-appointed boards and bureaus. In Connecticut and Maryland, class codes are approved or maintained by the National Council on Compensation Insurance (NCCI).
To promote safe working conditions and to ensure fairness within the classification system, an “experience modification factor” is used to rate the risk of your business compared to other similarly sized businesses within the same nature of business.
The experience modifier provides a financial incentive for businesses to operate safely. Businesses that continuously operate safer than their peers have a lower experience modification factor and lower premiums than those that demonstrate riskier behavior that leads to higher severity and more frequent claims.
How is the “experience modification factor” calculated and how does it impact premium?
The experience mod factor is used to calculate your risk. An experience mod for an average level of risk is 1.0. A rating below 1.0 shows that a company has a better claims history than average. A rating above 1.0 indicates that it has a worse claims history than average.
For example, A business has a payroll of $100,000 with a 1.0 experience modification rate:
| A company’s payroll exposure and rate develop a manual premium: | $10,000 |
| Experience Modification Factor: |
x1.0 |
| Modified Premium: | =$10,000 |
If this business pays $10,000 in workers’ compensation modified premium, the class rate is average, so there is no adjustment to the premium.
For a business with a payroll of $100,000 with a 0.8 experience modification factor.
| A company’s payroll exposure and rate develop a manual premium: | $10,000 |
| Experience Modification Factor |
x0.8 |
| Modified Premium: | =$8,000 |
If this business pays $10,000 in workers’ compensation modified premium, the experience modification factor would result in an $8,000 premium.
For a business with a payroll of $100,000 with a 1.2 experience modification factor:
| A company’s payroll exposure and rate develop a manual premium: | $10,000 |
| Experience Modification Factor: |
x1.2 |
| Modified Premium: | =$12,000 |
If this business pays $10,000 in workers’ compensation manual premium, the experience modification factor would result in a $12,000 modified premium.
Organizations can help reduce their experience modification factors by being proactive and creating a safety-conscious work environment. NJM works with policyholders to help implement workplace safety programs designed to reduce the frequency and severity of on-the-job incidents.
Please reach out to your NJM representative if you have any questions about your experience modification factor.