UNDERSTANDING EXPERIENCE MODIFICATION RATES
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A business’ Experience Modification Rate (EMR) can play an important role in their bottom line and long-term strategies. Unfortunately, many businesses are entirely unaware that an EMR even exists, let alone what their number is. Let’s examine what an EMR is, how it’s calculated, why it’s important, and how you can lower it.
What Is An EMR?
Your EMR is the number insurance carriers look at when determining what you’ll pay for a Workers’ Compensation premium. It reflects your company’s past injury and illness incidents and lets the insurance carrier calculate future risk. The National Council of Compensation Insurance (NCCI) looks at the national average of claims within a given industry and assigns that average the number 1.0. Your company’s personal EMR will be either greater or lower than 1.0, depending on a variety of factors used to determine risk. Let’s look at an example:
A company operating in the manufacturing industry has an EMR of 1.10. This means their history as a company shows a greater risk of injury and Workers’ Compensation claims than the average manufacturing company. This also means that they will be paying up to 10 percent more in insurance premiums. Another company in the same industry has an EMR of .80. Compared to others in manufacturing, they are perceived as less of a risk and will pay up to 20 percent less than the average premium. See the difference it can make?
How EMR Is Calculated
To begin with, the NCCI determines a class rate which identifies the overall risk in a given job within that class (e.g. a machinist has a higher overall risk of injury associated with the nature of their job than a salesperson). A base insurance premium is initially calculated by dividing your company’s payroll within a given job classification by 100, and then that number is divided by the class rate.
The insurance carrier will examine your past claims. They look at the three years ending exactly one year prior to the expiration of your current policy. Your history is important because a carrier will see that if you have a habit of producing injured workers, it’s reasonable to assume you will continue to do so into the future.
The NCCI will use their own formula look at the expected incidents within your industry based on a national average and compare it to the number produced by your company. Frequency and severity are taken largely into consideration.
Your EMR comes from NCCI’s determination before being calculated with the base premium rate to come up with your official premium. As we saw, companies with an EMR above 1.0 pay more, and those with an EMR below 1.0 pay less.
Why Is Your EMR Important?
The cost of your Workers’ Compensation premium is the most obvious answer. Let’s say one company pays a base Workers’ Compensation premium of $130,000 and they have an EMR of 1.25. They will pay up to 25 percent more on their premium: $162,500. Another company with the same base premium has an EMR of .75, making their potential modified premium $97,500. We have two companies within the same industry with the same base premium, and one pays $65,000 more per year solely as a result of their incident history.
However, your Workers’ Compensation premium isn’t the only way you can lose money with a poor EMR. Often, government or large-scale agencies looking to contract a company’s services will require EMR information as well as a history of OSHA violations. It’s not uncommon for a contractor to lose a bid because an agency chose to go with a company with a lower, less risky EMR. If your EMR is higher than your competitors, be prepared to offer a suitable explanation.
How to Lower Your EMR
Fortunately, a poor EMR can be remedied. The downside is that it is a lengthy process. Like we mentioned, an insurance carriers looks at your risk history over the three full years before one year prior to the expiration of your current policy. That means you will always have four years total dangling over your score.
Ultimately, an improvement in EMR happens as a result of no injuries or losses. If your company sees incidents occur often in the workplace, this is going to mean a hefty overhaul of your safety program. At the same time, it’s important to remember that incidents occur in every industry, and you can’t expect to see a complete cessation overnight. It will take time, investment, and dedication to safety. You need to look at your program’s elements and execution, your process for incident investigation and response, the frequency and effectiveness of your safety meetings, the jobs performed on site and how safe and efficient their processes are, and more.
Safety Services Company can help you evaluate your company’s workplace health and safety needs and create custom programs designed to meet your goals. If your workers’ safety wasn’t crucial enough on its own, you also have a bottom line to think about. Rather than losing your profits to increased insurance premiums and the plethora of hidden costs associated with a safety incident, invest in safety now and start saving in the long term. Contact us today to learn more.
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