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Workers Compensation Experience Modification Rate and What It Means for Your Bottom Line

workers compensation experience modification

What in the world is a workers compensation experience modification rate, and why are your insurance premiums so high?

It’s no secret that workers’ compensation (WC) insurance protects businesses just as much as it does employees. But not every company pays the same premiums. Some insurance providers quote rates so high that small businesses with a high workers compensation experience modification rate forego coverage. This option is not a wise one—and in many states, it’s also illegal. 

So, why do you have to pay so much? Keep reading to discover the answer and what you can do to save your company money.

Why Do You Need Workers’ Compensation Insurance?

Workers’ comp is a type of specialty insurance that covers medical bills after work-related injuries. Companies purchase coverage and hope they never have to use it. But since no one can predict when or where an on-the-job accident may occur, WC gives both businesses and employees peace of mind.

As a small business owner in a high-risk industry, finding ways to cut spending is essential. But you should never operate without WC coverage. Doing so could open a dangerous and extremely costly can of worms. Here’s why this insurance is invaluable:

It’s the law almost everywhere. 

Most states require companies purchase WC coverage for their employees, no matter the industry. What if the rates are too high? Quite frankly, the government doesn’t care how much you have to spend to stay in compliance.

If you happen to operate in a state where WC isn’t required, don’t celebrate too much. It’s still a good idea to purchase it anyway. Once again, you never know when tragedy could strike your workplace.

It encourages your workers to seek medical care. 

Of course, going to the doctor isn’t cheap, and a trip to the ER costs a small fortune. But prompt medical attention following a work-related injury is crucial. The sooner your employee gets seen by a doctor, the sooner they’ll get back to work.

Injured workers often skip going to the doctor because of the price. With workers’ comp, however, they won’t have to worry about money. Instead, the plan will cover any medical expenses, physical therapy, and, in some cases, lost wages.

It could save your business. 

Employees who get hurt at work rack up a bundle of medical bills and other expenses. It’s easy to assume they’ll have to find a way to pay if you don’t have WC coverage. But that’s not usually the case. Instead, an injured worker may hire a lawyer and seek damages from your company. Can you afford to pay it all out-of-pocket?

According to the National Safety Council, the average cost for a medically consulted injury was $42,000 in 2019. And if the worker lost their life, that figured jumped to over $1.2M. Imagine if you didn’t have insurance and had to repay that amount? It could easily bankrupt your company.

What Is Workers’ Comp Experience Modification Rate?

There’s no denying that the benefits of workman’s compensation insurance far outweigh the cons. But if the premiums go up, will you still feel the same? And why are they so high in the first place? The answer boils down to the experience modification rate (EMR).

All companies have an EMR. This rating determines the accident risk for your facility. And it can—and will—fluctuate over time. Businesses start with a score of 1.0. This number increases annually based upon any reported work-related accidents. In other words, the higher the number, the riskier your company is to insurance providers.

How Does EMR Affect Insurance Premiums?

As you probably already guessed, your experience modification rate correlates to your WC premiums. High-risk industries have a higher EMR by default. Adding injury claims to the mix only makes these companies a higher liability.

How do you calculate insurance premiums from an EMR? The National Council on Compensation Insurance (NCCI) has strict rules in place to determine this number. Here’s the formula they use:

Class Code Rate X Employer Payroll per $100 X Experience Modification Rating = Workers’ Comp Premium

What does this formula mean? Let’s break it down:

The class code is a number assigned to each industry, as designated by the NCCI. Each class code has a set rate depending on the nature of the business. Industries deemed riskier have higher rates. It’s probably the number one factor in determining the premium when underwriting a WC policy. And there’s no way to change the class code rate.

Payroll reflects your organization’s real wages only. It doesn’t include anyone not considered an actual employee. These may include contractors, vendors, subcontractors, or leased workers. So how does payroll affect WC costs? Simple—the higher your payroll, the higher your premiums. But, interestingly enough, the more people you employ, the less it will affect your EMR if you do file a claim.

And, finally, the experience modification is the risk-assessment number assigned by the NCCI. 

Unfortunately, if this formula gives you a hefty premium, there’s not much you can do about it. Insurance companies are in the business to make money. And if you seem like a risky client, they will charge you more. It’s that plain and simple. But you still have options.

Where Can You Buy WC Insurance with a High EMR?

Do you work in a high mod industry? That doesn’t mean you can’t find an affordable workers’ comp plan. There are three places you can turn for a quote. They are:

  1. Private Insurance Providers: Most companies begin their hunt for WC coverage with private insurers. These are the big names in the industry that most people recognize—many even spend big bucks on advertising. But merely having a well-known name doesn’t mean they are the best match. And they could deny you coverage altogether.

