Did you know that most, if not all, states need businesses to have a Workers Compensation Insurance Policy in place?
Being a business owner, you may have already complied with securing your employees with the workers Policy as part of their fringe benefits. In reality, a policy like this can cost quite a lot which could ultimately, really affect your bottom line. Being on the pragmatic side, however, you would still not have it any other way. Costly or not, getting this protection now is better than regretting non-compliance later on. It is because most states require business owners to have a workmans comp Insurance Policy on board.
The next issue is, you might be wondering why the premium paid for these policies varies. There are rumors of certain competitors in your industry paying higher premiums year after year as if they were being penalized. While others are getting rebates. Yet both are within the same business, with the same number of manpower and operating within the same number of years already.
It might be true that you know a little about this already. As a business owner, however, it is extremely important to have it since work accidents can happen at any time. A great part of your work comp policy depends on your EMR. Keep reading to learn how to understand what your EMR rating is and how to help you lower it for better premiums.
What is an EMR?
EMR stands for Experience Modification Rate, which is also called a Moderator or Factor, XMod, EMod, or just plain MOD. It is used to assess workers compensation insurance premiums. Third parties check out your history for an impression of future peril, let us say construction for example. Insurers will use a company’s EMR to determine the cost of past injuries and what future liabilities will be. And average EMR is 1.0 and if your EMR goes below that, then your business is deemed safer than most. This means a lower workers comp premium. On the other hand, if your EMR is higher than 1.0, you are deemed as riskier, which can possibly cause your business to be incapable of bidding on certain projects. In principle, EMODs act as an indicator of competency or how good an organization is performing.
What are these experiences all about? These include:
- Payroll records indicating premium and losses in a given policy period.
- Records indicating risks incurred by the insured
- Records of premium paid the company against the claims paid by the insurance company.
- Collection of data on premium and losses across industries within a state
The rationale behind all these data gatherings is the proper rating of risk factors and safety standards across companies in the same industry. Companies with effective and efficient Safety Programs are less likely to experience accidents or health issues with their employees while at work. Therefore, they are also likely to have less to no compensation claim. The opposite can be said for companies with ineffective to no safety protocols in place. These factors have a direct correlation to the premium to be paid by employers of both businesses. Higher risk is equivalent to the higher insurance premium, lower risk equates to lower insurance premium.
The experience modification rating system used for the workers compensation program was developed by the National Council on Compensation Insurance or NCCI. It is a non-profit organization established by insurance companies to govern these programs for employees across the United States, which includes the state of Colorado. To date, NCCI also served as the rating bureau in the following states:
- Rhode Island
- South Carolina
- South Dakota
- New Hampshire
- New Mexico
- West Virginia
Other states like North Dakota, Ohio, Washington, and Wyoming have their rating bureau and have NCCI on an advisory capacity only.
To accommodate the needs of employers with inter-state operations, some states opted for their own independent rating bureaus but continue to work with NCCI. These include the states of Indiana, New Jersey, New York, North Carolina, Wisconsin, and Texas.
Some states meanwhile are totally independent of NCCI’s rating plan and have their rating bureaus. These include the states of California, Delaware, Michigan, Minnesota, and Pennsylvania.
Why is the rating important?
Varied ratings do not only spell bigger or smaller expenses for each business. Each claim is also equivalent to lost productivity and lowers the competitive edge of the business as well. For example, your company has a MOD rating of 1.4 due to several compensation claims from the past year. Your competitor, on the other hand, has a blemish-free record of .80! All things considered, this “tiny” speck might effectively push you out of the competition and lose possible business.
How does the EMR or Mod work?
Most states require business owners to secure a workmans comp coverage not just as a means to protect their employees. While covering the medical expenses and lost wages for their employees due to work-related accidents and injuries, it is also designed to protect employers from future liabilities arising from such incidents.
The states, on the other hand, went further to “reward or incentivize” the business owners for getting such coverage. The EMR or Mod is your company’s safety score as indicated in your work comp policy. Simply put, the more effective safety measures are in place, the less likely an employee will hurt himself. Less risk, less premium to be paid. More risk, the higher premium to be paid. Or there will be no changes at all if the rate remains average.
However, are all companies measured the same? Is the measurement used true to all industries? What about the volume of employees working for companies? How about the nature of their jobs? Surely people working behind the desks doing clerical works are less likely to be injured in the same manner those in construction do.
Determining your EMR
Each claim is analyzed using an EMR worksheet that looks at different factors such as the type of incident and monetary value, as well as your payroll. You can compare your company to the industry’s average EMR of 1.0 but remember that anything above 1.0 deems your company as high risk. Looking at the best performers in your industry, they might have very low EMRs. If the top performers in your industry usually have very low EMRs, a 1.0 can be treated as high EMR. You may also check your company’s performance. Since no employers have the same experience, take a look at yourself instead of others. It can happen that you previously had a high EMR, but what steps are you making to ensure its decrease? Do you have a more stringent or effective safety program in place or are focusing on the implementation of safety measures? Always keep in mind that your EMR changes from time to time and can definitely be lowered.
How does a Good EMR affect your Workers Compensation Insurance premium?
Individual business owners may be eligible for an experience rating initially based on the amount of premium he paid. A modification is computed for him which could give him either a debit or credit rating.
A debit rating means he gets lower than the average score of 1.00 (1.1 or more) against the industry’s standard. So he is likely to be “penalized” with a higher premium. A credit rating on the other hand means he gets a lower than the average score of 1.00 (.9 or less) against the industry’s standard. He will likely get a rebate or reward in the form of a lower premium for his policy. It is also possible that there is no movement at all, meaning the rating remained on the average.
