emod calc

Workers Compensation Experience Modification

The good news about the workers’ compensation experience modification formula (e-mod) is that it is the same for all insurers. The bad news is that it requires several inputs and is exceptionally complex. Three years of inputs are used to calculate the e-mod.

E-mods: Why You Should Consider Us: – Because We Literally Wrote the Book on E-mods.

Yes, you could say we wrote the book:

  • On the entire experience mod system (or the e-mod; or the experience modification factor);
  • On proper corporate combinations for e-mod calculations;
  • All of which drive how the workers compensation premium is calculated.

Why You Should Consider Us:
Because We Literally Wrote the Book on All of These Issues.

Yes, you could say we wrote the Book:

  • On audits;
  • On the Classification System (class code);
  • On the Experience Mod System;
    (or the e-mod; or the experience modification factor);
  • On the formula for High Deductibles;
  • On the definition of “Payroll” for purposes of calculating premium;
  • On all PEO workers comp issues, such as proper corporate combinations for e-mod calculations;
  • On the formula for Retros;
  • On the formula for Scheduled Rating.

Because we did. And all of these items drive the final calculation of your workers comp premium.

Why You Should Consider Us: We Know This Stuff.

After all, during our years at the National Council on Compensation Insurance (NCCI), that was precisely our job. NCCI set the rules of the road for audits; the Classification System; for the calculation of e-mods and High Deductibles and Retros and Scheduled Rating. And while at NCCI, we wrote the rules of the road for PEOs as to workers’ compensation.

Together with our staff:

  • We oversaw all the rules that are applied to audits;
  • We wrote the descriptions for the 600+ Classifications in the Scopes Manual;
  • We wrote and implemented the U.S. e-mod system; including its formulas;
  • We created and implemented the complex formulas for high deductibles;
  • We authored and implemented the definition of “Payroll”;
  • For PEOs, we wrote the rules for corporate combinations for their e-mods; and most of the other rules that effect PEO premium;
  • We created and implemented the complex formulas for Retros;
  • We created and implemented the complex formulas for Schedule Rating;
  • We wrote the definition of “Payroll” for determining workers compensation premium;
  • We authored and filed some 500 statewide rate filings used throughout much of the U.S., setting the premium levels on about $15 billion of workers compensation premium – every year;
  • We gained regulatory approval to use all of the above formulas and rules.

Earlier in his career, as Iowa Commissioner of Insurance, Bill Hager judged each of these matters and approved or modified the rules as submitted to the Department of Insurance.
Classifications: Employer Inputs
The main inputs include:

  • Workers’ compensation classification codes.
  • Payroll by workers compensation class code.
  • Incurred losses – paid losses plus loss reserves.
  • “Primary” incurred losses –incurred losses for claims less than $5,000 plus $5,000 times the number of claims larger that $5,000.
  • “Excess” incurred losses – for claims over $5,000, the losses for claims excess of $5,000 up to a state specific limit. (e.g. a $6,000 claim has $1,000 in excess incurred losses).

Rating Bureau Calculations
Based on the inputs listed above, the insurer and NCCI (or local State Rating Bureau) calculate several values for the employer including:

  • Expected loss rate – the expected losses expressed as a percentage of payroll for each classification code.
  • Expected primary losses – the expected primary incurred losses
  • Expected excess losses – the expected excess incurred losses
  • Credibility factors – based on the size of the employer over the past three years, the amount by which to believe the incurred losses were not caused by random chance. Larger employers will have a higher credibility factor and will have a greater possibility of having an e-mod significantly different from 1.00.

E-mod Formula
Finally, the e-mod is calculated as follows:

[Actual Primary Incurred Losses + Actual Excess Incurred Losses] (separately adjusted for credibility)
divided by
[Expected Primary Incurred Losses +Expected Excess Incurred Losses] equals the E-mod.

Each Calculation is Used Three Years in a Row.
All inputs into the e-mod are used three times for three successive years of e-mod calculations. As a result, errors in the e-mod are particularly troublesome and often affect the calculation of three years of workers’ compensation premium. We have the expertise to verify all inputs provided are correct and that the e-mod is calculated correctly.

