The Experience Rating Plan is used to tailor the cost of workers compensation insurance to the actual loss experience of an individual employer. It acts much like a safe driver discount program, by comparing the losses and safety results of an employer to other similarly classified employers in your state. The result of this comparison is the experience modification factor, located in the bottom right-hand corner on the worksheet. Fewer accidents and losses than the average for your industry, in your state, will result in a modification factor lower than 1.00 and a reduction in premium. More accidents and losses will result in a higher premium. It is important to note that experience rating is not a penalty-reward system; it is a tool used to more accurately predict future losses for an individual employer.
The information on the worksheet is provided by your insurance company. Although the data has been reviewed, errors may occur. Please review the information with special attention to the classification codes, payroll and losses.
||Column 1 (Code)
||Also referred to as "classification code," this is the four-digit number that identifies the nature of your business. One or more class codes may apply. Return to Worksheet |
||Column 2 (ELR)
||The expected loss rate is the amount of losses expected per $100 of payroll. This actuarially derived factor is updated with each change in rates in your state. The ELRs are in dollars and cents and, therefore, a decimal point is implied before the last two digits. Return to Worksheet |
||Column 3 (D Ratio)
||The discount ratio is another actuarial factor updated with each change in rates in your state. It determines the portion of losses that are expected to be primary losses (the first $5,000 of each claim). Return to Worksheet |
||Column 4 (Payroll)
||This is the amount of payroll reported by your insurer for each of the class codes on your policy. A payroll total is provided for each policy. Return to Worksheet |
||Column 5 (Expected Losses)
||This is the dollar amount of the losses expected, based on your class code and payroll amount. (Multiply the ELR from Column 2 by the payroll divided by 100.) Return to Worksheet |
||Column 6 (Expected Primary Losses)
||This is the portion of the expected losses that are expected to be primary losses (the first $5,000 of each claim). (Multiply the expected losses by the D ratio from Column 3.) Return to Worksheet |
|Columns 1 and 6 relate to the type of business and the payroll your business has reported. They can be read across the worksheet. However, they do not have a one-to-one correspondence to the information in Columns 7 and 10, as that information relates to specific claims your workers have made. |
||Column 7 (Claim Data)
||This column provides the claim numbers for the losses reported by your insurer. Individual claims of $2,000 or less may be grouped together for reporting purposes. These grouped claims are identified by an asterisk in the O/F column, #8, with the number of grouped claims in this column. Return to Worksheet |
||Column 8 (IJ)
||This is an injury code assigned to each claim by your insurer based on the type of injury. For example, 1 represents a death; 5 represents a temporary disability. Return to Worksheet |
||Column 8 (O/F)
||This represents the status of the claim, either Open (O) or Final/Closed (F). The designations in Column 8 do not have an impact on the experience modification calculation. Return to Worksheet |
||Column 9 (Actual Incurred Losses)
||These are the losses for each claim. These are the dollars spent to pay the claim. For open claims, it includes the money your insurer has set aside for future payments on the claim. Return to Worksheet |
||Column 10 (Actual Primary Losses)
||For losses under $5,000, the entire amount is taken as the primary value. For losses in excess of $5,000, only the first $5,000 is primary. (Please refer to the explanation for Column 6.) Return to Worksheet |
Near the bottom of the rating sheet is a row of boxes (A) through (I). These figures are both actuarially determined, and based on the information provided above. They are used in the experience rating calculation to formulate the final modification factor.
The experience modification system, for all eligible employers in the state, provides a greater weight to the frequency of accidents than the actual dollar amounts those accidents may cost. The frequency of accidents is a better predictor of losses than the costs of accidents. For example, compare an employer with one loss of $50,000 with another employer of about the same size with 15 accidents, each costing $3,000 per claim, for a total of $45,000. The second business, although currently paying less in total claims, can be expected to develop more claims in the future.
The primary cutoff of $5,000, referred to in Columns 3, 6 and 10, provides for full weighting of the costs of claims below that amount. Claims that cost more than that are weighted at less than full value. This approach provides an economic incentive to employers to avoid any losses, and does not unfairly penalize an employer for an unexpected catastrophic accident. As a result of the relative weightings, the employer with 15 claims in the above example will receive a much higher modification, even though the total losses are less.
For more information, or if you have any questions, please contact your insurance agent or company, or call NCCI at 800- NCCI 1-2-3 (800-622-4123).