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Experience Modifiers – Workers’ Compensation Policy

What is an experience modifier, how is it computed and how does it affect my premium?

The experience rating modifier is the one area where an employer’s efforts can significantly reduce premium cost.

Experience rating is the interaction of claims management and insurance pricing. An organization that controls its losses also controls its experience modifier and ultimately is responsible for higher or lower premiums. Although the formula is quite complicated, an understanding of the basic components will assist you in minimizing the impact of losses.

The experience modification formula considers losses for a three-year period, excluding the current policy period. The “losses” are more than just the amount that has been actually paid out on a claim. They are the “incurred” losses, which also include the reserves that an insurance company adjuster has estimated the loss will pay out in the future, either in direct medical treatment or as indemnity payments to the injured worker while he or she is unable to return to work.

As an example, let’s consider that an experience modifier for a risk is being calculated during 2006 for a policy that will be written effective Jan. 1, 2007. Since the 2006 policy is not yet closed (expired), the loss data is not available. This one-year lag period allows the insurance company the time to close most claims and more accurately estimate the cost of the open claims that will continue for more than one year. The three years that the experience modification calculation is based on are the years that began in January 2003, January 2004 and January 2005.

In its simplest form, the experience rating calculation compares the actual losses for the individual employer with the expected losses for the average employer in the same industry and same state with the same amount of payroll.

An experience modifier of 1.00 represents an employer whose actual losses closely matched the expected losses for their business. If the actual losses were greater than the expected losses, the experience modifier would be greater than 1.00; conversely a modifier less than 1.00 means that actual losses were less than expected.

Since no two employers in the same industry will have the same claims histories, the experience modifier calculation is designed so that the employer with the greater claims pays more for workers’ compensation. Through this system, employers have a financial incentive to improve the safety of the workplace. The chart below shows the significant impact that the experience modifier has on the actual premium an employer pays for insurance:

Manual Premium Exp Mod Discount/Surcharge Modified Premium
$62,106 .73 $16,769 Discount $45,337
$62,106 1.00 No Impact $62,106
$62,106 1.43 $26,706 Surcharge $88,812

The last aspect of the experience rating modifier that impacts the calculation is the frequency of claims. The formula places a higher penalty on an employer who has 10 injuries costing $5,000 each versus an employer who has one injury costing $50,000. Although the ultimate expense may be the same, the employer with one claim is considered a much better risk. A history of frequent losses normally implies there are poor safety standards in place and little management commitment to improving safety. In Texas, as in most states, large claims are “capped” so that the amount that exceeds the cap is not counted at all in the calculation. The current cap in Texas is $107,000. This capping process reduces the penalty to the employer when there are “shock” losses.

The examples below show the impact of losses on the experience modification calculation as well as the impact of frequency versus severity in the calculation.


Example #1 Hypothetical Account
Claims History
Claims Policy Yr Actual Primary  
Under $2000 01 5,660 5,660  
Under $2000 02 5,303 5,303  
Under $2000 03 3,018 3,018  
#51261701 01 3,267 3,267 Lost Time Claim
BJM3976 03 72,848 5,000 Lost Time Claim
BJM9986 03 4,708 4,708 Lost Time Claim
    94,804 26,956  
Premium Calculation
Class Code 3628 8742 8810 Mod Adj Prem
Est Payroll 1,000,000 100,000 1,400,000    
Divide/100 10,000 1,000 14,000    
Prem Rate 3.50 0.75 0.36    
Premium 35,000 750 5,040    
      40,790 1.275 52,007


Example #2 - What IF there had been no Lost Time Claims?
  Premium Mod Adj Prem
Example #1 40,790 1.275 52,007
Example #2 40,790 .80 32,632


Example #3 - What IF instead of three lost-time injuries, there was only one but the total loss was the same?
  Premium Mod Adj Prem
Example #1 40,790 1.275 52,007
Example #2 40,790 .80 32,632
Example #3 40,790 1.120 45,684

Remember, experience modifiers are not arbitrary numbers assigned by the insurance carrier; they are calculations based on the employer’s actual losses. You can reward yourself and your business by implementing safety programs that will reduce losses.

This article was derived from an article written by Jan Kearbey, CIC, CISR, CPIW, CWCP, Director of Education & Production for Service Lloyds Insurance Company of Austin, Texas, and was originally printed in Service Lloyds Connection Volume II, Issue 3.

This article was prepared and made available to your agent by the Independent Insurance Agents of Texas, which is solely responsible for its content. Please read your insurance policy. If there is any conflict between the information in this article and the actual terms and conditions of your policy, the terms and conditions of your policy will apply. The Independent Insurance Agents of Texas is a non-profit association of more than 1,800 insurance agencies in Texas, dedicated to helping its members succeed, in part by providing technical resources that explain insurance policies sold to their customers.

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