Controlling the Experience Modification in the Face of Declining Expected Loss Rates

Several factors go into pricing a company’s workers’ compensation insurance policy. One aspect that impacts the rates of most employers in California is the Experience Modification Rating (EMR). The Experience Modification Rating measures an employer against its industry peers by comparing its actual losses to its expected losses. If the employer has fewer losses than expected, the premium is discounted. If the employer has more losses than expected, then a premium penalty is applied. Expected losses are determined by, multiplying the Expected Loss Rate (ELR) for each class code by the total amount of payroll developed in that class code during the policy term, and dividing by 100. This is because the ELR represents the “amount” of dollars in claims the company is expected to have in a given policy period per $100 in payroll in that class code, based on how hazardous that work is.

The purpose of the Experience Modification Rating is to ensure that the insurance company collects enough premium to cover a risk’s claims and to incentivize employers to provide a safe workplace. But, some aspects of this rating are not within the employer’s control. For example, Expected Loss Rates are determined by the Workers’ Compensation Insurance Rating Bureau (WCIRB) each year and are not a factor within your control. They are developed using retrospective, or historical data; but they are applied to your experience modification in a predictive manner. Expected Loss Rates use past claim trends to predict how many claims you as an employer should have in the future.  This year, the WCIRB made a mid-year filing effective September 1, 2022, that included new Expected Loss Rates. Many of those rates decreased quite a bit from the previous filing. When ELRs decrease, the Experience Modification Rating will increase even if there are no claims in the experience period. Below is a table of several class codes that have seen a reduction in Expected Loss Rates in 2022.

Class Code 2021 Rate 2022 Rate Difference Description
8601 .12 .09 .03 Architects & Engineers
5606 .35 .29 .07 General Contractors – Supervisors
5610 1.55 1.44 .11 General Contractors
9067 .73 .58 .15 Boys & Girls Clubs
5432 1.91 1.77 .14 Carpentry
6316 1.38 1.08 .30 Tunneling
8227 1.49 1.35 .14 Construction or Erection of Permanent Yards or Shops
3076 2.39 2.03 .36 Furniture Manufacturing – Metal

While the WCIRB typically doesn’t share all the data it uses to develop ELRs, we do know that in the past few years injury rates declined due to the COVID-19 pandemic. Many companies moved their workforces entirely remote, many laid-off good portions of their workers, and social distancing on job sites meant fewer chances for folks to come in contact with each other. When layoffs did occur, it was often the most seasoned employees that were retained. Statistically, we know these are the employees least likely to be injured. All of these things may have contributed to lower injury rates.

However, this circumstance may not truly be predictive of where we are today. Nearly across the board, our clients report that they are in a hiring crunch. Work backlogs look great, if only companies could get the talent and materials to start their jobs. Even in normal times, when an organization is in a rush to hire, they don’t always have the luxury to wait for the cream of the talent crop. In terms of talent acquisition, these are certainly not normal times. Companies are facing unprecedented recruiting challenges. Additionally, newer employees are the opposite of the above-mentioned seasoned employees. While older workers get injured less often but more severely, new hires are often the source of injury frequency. Remember that when ELRs go down the rating will usually go up even if there are no claims. If claim frequency increases, rating increases can be severe. So, many companies are facing what looks like an Experience Modification Rating perfect storm- a tight talent market, tremendous staffing needs, and decreasing Expected Loss Rates.

What can you do to control your Experience Modification Rating in the face of declining ELRs? Here are a few best practices:

  • Have a Consistent and Effective Hiring Process- to the extent that it is possible, vet every single candidate. The best day to prevent a claim is the day you don’t hire someone who isn’t a good fit for your organization.
  • Train and Onboard Every Single Employee- now is not the time to abandon your great orientation processes that assimilate new employees into the culture of your organization and teach them how to perform their jobs safely.
  • Consider Post-Offer, Pre-Hire Physicals, or Skills Assessments- to ensure new hires are physically capable of performing the essential functions of the job with or without an accommodation.
  • Manage Performance- in real-time, so that unsafe habits can be corrected before they become injuries.
  • Manage Claims- actively. Offer modified duty whenever possible. Create a recover-at-work culture. Stay in communication with employees on leave.
  • Have an Effective Health and Safety Program- create a culture of safety and safety communication. Educate management and employees on the importance of safety and open communication regarding hazards in the workplace.

If you have questions about how to do any of the above or need help with implementing any of these programs, contact your broker. A great insurance broker will have experts on staff who will be able to advise you in these areas and help you put these practices into place; as well as help you understand your own experience modification rating, ELRs, and loss history, which is essential to controlling them.

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