How Your Experience Modifier (X-Mod) Affects Your Workers' Comp Insurance

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9
min read
August 20, 2021

If there’s one thing about workers' compensation insurance that confuses business owners, it’s the experience modifier (X-Mod). An X-Mod is a numeric factor that’s used to calculate your workers' compensation premium. It may also be called an E-Mod or experience modification rate (EMR). You’ll find it on the Information Page of your policy in the section that shows your premium. Your X-Mod can significantly increase or decrease your cost of insurance so it’s important to understand what it is and where it comes from.

What’s an X-Mod?

X-Mods are used in experience rating, which looks at your previous claims history to modify your current premium. An X-Mod is a numeric factor that may be greater than, equal to, or less than 1.0. Examples are .90 and 1.05. Your X-Mod is multiplied by your workers' comp premium so it can raise or lower your cost of insurance.

A rating organization calculates your X-Mod by plugging your premiums and losses into a mathematical formula. The formula compares your loss history to that of other businesses in your industry. If you’ve sustained fewer than average losses, your X-Mod will be less than one, and will lower your premium. The reverse is also true. If your loss history is worse than the industry average, your X-Mod will be greater than one, and raise your premium. An X-Mod that’s less than 1.0 is considered a “good” because it indicates that your loss experience is better than the industry average.

To see how an X-Mod works, suppose your manual premium (premium before the X-Mod is applied) is $8,125 and your X-Mod is .95. The fact that your experience modifier is less than one indicates that your loss experience is better than the average for your industry. Your reward for your good experience is a $406 discount on your workers' comp premium. You pay $7,719 (8,125 times .95) instead of $8,125. Now suppose your X-Mod is 1.05. An X-Mod that’s greater than one indicates your claims experience is worse than the industry average. You are penalized for your poor experience with a $406 debit. Your actual premium will be $8,531 ($8,125 times 1.05).

The Workers’ Comp Rating System

To understand X-Mods, you need to know a bit about workers' comp rating. All states have a system for classifying and rating employers. A majority of states use a classification system developed by a national rating bureau called the National Council on Compensation Insurance (NCCI). The remaining states (including California) use their own classification system. Most state-specific classifications systems are similar to the NCCI’s. If you understand how the National Council’s system works, you’ll have a good idea of how the others work. 

The NCCI rating system divides employers into categories (classifications) based on their occupation. Employers with similar types of businesses are assigned the same classifications. For instance, businesses that engage in tree trimming might be assigned the classification Tree Pruning and Removal. Similarly, companies that operate accounting or auditing businesses might be classified as Auditor, Accountant or Computer System Designer. Each classification has an associated four-digit classification code. The NCCI class code for Tree Pruning and Removal is 0601 while the class code for Auditors, Accountants, etc. is 8803.

Each workers' comp class code is assigned a rate that varies from state to state. Workers' comp premiums are calculated for each class code by multiplying a rate times payroll and dividing the result by 100. 

Workers’ Comp Premium = Rate x Payroll/100

For example, suppose your workers' comp policy includes the following class codes, payrolls, and rates. Your premium calculation would be:

Workers' Comp Premium Calculation
Classification Class Code Payroll Rate Premium
Clerical Office Employees
8810 $500,000 .50 $2,500
Salespersons - Outside 8742 $750,000 .75 $5,625
Total Premium $8,125


What Goes Into the X-Mod Formula?

As we mentioned earlier, your X-Mod is applied to your premium to calculate any discounts or added charges. Your experience modifier is calculated by comparing your loss experience to the loss experience of other businesses assigned the same class codes. The rating formula considers premiums you paid and losses you incurred during the previous three years (called the “experience period”). The experience period does not include the most recently expired policy period. For example, suppose your current policy runs from January 1, 2021 to January 1, 2022. The X-Mod that applies to your current policy will be calculated based on the premiums you paid and the losses you sustained between January 1, 2017, and January 1, 2020. The formula won’t include premiums and losses for the most recently expired period (January 1, 2020, to January 1, 2021) because some claims filed during that period may still be open.

When a rating bureau calculates your X-Mod, it compares your actual losses to your expected losses. Your actual losses are the losses you've actually sustained. Your expected losses are a statistical estimate of the losses your insurance company is likely to pay for a business assigned your class codes. If your actual losses exceed your expected losses by a significant amount, your X-Mod will likely exceed 1.0. 

