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.
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: