I wrote a blog post titled What Is A Good Experience Modification Rate? It explains why a good, below 1.00, EMR Rate is an even better achievement than most people realize.
In this post, I'm using much of the same material related to Experience Modification Rating calculations to explain why your debit (> 1.00) Experience Mod isn't necessarily as bad as you think. And, I want to explain why there might be a good opportunity to realize a big impact from relatively small changes in safety practices, claims management, etc.
Why Is An Experience Modification Rating Over 1.00 Bad?
If your EMR Rate is over a 1.00, this could spell trouble for you in a number of ways. The 2 most prominent are:
Increased Premiums/Costs
Lost Revenue (not eligible to bid on projects)
There are plenty more.
Although your Workers Compensation Experience Mod may be causing you problems in the here and now, you are likely in position to improve your Experience Modification Rate faster than you think. In the process you can save yourself money and position yourself more competitively when submitting your EMR Rate is required for new business proposals, RFPs, etc.
EMR Rates Are Like Golf; The Lower The Better
The lower your Experience Modification Rating the better just like your golf score.
Also, like golf, when you are not very good you get better quickly with small improvements in technique, small commitments to regular practice, playing more frequently, etc.
Conversely, as you improve from shooting regularly in the 90s to the 80s to the 70s (not there yet by a long shot!), it becomes increasingly difficult to improve. Exponentially more practice and training are required to improve your scores the better you become.
Your Experience Modification Rating Decelerates (Slows Down) Moving Away From The Mean (Average 1.00) & Accelerates Toward The Mean
Good News If Your Experience Modification Rate Is Over A 1.00!
Remember the Normal Distribution or Bell Curve from statistics? The high point of the curve represents the mean with a strong concentration of data points clustered around the mean.
The IQ distribution, for example, is a Bell curve and the mean is 100.
Experience Modification Rating has a mean of 1.
For example, to relate Experience Modification Rating back to IQ, the gulf in brain power between a 130 and a 135 IQ is not nearly the difference in brain power as that between 135 and 140. Every additional IQ point higher is increasingly more difficult to achieve than the previous point.
Moving away from the 1.00 mean, in terms of Experience Modification Rates, a .90 isn’t 10% better than a 1.00. It’s something more. A .80 is not simply another 10% better than the .90. It’s definitely better than that.
Likewise, an EMR Rate of 1.10 isn't simply 10% worse than a 1.00. It's something more. A 1.20 isn't twice as bad as a 1.10. It's definitely worse than that.
But, EMR Rates Accelerate Toward The Mean (1.00).
An important thing to remember is that in this type of distribution it becomes more and more difficult to diverge from the mean; and increasingly easier to converge on the mean. In other words you can improve your debit experience modifier (> 1.00) quicker than you think.
Good News: EMR Rates Aren't Fixed Like An IQ
And, improvements in your loss experience will increasingly accelerate the improvement of your Experience Modification Rate the farther away from the mean you are (to the right - over a 1.00). This acceleration will continue up until the point where you arrive at the 1.00 mean.
In other words, consider hypothetical implemented safety efforts that reduce your claim frequency by, say, 5 claims per year. Or, alternatively, implemented safety efforts that reduce your total claims cost by $15,000 per year. Those identical changes will reduce your Experience Modifier MORE if you have a 1.05 Experience Modification Factor rather than a 1.10.
If you have a 1.10 Experience Mod, those identical changes (improvements) in loss performance will benefit you (lower your Experience Modification Factor) more than someone with a 1.20.
Again, this will be true up until the point where you start falling below a 1.00 where, for each additional point drop, it becomes increasingly difficult to lower your Experience Mod.
Now, I believe Experience Modification Rating falls into a log normal distribution rather than a normal distribution because the lowest EMR Rates I’ve seen are around a .5 while the highest I've seen are north of 2.00.
One way or another though, reducing your Experience Modifier becomes exponentially easier the closer to the mean, 1.00, you go (from right to left).
So, Are There Any Exceptions For Some EMR Rates ?
Yes, if your Experience Modification Rate is really bad, improvements in claim frequency and severity may not help your Experience Modification Rating at all initially. There are some safeguards built into the Experience Rating Algorithm to prevent EMR Rates from rising to, for example, a 10.00.
One is the Claim Max or State Max. Each state has it's own severity limit for an individual claim. It may be $350,000 in your state which would mean that any amount above "the max" can't be counted in your Experience Modifier.
So, in the case of a $1,000,000 claim only $350,000 would count against you while the remaining $650,000 would not.
There are other "triggers" like this that limit catastrophic rises in EMR Rates beyond the scope of this post. But, let me know if you're interested in more.
If you are an employer with a really high Experience Modifier benefiting from some of these safeguards, your claims performance is going to have to improve to a large extent before your mod will fall at all.
For example, if the reserves on that million-dollar claim example above are reduced by $500,000, your EMR Rate won't benefit at all since the claim is still valued above the State Max. The claim value was capped at $350,000 and it's still valued at $500,000 after the reserves were taken down ($1M initial value - $500K = $500K). That claim would have to still fall below $350,000 before you could realize any benefit.
Getting Back To The Original Question: Is Your "Bad" Experience Modification Rate Really That Bad?
It's probably not that bad in the sense that a relatively small effort and focus should get your Experience Mod back to where it's not costing you additional premium and working for you (rather than against) in bidding processes.
I wrote a post called 3 Simple Ways To Reduce Your Experience Modification Factor with suggestions that should help you get started, build some momentum and reduce your Experience Modification Rate. And, I created a video summary of this post.
And, since I wrote the above post I added The Zero Cost, Easiest Way To Reduce Your Experience Modification Factor which will really interest you if your Experience Modifier is above a 1.00.
These are no-cost or little cost techniques you can implement without taking time away from what you do best. And, we know how building a little momentum can snowball!
If you want to lay out a comprehensive plan to attack your EMR Rate, let me know.
Lastly, It May Help To Turn Your Experience Modification Rating into dollars and cents.
Sometimes improving your Experience Modifier just takes "buy in" from management or even your colleagues to get the support for your plan.
Your best bet may be to demonstrate how much your Experience Mod is costing your company. To do this you:
Calculate your "minimum mod" (what your mod is with zero claims)
Substitute it on your policy for your current mod and figure out the annual premium with your minimum mod
Subtract premium with your minimum mod from what you're currently paying
The difference in premium between the two is what your Experience Modification Factor is costing you. And that dollar figure is called your Controllable Premium. If your controllable premium is significant enough, you should be able to get the attention you need for an investment in time and resources to put some measures in place.
If you want help determining your minimum mod and controllable premium, let me know. I’d be happy to do the calculations for you, no fee.
Stuart Cytron, MBA has been published in trade journals such Construction Forum St. Louis and St. Louis Business Journal among others. You can read more about Stuart and how he developed a passion for helping businesses reduce work comp expenses on his website.
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