I saw a post where a construction company was trumpeting their latest Experience Modification Rate, a .66.
Rightfully so, they should get this information out to clients and prospects since it is a fantastic testimonial to their safety efforts and results.
This post's self-congratulatory comment said that, since the average EMR Rate is 1.00, our EMR Rate is 34% below the industry average (remember your Experience Mod is like golf; the lower the score the better).
Don't Sell Your Experience Modification Rate Short!
I commented under the post further congratulating them and stating that they are actually much better than 34% below industry average.
The first, simple, explanation for why this is so is that it's not a 100 point scale. There is no such thing as a 0% Experience Modification Rating. That would, however, be nice because you'd pay zero for your work comp insurance! Likewise, there's no such thing as a .10 EMR Rate. You can't just subtract your mod from a 1.00 (average) and arrive at your EMR Rates relationship to the average. You're selling yourself short!
But, the fact of the matter is that trying to come up with a percentage by which to measure your safety performance just isn't accurate.
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.
An important thing to remember is that it becomes more and more difficult to diverge from the mean. The gulf in brain power between a 135 and a 130 IQ is not nearly the difference in brain power as that between 140 and 135.
In terms of EMR 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.
In other words, consider whatever increased safety efforts and claims reduction would be required to reduce your Experience Modification Rate from a 1.00 to a .90. Those claims reductions would have to be significantly outperformed to move from your .90 to a .80; not simply doubled.
Not being a mathematician I can’t tell you how much better than average a .66 is or if it can even be estimated as a percentage. But, I know it’s fantastic! That far away from the mean has to indicate performance significantly farther from the mean than "34%."
To ignore claim severity, claim frequency and really oversimplify the matter: if the average organization with a 1.00 experience mod had $100,000 in claims, the competitor with a .66 will have a value much less than $66,000 in claims.
Now, I believe your Experience Mod 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 reducing your Experience Modification Rate becomes exponentially more difficult the farther below the mean, 1.00, you go.
The best Experience Mod is your “minimum mod.” Take all the claims off your Experience Modification Worksheet, recalculate, and that is the lowest EMR Rate possible for your business.
Most people you speak with seem to think that anything below a 1.00 is good because they are getting (think they’re getting) a discount on their workers’ compensation insurance premiums.
And, if you are in an industry where EMR Rates are qualifiers for new business, over a 1.00 could be a death knell while just under a 1.00 very dangerous.
What constitutes a good Experience Modification Rating depends on your perspective; including the industry in which you operate.
Turn Your Experience Modification Rating into dollars and cents.
Your best bet is to calculate your minimum mod, substitute it on your policy for your current mod, and figure out the difference in premium (dollar cost of your work comp insurance) between the two. That will tell you what your current level of claims cost you; your controllable premium.
If that number (controllable premium) is significant, it could justify further investment in your safety operations. If your controllable premium is nominal, you are probably doing a great job for both your business and employees' safety.
If you want to know what is the lowest experience modification rate possible for your business and 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.