Experience Modification Factor

An experience modification, or "e-mod," is a method of modifying an employer's premium based on the past experience of that employer.

After a business' policy reaches a certain size, the rating organization for each state will compute experience modification for that business.

An experience modification is determined by measuring the actual losses against the expected losses of an employer based on the employer's size and type of work.

The dollar value and type of losses are used to develop the experience modification factor.

If the experience modification is higher than 1.00, then past losses have been greater than expected.

If the experience modification is lower than 1.00, past losses have been lower than expected.

An employer's premium is increased or decreased based on the company's loss record.

The premium is multiplied by the modification factor.

For instance, if the standard premium is $10,000, a .90 modification would reduce a company's premium to $9,000.

A 1.10 modification would increase the premium to $11,000 for the same coverage.

One common misconception is that these factors are calculated by the state. In most states, this is not true.

Experience mods are calculated by rating bureaus (or as they are now designated, Advisory Organizations.

Most states use the NCCI (National Council On Compensation Insurance) for this work, but a few states have their own rating bureau).

But NCCI is a private corporation, created and funded by member insurance companies.

It is approved by the states, but it is not connected with government in any way. But California, Delaware, Hawaii, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Texas, and Wisconsin have their own government-run rating bureaus that are separate from NCCI.

Another common misconception is that the experience modification factor compares a company's past premiums with past losses.

It does not. Instead, the formula compares actual reported loss information for that particular employer with average loss data for all employers in that state who are also in the same classification codes.

Most experience modification factor calculations use data from three prior policy years, but sometimes mods can be calculated using fewer policy periods.

The usual "window" used for the payroll and loss data goes back four years for the first policy year, and also encompasses the next two policy years.

The most recently-completed policy year is excluded from the "window". For example, a mod effective August 1, 2001 would use policy data from the policies effective in 1997, 1998, and 1999. The data from the 2000 policy would not enter the "window" until the 2002 mod, when the data from the 1997 policy would drop out.

Since the mod is calculated based on data reported to the rating bureau by an employers' past insurers, incorrect or incomplete data can cause incorrect experience mods.

It can be worthwhile for employers to review these mod calculations, to make sure the calculation is complete and accurate.

Alcohol- and Drug-Free Workplace Premium Credit Program

A 5 percent credit is given to employers who have an alcohol- and drug-free workplace program that qualifies under Florida law. This discount is to be given at the end of the policy year at audit.

Excess Losses: In the Experience Modification Factor. .

The amount of any single claim that exceeds $5,000.