California Ex Mod

Ex Mod Ratings Offer Employers Financial Incentives That Reduce Work-Related Injuries & Accident Costs

Experience modifier (experience modification) is a term used in the American insurance business and more specifically in workers' compensation insurance.

It is the adjustment of annual premiums based on previous loss experience. Usually three years of loss experience are used to determine the experience modifier for a workers' compensation policy. This timeframe typically includes the three prior years rather than the immediate past year. For instance, if a policy expired on January 1, 2016, the data included on the Experience modification would comprise the period from January 1, 2014 to January 1, 2017.

Experience modifiers are normally recalculated for an employer annually. Each year, a newer year's data is added to the three-year window of experience used in the calculation, and the oldest year from the prior calculation is dropped off. The other two years’ data in the rating window are also updated on an annual basis.

California's workers' compensation experience rating system - which uses a "modifier" to an employer's workers' compensation insurance rates - called an experience modification or "ex mod".

This is a merit rating system that provides a financial incentive for employers to reduce work-related accidents and the cost of these accidents. California law requires this process, which is administered by the Workers' Compensation Insurance Rating Board, or WCIRB.

Experience Modification - Actual Losses / Expected Losses

In simplest of terms, an experience modification compares actual losses to expected losses.

The first $7,000 of losses for a claim is considered primary losses. Thus, it is most important for an employer to avoid any injuries and related workers' compensation medical or lost time (temporary disability) expenses, as all of the first $7,000 of a claim are charged to him in the experience formula.  Above $7,000, only a portion of the dollars involved are charged to the employer, depending on his size.  (The larger the employer, the more of this "excess" claim cost is charged to him.).  A more complete description can be found at the WCIRB website

An Incentive for Workplace Safety

The experience rating system, in essence, adjusts the premium an employer will pay based on a comparison of that employer's history of payroll and claims (collectively referred to as "experience") to the average experience of other employers within the same classification. The result of this comparison is an experience modification.

An experience modification of less than 100% reflects a better-than-average experience, while an experience modification of more than 100% reflects a worse-than-average experience.The premium differential resulting from the application of an experience modification provides a significant incentive for workplace safety. Employers who implement safety programs and take steps to reduce the incidence of workplace injuries will generally have fewer losses and lower experience modifications than other employers within the same classification. These lower experience modifications translate into reduced premiums.The experience rating system is intended to redistribute system costs among employers within an industry classification based upon their actual historical experience. On a statewide basis it is premium neutral - it does not increase or decrease the overall statewide pure premium. 

ExMod-exhibit1The Data Used for Experience Rating

Claims and payroll are used for a three-year period beginning a year after the most recent policy year (to allow for claims history to develop) and for two additional years. With few exceptions, the payroll and claims arising from all policies incepting within the experience period are used in the calculation of an experience modification.

Who is Eligible for Experience Rating

A company has to pay sufficient premiums to have an experience modification calculated.  As of July 1, 2016, that minimum annual premium is now $25,225.

The Experience Modification Calculation

Once a year, every workers’ compensation insurer sends information on all its claims to the WCIRB.  Then the WCIRB publishes a company's experience rating worksheet showing a summary of the payroll and claims (incurred and estimated) reported by the insurer and the experience modification. Other factors used in the experience rating calculation, such as Expected Loss Rates are developed by the WCIRB and approved by the Insurance Commissioner. The vast majority of experience rating worksheets are issued more than 30 days prior to their effective date. Each workers' compensation insurer provides a copy of the worksheet to a policy holder's insurance agent or broker.  You can ask the agent for a copy, or contact the WCIRB directly for a copy.

An Incentive for Safety but Not a Measure of It

The purpose of experience rating is to provide a financial incentive for safety and to objectively and equitably distribute the costs of workers' compensation claims. Improved safety practices and fewer workplace accidents will tend to decrease an experience modification over time.

Experience Rating Form Revised in 2016

In 2016, California's experience rating form had a major revision and the experience rating calculation was simplified by the inclusion of "Primary Credibility" and "Excess Credibility” values. These changes are a series of experience rating system changes that were recommended by the Insurance Commissioner's Experience Rating Task Force from 2012.

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