Experience Modification Rating for Workers' Compensation Insurance

Abstract

Most employers regard workers' compensation insurance (WCI) as an outrageously expensive, but necessary cost of doing business. One of the objectives of WCI, to provide incentives for employers to improve safety performance, has been lost in the complex method used to calculate WCI premiums. Few employers and few insurance agents understand the process. This paper explains how WCI Standard Premiums are calculated using manual rates, payroll, and an experience modification rating. Manual rates help predict loss rates for different work classifications, payroll gives an indication of risk exposure, and an experience modification rating compares an individual employer's actual loss experience to its expected record. This paper shows that employers with WCI are really self-insuring for most losses and ultimately pay for their own injuries. The paper shows how several small losses cost far more than one severe loss, how employers who try to save money by reporting incorrect work classifications may end up paying more, and why using the experience modification rating to compare the safety performance of different employers is not valid. Employers who understand how their WCI premiums are calculated will have far more incentive to improve safety, and will be better prepared to negotiate savings when purchasing WCI.