Although standards vary from state to state, most businesses are usually required to offer their employees Workers’ Compensation.   This type of insurance is a major investment for businesses to make, so it is important for employers to know how their premiums are calculated.  The experience modification factor, sometimes shortened to xMod, plays a significant role in determining that number.

Workers’ Compensation

 Workers’ Compensation is a type of state-mandated, employer-purchased insurance requiring employees who are injured or disabled in connection with employment.  As long as the injury occurred at work and qualifies by the state’s standards, Workers’ Compensation payments usually cover medical costs, retraining costs, replacement income, survivor benefits, and payment for any permanent injuries sustained from a work-related incident. You can check to see your state’s Workers’ Compensation laws by reviewing the U.S. Department of Labor’s State Workers’ Compensation website.

What is an Experience Modification Factor? 

Employers within the same industry may face similar risks, but that doesn’t mean that they all see a similar amount of filed Workers’ Compensation claims.  An experience modification factor is a method used to distinguish businesses with fewer expected losses from those with greater expected losses.

Here is how the value system works: An individual employer’s claim profile is compared to the expected claim profile of an employer within the same business and with a similar payroll.  If the business receives a factor of 1.00, then they are average, or experienced the expected amount of losses.  If the factor is greater than 1.00, it means that the employer experienced a worse amount of losses, and if the factor is less than 1.00, it means that the business’ losses were actually fewer than expected.

The experience modification factor considers both the frequency and cost of losses.  For example, if a company experiences one loss that costs as much as a company with several losses, the former company won’t necessarily be charged a higher premium because it is still statistically likely that it will experience fewer losses despite the high cost of the one.  However, if a company repeatedly experiences few losses with high costs, its premium will eventually see an increase.

Why are Experience Modification Factors Used? 

 Workers’ Compensation programs use a class system to determine rates.  Within each state, a certain business type (truck driving, engineering, construction, etc.) qualifies as a class, and the insurance company will apply a standard rate to the employer based on its class.  For example, a truck driving company would be subject to the truck driver rate and an HVAC technician would be subject to the HVAC technician rate.

The problem with this class system is that there is no statistically supported method of distinguishing businesses within the same class.  The experience modification factor helps remedy this situation by using the individual employer’s actual loss experience as a basis for the premium.

How Does the Experience Modification Factor Affect Premiums?

This is pretty simple once you understand how the experience modification factor works.  If a businesses experience modification factor indicates fewer than the expected losses, the premium will be lower.  If the factor indicates that the business experienced greater than the expected losses, the premium will be higher.  Because of this, employers can be more confident in a rating system that is not simply based on industry, but also on actual statistical data.

There are two steps a business can take to lower its experience modification factor.  The first and most important is to ensure safe work environments.  Second, employers should review experience modification worksheet calculations because mistakes do happen, and they could be influencing their business’s premium.