To begin with, we need to understand that the experience modification for a particular insured is for the adjustment of the state’s developed “average” rate by class – based on the individual risk’s experience being better or worse than the average.
To properly understand how it works – we must first understand that the insurance dept of each state collects info on all of the insurable interests within the state from the insurance companies licensed within that state. The info consists of 2 essential items “EXPOSURE” (we all know for work comp, that is usually payroll) and “LOSSES”. With the entire payroll and the entire loss numbers for each classification (by year) for the state, the dept. then works up its “Z Tables”, a calculation by year that develops the average rate needed to cover all the expected losses and expenses for the entire classification within that state. In summary, the manual rate is the “Average rate” needed for the entire class within a particular state and is based on losses to exposure.
The Experience MOD is then worked out, according to the formula, as the individual insured’s relationship to that average rate. Obviously, in order to maintain an “apples-to-apples” relationship, the E-MOD has to be worked out on the same basis as the manual rate is –Payroll to losses, and NOT on a premium to losses basis.
So while the E-MOD does “affect” the client’s premium, it is not a function “of” their premium, and any changes in their past or future premiums will not have any great effect on their future experience modifications or their future premiums.
(Please note that many Agents and Brokers do not fully understand the basis of experience modifications as many of you are usually only dealing with the after-effects of a client’s past losses on the mods, and then on the resulting effects of those developed modifications on current and future premiums.
The effect of any changes in payroll by classification is seen in the selection of factors from the tables for “Expected Loss Factors” to the payrolls of each classification and the “Credibility Factor” which corresponds to the Expected losses. The Experience Modification is then further impacted by the changes in reserved claims (unsettled claims). As these claims change from “estimates” to actual payments, their dollar amount changes and these differences also effect the experience modifications.
