Man manipulating gears inside a graph

The first step in evaluating workers’ compensation costs begins with a clear understanding of the Experience Modification Factor (EMF) and its direct impact on premium. Equally critical is a complete understanding of an organization’s key loss drivers and the effect individual claims have on the experience modifier. Not only does it impact the workers’ compensation premium, but a higher experience modifier may also limit a construction company’s insurability in the voluntary market, preventing bidding eligibility and opportunities for certain types of businesses. 

On the other hand, a lower experience modifier may result in more opportunities to compete, create more bidding opportunities and position the company as a better risk for underwriters. The process of reducing premium in an experience-rated workers’ compensation program begins with making sure the data used to calculate the experience modifier is accurate. As part of the process, brokers should routinely perform the same experience modifier evaluation as state regulators in order to determine accuracy and forecast future financial impact on the premium. Inaccurate experience modifier calculations are often the result of errors in payroll amounts, inaccurate job classifications, improper claim reserves and open claims that should be closed. A comprehensive process should include a detailed analysis of an organization’s payroll, class codes and claim history, which will ensure the experience modifier is accurate and that workers’ compensation premiums are reduced accordingly. 

Take the case of one owner of a large construction company who was looking at ways to reduce the company’s overall workers’ compensation premium. An analytical review uncovered an error based on a rating rule. This led to the successful negotiation with the insurance carrier to revise the experience modifier calculation in order to address this error properly. The correction impacted 3 separate years, resulting in $41,000 of premium refunded to the client.

Accuracy First & Foremost

In another case, a mechanical contractor enrolled for 5 years in a guaranteed cost workers’ compensation program with $300,000 in annual premium saw its experience modifier escalate from .91 to 1.08, which resulted in the contractor being excluded from bidding on projects that had an Experience Modification Rate (EMR) prequalification factor that required the bidders to have an EMR of 1.0 or less. The company’s insurance carrier had not performed the proper analysis, and inaccuracies in the reported payrolls from a wrap-up carrier, as well as claims which were previously improperly assigned were identified. The payroll errors were corrected, and four claims were removed successfully from the calculations, resulting in a drop of the experience modifier to .89. The change led to a 19-percent premium reduction and allowed the company to bid on projects with a prequalification standard of 1.0 or less. The proper process ultimately resulted in an annual premium savings of $57,000.

A Critical Process

Despite its importance to insurance costs, the experience modifier calculation often lacks transparency. This is partly because many companies do not actively participate in the process, choosing instead to rely on behind-the-curtain calculations conducted by their broker, the National Council on Compensation Insurance (NCCI) or state rating bureaus. To start, here are a few important questions that every construction company should be able to answer on its own:

1. Are you sure the data and information used to calculate your experience modifier is accurate, especially if you have participated in wrap-up programs?
2. Do you understand how your experience modifier stacks up against your industry peers?
3. Do you know what is currently driving your experience modifier, and do you have a plan to improve it?
4. Have you evaluated the opportunities that exist to improve your experience modifier, and calculated the potential dollar savings available?

Some insurance brokers simply may ask insurance carriers for workers’ compensation quotes, which allows the carrier to dictate pricing. However, completing a comprehensive evaluation of exposures before submitting information to underwriters will help a construction firm take control of its workers’ compensation claim drivers and total cost of risk.