Key takeaways
– An experience rating compares a policyholder’s loss history with the expected losses for similar businesses and is most often used in workers’ compensation.
– The experience modification factor (experience mod) adjusts a policy’s premium up or down based on past losses: >1 increases premium, 1.00 → worse-than-average losses; premium increases proportionally.
– Mod < 1.00 → better-than-average losses; premium decreases proportionally.
– Frequency: Mods are typically computed annually and based on a multi-year lookback (commonly three years of losses, excluding the most recent policy year).
How premiums typically incorporate the mod
A common workers’ compensation premium formula:
Premium = (Manual rate for class × Payroll) / 100 × Experience Mod
(Exact mechanics, including the “manual rate” and payroll units, follow state and bureau rules.)
A simple example
– Suppose your calculated premium before modification is $10,000.
– If your experience mod = 1.20 → Adjusted premium = $10,000 × 1.20 = $12,000 (20% increase).
– If your experience mod = 0.85 → Adjusted premium = $10,000 × 0.85 = $8,500 (15% reduction).
How experience ratings are determined (overview)
– Insurers or rating bureaus compare your actual losses (frequency and severity of claims) to expected losses for your industry/class and payroll size.
– The process often involves:
– Loss development and weighting (larger losses and more recent losses may be weighted differently).
– Credibility adjustments (smaller employers have less “credible” data, so adjustments can be tempered).
– Exclusions or limited weighting for very large single losses (subject to bureau rules).
– Details are technical and vary by state and rating organization; exact formulas are published by the relevant bureau (e.g., NCCI).
Why insurers use experience rating
– Fairness: Aligns premiums with a business’s actual risk history rather than only industry averages.
– Incentives: Encourages companies to reduce accidents and control claim costs.
– Risk selection: Helps insurers price and manage portfolios more accurately.
Practical steps for employers to manage and improve their experience rating
1. Prevent injuries (primary defense)
– Implement and enforce an occupational safety program (training, PPE, hazard assessment).
– Keep records of safety meetings, training logs, and corrective actions.
– Use leading indicators (inspections, near-miss tracking) as well as lagging ones.
2. Proactively manage claims
– Report injuries promptly and accurately to the insurer to avoid penalties and coverage gaps.
– Work with claims adjusters to ensure appropriate, timely care and return-to-work planning.
– Assign a point person for workers’ comp communications and follow-up.
3. Return-to-work and light-duty programs
– Create formal return-to-work policies that use modified duties to get injured employees back to work sooner.
– Document transitional job descriptions and make modifications available where possible—this reduces indemnity (wage-replacement) costs, a major driver of mods.
4. Control medical and indemnity costs
– Use pre-designated medical providers where allowed.
– Review medical bills for accuracy and appropriateness.
– Use vocational rehabilitation and early intervention when recovery stalls.
5. Audit payroll and class codes
– Ensure employees are assigned the correct workers’ comp class codes—misclassification can raise rates.
– Keep accurate payroll records and cooperate with premium audits to avoid retroactive corrections.
6. Review loss runs and contest questionable claims
– Request loss runs regularly (every renewal and after major claims).
– Investigate suspicious or inaccurate claim reports promptly and contest if warranted (use legal counsel when appropriate).
– Seek subrogation or third-party recovery when another party caused the loss.
7. Buy appropriate coverage and understand alternatives
– For large employers, consider large-deductible programs, self-insurance, or captives if financially and operationally feasible—these affect how losses are reported and can alter mods.
– Understand rules for deductible reporting and how claims affect experience rating.
8. Work with your broker/insurer
– Ask how the experience mod is calculated in your state and request a pre-modification estimate before renewal.
– Seek loss control services many carriers offer—inspections, training, and recommendations often reduce future claims.
Steps to take if your experience mod is high
– Request a detailed explanation and loss run from your insurer or rating bureau.
– Verify: payroll, classification, and claim details for accuracy.
– Identify and prioritize high-cost claims for medical-cost management, return-to-work, or subrogation.
– Develop a targeted safety and claims plan and document corrective actions to show improvement at next rating cycle.
– Consider appealing with the rating bureau if you find clear errors in the data used.
Special situations
– New businesses: Often have limited or no loss history. They may be assigned a manual rate or an assigned experience modifier until a track record forms.
– Large single losses: Some bureaus have specific rules to limit the impact of an unusually large claim (split-point systems, capped weighting), but these rules vary.
– State differences: Experience-rating rules (lookback window, formula, exclusions) differ by state; confirm the process with your state’s rating bureau or the NCCI if applicable.
When to involve professionals
– Use your insurance broker to interpret mods and propose corrective actions.
– For disputing data or technical questions, contact the state bureau or NCCI (if applicable).
– For legal disputes or complex claims, consider counsel experienced in workers’ compensation.
Where to learn more and official sources
– Investopedia — “Experience Rating” (definition and overview): https://www.investopedia.com/terms/e/experience-rating-insurance.asp
– National Council on Compensation Insurance (NCCI) — “ABCs of Experience Rating” (detailed guidance on how mods are calculated in many states): https://www.ncci.com
Bottom line
Experience ratings let insurers tie premiums more closely to a business’s actual loss history. For employers, the most effective ways to lower an experience mod are prevention (safety), disciplined claim and return-to-work management, accurate reporting, and proactive collaboration with carriers and brokers. Understanding how your mod is calculated, monitoring loss runs, and taking targeted corrective actions give the best chance of reducing future premiums.