    Private insurance companies usually require an annual lump sum payment. Others may also offer a pay-as-you-go plan. The best fit depends on your budget and employee turnover. However, if you run a small business, expect to pay more for coverage.
  2. State Fund: Can’t get coverage elsewhere? Most states require WC insurance, and they have to provide an option if private insurance companies deny your application. This type of coverage comes from the State Fund. But don’t expect much from these plans. They often come with high premiums and minimal coverage. After all, the government has a reputation for cutting corners and being cheap.
  3. PEO: Small business owners in high-mod industries often believe they have to settle for outrageous premiums. Thanks to PEOs, that’s not always the case. Professional employer organizations pool several companies together. The result? Lower WC premiums across the board—even for those with a high EMR.

Small Businesses and Insurance Premiums

Small business owners feel like they get the short end of the stick when it comes to WC premiums. While it may seem like mom-and-pop companies pay more than their larger counterparts, that’s not always the case. Big and small organizations in the same industry may have similar mod ratings. So why do WC premiums seem more unfair for the little guys?

The answer boils down to available capital. Let’s pretend two companies in the carpentry industry—one big and one small—have a high EMR. (And since carpenters injure themselves on the job frequently, this example is plausible.) Insurance providers may charge both businesses a steep $26 premium per $100 of payroll. Yikes! That’s not pocket change.

As you can probably guess, this scenario won’t affect both companies equally. The multimillion-dollar company has, well, millions of dollars at its disposal. The CEO has greater access to funds, meaning they can afford higher premiums. However, the owner of the small business will probably struggle to afford these premiums. They may be a single accident away from getting priced out of their policy.

These factors also determine a company’s WC premiums:

  • Number of claims. The more claims a company has on record, the higher their experience mod rating. And if they go without incidents for at least 3-4 years, that number will decrease.
  • Cost of claims. The more insurance has to pay on WC claims, the more your EMR will increase. Conversely, claims that cost less than the deductible won’t affect your rating as much.
  • Frequency of claims. Too many claims in a short time is a red flag for insurers. Several claims, no matter the size, can increase your mod score.
  • Severity of claims. All it takes is a single, severe insurance claim to raise your EMR and premiums.
  • Industry reputation. The NCCI considers your industry when assigning a class code. Riskier industries have higher premiums across the board. It doesn’t matter how many claims individual businesses make.
  • Years in operation. Startups often have lower modification rates. Why? Everyone starts at 1.0, and young companies haven’t been in business long enough to make claims.

A Better Solution for High Mod Industries

Workers’ comp policies are a necessary evil. Although they are pricey, high-risk companies need them to protect themselves and their employees. Without coverage, bankruptcy is a very real possibility. But how can you afford a policy with a high EMR rating?

Whether you work in construction, roofing, manufacturing, home health, or another risky business, you still deserve affordable coverage. PEOs are perhaps the best solution. In most instances, these organizations can obtain lower quotes for high-mod industries.

Here’s how PEOs work:

  • Your company and a PEO broker enter into a co-employment agreement.
  • The PEO takes over all payroll and tax responsibilities.
  • Your employees also become employees of the PEO.
  • The PEO broker pools your employees with those from other companies to get lower insurance rates.
  • You sit back and enjoy the savings.

In addition to helping with insurance coverage and taxes, most PEOs also take on the tasks of a full human resources department. Yes, you’ll lose some control of some of your company’s day-to-day operations. But you probably didn’t want to deal with boring HR-related stuff anyway. In the long run, you’ll have more time to devote to more pressing matters. This unique co-employment agreement is a win-win for both the PEO and your small business.

High Mod Rating? Turn to a PEO You Can Trust

Are you struggling to obtain affordable workers’ comp coverage for your employees? Insurance premiums vary from company to company. And those working in high-risk industries pay more for WC coverage.

However, your premiums may be even higher if you:

  • Are with the State Fund.
  • Have gaps in your coverage.
  • Received a non-renewal notice from your current provider.
  • Have previous losses on record.
  • Have a high experience modification rating.

Just because those statements apply to your situation doesn’t mean insurance companies should take advantage of you. It’s time to consider hiring a PEO to reduce your insurance rates and get better coverage.

Coastal Work Comp Brokers can help lower your premiums. Our clients save up to 30-40% from their current premiums. And you don’t have to worry about a down payment or the dreaded annual audit. As a premier PEO, we understand the challenges faced by many high-risk industries. We can help you find the right workers’ compensation policy that fits your needs and budget. Our team can also tackle payroll processing, employee benefits, HR services, and risk management for your business.

Also, because you’re in a high mod industry, you may want to know more about:

Ready to switch to a more affordable WC plan with better benefits? Call us today at 1800-411-0733 to discuss how Coastal Work Comp Brokers will save you money even with a high workers compensation experience modification rating.