Insights

The Effect of Your Experience Modification Rating (EMR) on Your Company

November 24, 2020

Property & Casualty

Experience Modification Rating: It’s called “EMR”, “Xmod,” “Ex Mod,” and “Mod Rating.” In a world filled with acronyms, it’s sometimes hard to keep them all straight. However, no matter how you abbreviate it, if you’re an employer in a state that requires Workers’ Compensation insurance, you need to know about your Experience Modification Rating and what it means to your company.

In this article, we’ll discuss what an EMR rating is, why it’s important, and how it can be lowered.

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What is an EMR?

The Experience Modification Rating (EMR) is an actuarial formula designed to compare an employer’s Workers’ Compensation (WC) loss experience to those of other employers of similar size doing the same class of work. The formula produces a numerical rating which uses 1.00 as a benchmark. A rating below 1.00 means an employer’s loss experience is statistically better than the industry average, while a rating above 1.00 means the loss experience is statistically worse.

The EMR is intended to provide a financial incentive for employers who promote safety in their operations. Your EMR represents either a credit or debit that is applied to the WC insurance premium. If your company’s EMR is higher than 1.00, the result is a debit, or a surcharge, on your premium. On the other hand, if your company’s EMR is less than 1.00, you will get a credit, or a discount, on your premium.

What are the Important Variables of Your EMR Calculation?

When calculating your company’s EMR, there are two important variables that will affect your final rating. First, is your company’s WC loss experience, or claim history. The more WC claims you have, the higher your EMR will be.

When it comes to claims, the EMR formula has some built-in forgiveness. The formula treats a single large (severe) claim differently than multiple small (frequent) claims. A single large claim will have a smaller impact on the EMR than would a large number of small claims totaling the same dollar value. This is because one large claim might be the result of an unavoidable accident, while many small claims might be the indication of a faulty safety program.

The second important variable when it comes to your EMR calculation is your company’s payroll, or size. The larger your payroll, the less affected your EMR will be by WC claims.

The EMR formula “expects” a company with small payroll to have less losses than a company with large payroll. This means that one WC claim will have a larger effect on a small company’s EMR than it will on a larger company’s EMR.

If all other factors remain unchanged, year-to-year growth that results in a higher payroll will lower your company’s EMR.

How Does Your EMR Affect Your Business?

As previously mentioned, your Experience Modification Rating has a direct impact on your WC premiums. Any EMR below 1.00 translates into a premium savings in the form of a percentage discount, while any rating above 1.00 translates into a percentage surcharge. For example, a 0.75 EMR results in a 25% discount, while a 1.13 EMR receives a 13% surcharge.

Additionally, insurance carriers have the power to place favorable employers with clean loss histories into a preferred rating tier that translates into lower WC rates. Although WC carriers have no control over the base WC rates, they are allowed to have multiple rating tiers—each with different rate multipliers that modify (increase or decrease) rates. A carrier’s “preferred” tier would have a smaller multiplier and, therefore, lower modified rates.

The EMR can have an even more significant impact on contractors. The rating is a way for third parties to gauge if a contractor has a higher potential for future claims and may limit the contractor’s ability to qualify for specific projects. Owners and General Contractors of large projects are fully aware of the benchmarking benefits built into the EMR formula. They will use it to their advantage when accepting bid proposals from potential contractors or subcontractors.

How Can You Lower Your Experience Modification Rating?

Accidents can happen at any time, but if your EMR is high due to frequent claims, this may be an indication of operational deficiencies that need to be addressed. For example, repetitive eye injuries might be the result of employees not wearing the proper eye protection. By critically evaluating your operations and taking a proactive approach to correcting operational deficiencies, you can mitigate future work-related injuries and lower your EMR.

Here are some critical operational questions to consider.

  • Is your safety manual and loss prevention program up to date?
  • Do you need to improve employee job training?
  • Do you need to add additional or job-specific safety training measures?
  • Are your current hiring practices correctly identifying qualified individuals?
  • Do your qualified employees receive proper on-the-job supervision?
  • Are there procedures or best practices that your company is not following?

Understanding the Experience Modification Rating can be daunting, but at its core, the EMR is an excellent benchmarking tool. With the proper understanding and application, the EMR can help you clarify operational weaknesses, reduce future losses, and ultimately lower your WC premium.

As your agency partners, all of us at Woodruff Sawyer and Risk Solution Partners are here to provide you with our insurance expertise and support you with additional risk management and claims services. Don’t hesitate to reach out to us with your EMR-related questions.

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Richard Rolefson

Senior Account Manager

Richard is your primary contact for day-to-day consultation, support and management of your insurance program including policy changes, coverage reviews, and quote analysis.

808.954.7480

Richard Rolefson

Senior Account Manager

Richard is your primary contact for day-to-day consultation, support and management of your insurance program including policy changes, coverage reviews, and quote analysis.

808.954.7480