Understanding Workers Comp E-ModsSeptember 26, 2019
If you are an employer, it is mandated that you carry Workers Compensation Insurance or have an approved self-insurance program in place. Even the largest employers typically look to transfer the financial burdens associated with the inherent risks of having employees over to an insurance company by way of a worker’s compensation policy. As such, true self-insurance programs aren’t all that common. And, risks are often determined by workers comp E-mods.
Worker’s Compensation Insurance is highly regulated. Although many private insurance companies will offer policies of this type, their rates will initially be based off the State’s rates and then varied based on factors which include that individual company’s experience within a certain class of business.
Whether you have a Worker’s Comp policy through a state-funded program or a private insurance company, your company will be given an experience rating that can affect your insurance premiums in drastic ways. This rating number is known as an Experience Modification Factor, or simply, your “E-Mod”. Here are some basics to know when it comes to understanding workers comp E-mods:
Do All Businesses with Worker’s Compensation Policies Have E-Mods?
While claims on worker’s compensation policies are recorded and tracked regardless of the size of the company’s Workers Comp policy, in many states, such as our state of Pennsylvania, the presence of an E-Mod is reserved to companies with a policy premium that exceeds a specific threshold. However, companies with smaller premiums, say under $10,000, may still receive a rating factor. In the cases of smaller companies, this may be applied as a Merit Rating and can be either a fixed debit (surcharge), a credit (discount) amount, or simply flat (neither surcharged or discounted).
New start-up companies will have neither an E-Mod nor a Merit Rating at their inception because they do not have any experience in which to use to calculate the rating factor. In the case of E-Mods, once a Worker’s Compensation Policy is maintained for a few years, an E-Mod can be calculated based on factors which include the frequency and severity of claims, relative to the size of the policy premium.
Each industry will have varying maximums for the E-Mod that can be applied to the policy. For some industries, the lowest E-Mod may be .9 while best-in-class businesses in other industries may be able to capitalize on E-Mods of .8, or lower. How high E-Mods can go is also variable. Some “high-risk” industries may have a maximum E-Mod factor of over 2.0.
How is an E-Mod applied to a Worker’s Comp Policy Premium?
In short, the E-Mod that is calculated for your business gets multiplied with your policy premium. In this way, a credit mod, or one that is below 1.0, provides you with a premium discount. To the contrary, a debit mod over 1.0 will serve to increase your worker’s compensation rates. Sometimes the increase can be significant.
Imagine multiplying your worker’s compensation premium by 1.5. At first glance, multiplying anything by 1.5 may not seem significant. However, it is important to realize that this E-mod factor increases worker’s compensation premiums by a staggering 50% over a company’s typical flat rate! In the case of large worker’s compensation policies, this can amount to a significant sum of money.
For example, a small manufacturing business that has a payroll of $1,000,000 may have a rate per $100 of remuneration (wages) of $10. If the company’s E-Mod is 1.0, they will pay $100,000 of Worker’s Compensation premiums annually. If the E-Mod increases to 1.5, that premium payment turns into $150,000. If the company has a credit mod of, say, .85, they can “save” a nice $15,000 off their premium each year.
How are Workers Comp E-Mods Calculated?
E-Mods are based on a calculation that is influenced by the frequency and severity of claims and the size of the policy. However, it is also important to understand that your current modifier is calculated as an average of the last three years of experience. This means that a severe worker injury from two and a half years ago is likely still affecting your worker’s compensation premium this year.
At first glance, it might appear that E-Mods are just a way for an insurance company to penalize an employer for having a claim. In reality, the conversation requires a deeper look and more nuance. E-Mods play an important part in maintaining the sustainability of worker’s compensation insurance programs which serve the public good.
The genesis of worker’s compensation insurance was the idea that remedy needed to be provided to injured workers so that they would not have to be dependent upon the government when their injuries left them unable to work or they incurred onerous medical bills. In exchange, employers who carried worker’s compensation policies are provided with common law defenses and, with the exception of cases of excessive or gross negligence, cannot be held legally liable for the injuries sustained by their workforce.
E-Mods are a way to ensure that employers who have a disproportionate amount of claims, in terms of size or frequency, are required to pay more into the “pot” than employers who have no claims. When it comes to workers comp E-mods, the E-Mod system rewards employers who do not have claims by providing them with a premium credit for their positive experience.
In this way, workers comp E-Mods help to establish safer workplaces and workplace practices by monetarily incentivizing safety. A forward-thinking approach to workplace safety leads to cost-savings for an employer and a better place to work for employees. The nature of the rolling average encourages employers to help employees seek immediate medical treatment so that claims can be minimized, closed quickly, and ultimately, helps to ensure the severity of the claim doesn’t increase over time by either an employee, or an employer, ignoring it.
E-mods are one of the factors that affect the cost of commercial insurance policies. As an employer, your goal should not be a modification factor of 1.0. The goal should be the lowest modification factor available to the worker’s compensation classification which your workers are filed under. For this reason, it is important to understand both how E-Mods work, as well as what is the lowest mod you can achieve.
If you currently have a debit mod over 1.0, there are still ways you can reduce the financial impacts that this has on your company. In fact, one of the benefits of a monoline workers compensation insurance policy is that you can get coverage even if you have a high E-mod.
Knowing the basics of workers compensation is one thing. But, talking with an independent insurance agent is the best way to explore all of your options. This may include the creation of safety committees or the initiation of new safety protocols and procedures that make the work environment a safer place and demonstrate proactive due diligence. These are additional things that can lead to other policy credits which can help to manage your premium costs while you work at bringing your E-Mod below 1.0 over the next couple of years.
If you need assistance with your current worker’s compensation insurance policy or need to explore options to get your first policy in place, give us a call at 1-800-537-6880 or 717-665-2283 and one of our licensed independent agents can walk you through the process!
Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.