To further narrow it down, we have listed here some factors that will affect your company’s Mod rating.
The Industry or Workers Compensation Classification
Your company and your employees must be classified properly due to the following reasons:
- Misclassification may result in a “penalty” of retroactive premium worth three years once a claim has been filed calling for an audit.
- Misclassified employees are likely to do irregular and improper claim frequency which could be below or beyond the normal for that class code.
- Incorrect classification could also get you dropped or denied coverage by your insurer. If that happens, it will also likely raise a red flag for your new carrier. Either you might get refused or they will give you a higher markup due to the increased risk.
The codes are determined by the following factors:
- Size of the business or payroll generated
- Expected Loss/frequency of claim
- Business age
Need to know your business class code? Download the file here to see for yourself.
Let us discuss it further:
Size of the Business or Payroll Generated
This is an estimated budget allocated for the payroll or compensation to be paid based on the number of employees for the succeeding year. This is one of the data the insurance company used to compute for your company’s estimated premium. Overestimation will give you a refund or credit while underestimation will have you pay more.
When we say “Payroll”, it can also include:
- Overtime pay
- Holiday, vacation, and sick benefits
- Employer share in payments of Social Security and Medicare taxes
- Profit-sharing and other incentives
- Add-on benefits such as board and lodging for employees
- Reimbursements without proper documentation
On the other hand, these are exclusions::
- Group insurance or group pension plan payments
- Gratuities or tips received by employees from clients
- Special rewards are given for exemplary performance
- Severance payments excluding earned vacation
- Payments for active military service
- Employee discounts on goods or products purchased from the company
- Meal allowances for overtime services
- Uniform or clothing allowance
- Payments made by a third party such as a group insurance carrier in case of disability
- Employer-provided compensation package, like company cars, work-related travel, perks for discounted services or memberships, and free tickets to non-work-related events.
- Employer share to retirement, meal allowance in the cafeteria, and other similar programs
The expected loss rate is pegged at $100 for each classification code based on the type of business and job description. Classification codes which have a higher premium rate are also expected to have a higher expected loss rate and vice versa.
The lifespan of a business is also a factor considered in determining the EMR. However, only the data from the last three years are used in computing for eligibility. New businesses are normally given a modification rate of 1.0.
Since we have already discussed the relationship between your business rating and the cost of insurance premiums, here are some more suggestions on how you can improve your rating.
Lowering your EMR: The key to improving your rating and lowering your premium effectively
First and foremost, you will want to learn about any procedures for best practices your company is not following. That way you can prevent hazards and injuries when you prioritize workplace safety for your employees. If you do not have one yet, devise a simple checklist or put visual reminders like posters across the company for a start.
Learn from your mistakes. If you have been in the business for some time, note that records used for assessing your EMR are within the last three years of your operations. Make sure proper auditing, recommendation, and action plans are put in place and followed. You would need to have a plan to manage injuries and workmans comp claims as well. Make sure to document all the changes you have made and forward a summary to your insurer.
Curious to know what exactly influences your EMR? For starters, your business age serves as one of the factors.
If you are a new business with less than three years of claims, your EMR will normally be 1.0. it is important to pay attention to your industry and the frequency of your claims as well. Regardless of how costly they are, having too many claims will impact your EMR. And depending on the industry, some have more claims than others.
Keep everyone on board. There are several mechanisms and process improvement tools that you may use in ensuring everyone cooperates. As we all know by now, experience is the best teacher. The supervisor may be able to give a worker a few pointers or two. However, the best person who can say what could be improved or removed to efficiently and safely do his job is the worker himself. You may empower him by making him accountable for his task. It can in effect greatly improve safety even on his station for a start.
Establish a plan for managing injuries. Make sure everyone knows what to do in case such unfortunate incidents happen in the workshop. Document everything and follow the process — including letting your insurance partner know your status.
Keep open communication with the rest of your team. Discuss safety protocols and do audits spontaneously. This will keep everyone on their toes. Everyone should take it as their responsibility to enforce safety. It develops both personal and organizational leadership.
Develop a succession plan especially for those who were injured, sick, or incapacitated. It will help keep their morale in check. When your employees see their workplace not just as a place to earn their keep, but as a “team or family”, they are more likely to be as eager to return and perform. Employees with high morale are likely to be more productive and inspire others to do the same. As the saying goes: “hire for attitude and train for skills”. Skills can be taught but attitude is caught.
Include adherence to safety protocols part of your performance appraisal program. It is a healthy way to encourage workplace safety and concern. A safe working environment is already a big step in minimizing claims and improving your EMR. The less hazard, the lesser injury. No injuries. No claims. Better EMR score.
Be open to learning. Benchmarking from the best practices of other companies in similar industries. This can help you improve your safety standards and increase not just your company’s productivity but your EMR or Mod rating as well.
An important key also is to establish a positive relationship with your carrier. After all, they will be the ones to prepare your policy for your company. It is in your best interest to have them with you when you design your safety standards for your organization. This will also give them a better insight into your organization, which could also help them in correctly evaluating your company and employee’s classification based on the NCCI or your state’s rating bureau in preparation for that premium.
Lastly, determining Your EMR and then acting on lowering it is vital to keep insurance premiums down. Keep your industry in mind and plan out all safety measures you can take to lower your EMR rating. Contact us, and we will find the best insurance carrier for your needs.