Common Errors
Finally, in the event the e-mod is calculated incorrectly, we can provide the correct calculation as well as the amount of the overcharge or undercharge.

Some of the more common errors in e-mod calculation are:

  • Misclassification – improperly classified payrolls lead to errors in the calculation of expected losses which, in turn, affect the e-mod calculation. When issuing an insurance policy, the insurance company assigns each employee to a classification code, which in turn determines the premium for that employee’s wages. There are significant differences in rates between classification codes. As an example, if an office worker’s payroll dollars are classified as a construction laborer’s, the expected losses will be higher than it otherwise should be. Based on the above formula, lower expected losses result in a higher e-mod. In the example, a misclassification error cost this employer $431,000 in annual premium! We have a detailed discussion of classification issues in a separate article.
  • Improper Combination Or Separation Of Business Entities – The experience of businesses with more than 50% common ownership is required to be combined into one experience rating modification. Combinability of the experience of entities with the same ownership is based upon the premise that the owner is responsible for safety and loss prevention programs within the businesses. When ownership equity in businesses change, that may affect the combinability of businesses for the purpose of calculating a workers’ compensation e-mod. The rating organization (NCCI) may issue, retract, and/or revise the current modification and up to two preceding modifications due to ownership or combination changes.
  • Improper Reporting Of Loss Experience – E-mods are calculated based on the loss experience reported to the NCCI. If this experience is incorrect (possibly due to inadequate or excessive reserving, failure to credit subrogation recoveries to the business, or just plain clerical errors), then the e-mod and premium for the current and last two policy periods may be changed.

What We Do, Step One: Did the Insurer Determine the E-mod Correctly? As stated, we know the e-mod system so we analyze the e-mod worksheets and underlying data in-depth to determine the primary issues to address in the e-mod calculation. Is there a classification issue? Has only the relevant experience been included in the calculation? Have losses been reported correctly? Has your insurance company used the correct rating variables and formula? This is not a simple task because dozens of decisions are made with regard to interpreting the rules on e-mod calculations, and the difference in a word or two can be the difference in a huge amount of premium. So the first key application of our expertise as to your circumstance is whether in fact the insurer has properly included or excluded all relevant data against the Experience Rating Plan or whether the decisions are erroneous, resulting in unwarranted premium.

What We Do, Step Two: Challenge the Insurer. If you are the employer and we conclude the insurer has wrongly calculated the e-mod, we will take the matter directly to the insurer and insist that they properly calculate the e-mod and reduce the premium. We know insurance companies and are confident in working with them. We are both former insurance company executives. If you are the insurer, we will prepare a strong defense to the employer’s challenge of our classification decision.

What We Do, Step Three: Appeal to NCCI or the State Rating Bureau. In the event the insurance company does not agree with the right classification, NCCI and the State Rating Bureaus have an appeal process in place where an employer can appeal an insurer’s e-mod determination directly to NCCI or the State Rating Bureau. We know NCCI and the State Rating Bureaus. We are confident in our abilities to put forth a powerful case for the right e-mod calculation. If NCCI (or the state rating bureau) rules in favor of the policyholder, the insurance company must correct the classification and the resulting premium calculation.

What We Do, Step Four: Appeal to Your State Department of Insurance. Additionally, a number of State Departments of Insurance have an appeal process as well. That is to say, absent policyholder success before NCCI or the State Rating Bureau, a second appeal is available to the State Department of Insurance. As above, we are likewise confident in our abilities to work with all state Department of Insurance. We are former state insurance regulators and understand the process. Again, if the State Department of Insurance rules in favor of the policyholder, the insurance company must correct the premium calculation – in the favor of the policyholder.

What We Do: Step Five: Advocate Your Case. Your insurance policy is a contract between you and your insurance company. If your insurance company is not charging a premium or e-mod allowed by the policy, the supporting rating manuals, and the filed rating factors, we will advocate on your behalf and take the matter to the next higher authority. We will directly apply our high-level firepower to the case.

Ready to Work for You Now. This team is prepared now – as in today – to begin working with you.  Please contact Bill Hager at 561-306-5072 or bhager@expertinsurancewitness.com for more information. To determine whether you are paying too much premium because of erroneous experience mod calculations, too much because of erroneous classifications: in short too much premium.