Two other factors rating bureaus consider are your loss frequency and loss severity. Loss frequency refers to the number of claims that have occurred while loss severity refers to the size of the losses. A business that’s sustained many small losses has a high loss frequency. A business that’s incurred one large workers compensation claim has incurred a high severity loss.

Small losses occur much more frequently than large ones so small losses are easier to predict. Predictable events are easier to prevent than random events. Consequently, the rating formula attaches more weight to loss frequency than to loss severity. The rating plan imposes a bigger penalty for having many small losses than for having one big loss. It divides large losses into two parts, the primary loss and the excess loss. When calculating your modifier, bureau uses all of your primary losses but only a portion of your excess losses. This minimizes the impact of a large loss on your X-Mod.

For example, suppose two employers (X and Y) operate similar businesses in the same industry. Each has incurred $30,000 in losses during the three-year experience period. Employer X has sustained six separate $5,000 losses while Employer Y has sustained one $30,000 loss. When the rating bureau calculates Employer X’s modifier, it will include all of Employer X’s $30,000 in losses. When the bureau calculates Employer Y’s modifier, it will use only a portion of Employer Y’s $30,000 loss. As a result, Employer X’s modifier will be higher than Employer Y’s.

Many states allow rating bureaus to apply a factor called an experience rating adjustment to medical-only claims (claims that involve medical expenses but no disability) when calculating X-Mods. The experience rating adjustment reduces medical-only claims by 70%. In states where it’s permitted, the rating adjustment can significantly reduce the impact of medical-only claims on your X-Mod.

Do All Businesses Get an X-Mod?

Your business will get an X-Mod only if it qualifies for experience rating in your state. Experience rating eligibility requirements are established by state workers' compensation boards. Each state sets its own criteria, which often include a premium threshold. Employers are eligible for experience rating if their average premium meets a specified amount. For example, suppose your business operates in State Y, which has set a premium threshold of $7,000. All employers located in State Y must be experience-rated if they pass either of two tests:

  • They’ve paid an average audited premium of $7,000 over the entire experience period
  • They’ve paid a combined audited premium of at least $14,000 in the last two years of the experience period. 

Suppose that your audited premiums for 2018, 2019, and 2020 (the experience period) were $6,025, $7,050, and $7,600, respectively. Your business will qualify for experience rating since your audited premium for the last two years of the experience period (2019 and 2020) was $14,650, which exceeds the $14,000 threshold.

How Do You Get an X-Mod?

Workers' comp rating bureaus calculate X-Mods and then send them to employers. Which bureau calculates your modifier depends on the state in which your business is located. If your business is located in one of the 35 states that follow the NCCI rating plan (called the NCCI states), the NCCI will calculate your experience mod. If you’re not located in an NCCI state, your X-Mod should be calculated by your state workers' comp bureau. In California, X-Mods are calculated by the Workers' Compensation Insurance Rating Bureau of California (WICRB). If you haven’t received a modifier and you’re eligible to get one, ask your insurance carrier or insurance agent which bureau you should contact.

If your company does business in two states, will a separate X-Mod apply to each state? The answer depends on the states where your business operates. If each state is an NCCI state and your business qualifies for experience rating in at least one of them, the NCCI will produce an interstate modifier that covers both states. If one state is an NCCI state and the other isn’t, the NCCI will produce an intrastate X-Mod for the NCCI state only. The workers' comp authority in the other state will produce an intrastate X-Mod for that state.

X-Mods are updated every year. When the rating organization has calculated a new modifier, it should send you an experience rating worksheet. The worksheet lists your new X-Mod and displays the data that was used to calculate it. The effective date of your X-Mod is usually (but not always) the same as the effective date of your policy.

Reduce Accidents to Lower Your Mod 

Since your X-mod directly affects your cost of workers' comp insurance, you have a financial incentive to keep it as low as possible. You can lower your modifier by reducing workplace injuries. Remember that many small losses will have a greater impact on your X-Mod than one large loss. 

The best way to prevent on-the-job accidents is to institute a workplace safety plan. If you don’t have a plan and need help getting started, ask your workers' comp insurer for assistance. You can also check out OSHA's Small Business Safety and Health Handbook. Reducing your X-Mod can take time but the reward will be sweet, a discount on your workers' compensation insurance premium!

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