This is an adjustment that is made to the Workers’
Compensation insurance premium of companies that meet or exceed a
certain thresholds. Typically, a company that has been paying $5,000 in
premium for the past few years or has paid $10,000 or more in a single recent
year qualifies to be experience rated. This means that an adjustment factor
will be calculated for such a company based on prior years’ payroll and loss
data, essentially comparing the loss data of that particular company to
average loss data for all other employers in that state who share the same
classification codes.
One common misconception is that these factors are calculated by the state.
In most states, this is not the case. Experience modifications are calculated
by rating bureaus. Most states use the NCCI for this work, but a few states,
such as California, have their own rating bureau. California utilizes the
WCIRB.
Another common misunderstanding 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.
In general, experience modification factor calculations use data from three
prior policy years, but sometimes they can also 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 includes the next two policy
years. The most recently-completed policy year is excluded from the window.
For example, a mod effective July 1, 2008 would use policy data from the
policies effective in 2004, 2005, and 2006.
