The Experience Rating Plan (Plan) modifies or adjusts an employer’s premium based on past loss experience. The concept is simple: a good claims history results in lower premiums, while a poor claims history results in higher premiums.
The program tailors the price of insurance and provides an incentive for safety. Several terms or slang words are used to describe the plan or part of it. Those terms are:
Does it Work?
Yes. Most studies (11 of 14) surveyed found that experience rating improves safety and health. The studies failing to detect the relationship were methodology weaker than the other studies. "Taken as a whole, the evidence is quite compelling: experience rating works."
Source: Workers Compensation Policy Review, May/June 2007, "An Overview of Workers Compensation" by John F. Burton, Jr.; page 14, last paragraph
Differences Among Employers
All states classify employers into categories for workers compensation insurance. Each classification has its own advisory rate. So, within a state, the same advisory rate applies to all employers who fall into a given class. For example, all jewelry stores in Indiana are grouped together under code 8013 and all machine shops are under code 3632. The advisory rate applied in each class is an average rate, and does not recognize any individual characteristics of that employer.
Therefore, the Plan recognizes differences among employers within the same business classification. Although the classification system subdivides employers according to product, process, operation, kind and character of business, etc. we recognize that employers can differ in a variety of ways: how the operation is performed, the manner in which the product is manufactured, and the implementation and operation of safety programs, to name a few. These factors will all affect the chance for an injury to occur. The Experience Rating Plan provides a measurable way to reflect these factors.
The Experience Rating Plan is mandatory in Indiana. To be eligible for experience rating, an Indiana employer must reach $2,500 in average annual subject premium or $5,000 in one year for policies in the experience period. Refer to the Experience Rating Plan Manual Rule 2-A, page R4.
The current eligibility was determined in the early 1980s, and confirmed in 2017. Item Filing E-1404, establishes a methodology to establish eligibility levels annually as part of the January 1 rate filing. The premium eligibility amounts are intended to be high enough so that at least one claim is expected in the three-year period used in experience rating.
Eligibility is based on premium (prior to experience rating, premium discount or schedule rating). The $5000 eligibility is not the premium on the current policy. It is for any one year in the experience period. Consider the following example:
01/01/17-18 - Premium prior to application of any modifications = $4500
01/01/16-17 - This premium is immaterial to the 2014 policy since it is not included in the experience period.
01/01/15-16 - Premium prior to application of any modifications = $5,100
01/01/14-15 - Premium prior to application of any modifications = $1,000
01/01/13-14 - Premium prior to application of any modifications = $900
The ICRB would produce an experience modification for the 01/01/17-18 policy, because the subject premium was at least $5,000 in one year of the experience period (the 01/01/15-16 policy).
The Plan basically uses three years of an employer's past policy experience (payroll and losses). For instance, an experience rating effective 01/01/2017 would normally contain these policy years:
For more information, check out the Experience Period document.
The Plan uses a formula to arrive at a bottom line factor (mod) that is multiplied by the class code premium which "modifies" the premium. A factor of 1.10 means the employer pays an additional 10% in premium. A factor of 0.90 means the employer pays 10% less in premium.
Expected Versus Actual
The experience rating formula compares actual losses against expected losses. Expected losses are calculated based on the employer's classification codes and size of payroll. If an employer's actual losses are better than expected, then it earns a discount or credit on its premium (mod factor less than 1.00). Conversely, if an employer's actual losses are worse than expected, then it earns a surcharge or debit on its premium (mod factor greater than 1.00).
Reserve amounts for open claims are treated as actual losses, so reserves directly impact the modification factor. If claims are still open for any of these years, then the carrier estimates the ultimate cost of the claim (reserve) and reports that amount to us, with updates once a year. An important point to notice is that a claim that is four years old could still affect the current rating.
Using Mod as Qualifier to Bid on Construction Projects
The construction industry often uses the experience rating modification (commonly referred to as “EMR” in the construction trades) as a metric for safety prequalification programs. The ICRB issued a “white paper” in July 2011 discussing the issues related to this use, titled “EMR as Qualifier to Bid on Construction Projects.”
The paper builds a convincing case for how the use of the experience rating mod can lead to an inaccurate picture of any particular company’s safety performance. A question still to be answered is what is a good alternative predictive indicator if the mod is not used.