The Experience Modification Rating (EMR) is a metric used by insurance carriers to gauge both the past cost of workers’ compensation claims and the future probability of additional claim costs.
In very simplified terms, the company’s EMR is calculated by dividing a representation of actual incurred losses over “expected losses,” which are determined based on payroll within specific employee classification codes. For example, payroll associated with direct labor in the building and construction industries results in higher “dollar for dollar” expected losses than clerical office payroll, because clerical office work is considered less hazardous than construction work. As such, a professional services firm with primarily office-based operations will have significantly lower expected losses than a company in the construction industries. There are more than 700 “classification codes” that are used, and in most states, employee classification is based on formal definitions published by the National Council on Compensation Insurance (NCCI), which is also the body that publishes EMRs for most states.
The EMR that results from this calculation will be a value somewhere near 1.00; a value below 1.00 theoretically signifies that a company has performed better than average from a claims standpoint, while above 1.00 infers worse-than-average performance. 1.00 is supposed to represent an average claims history relative to one’s industry. Please note, for smaller companies with lower payroll totals, the EMR can be impacted very quickly and easily by just one or two claims, because lower payrolls mean lower expected losses, and even the smallest of companies can potentially experience a large workers’ compensation claim. It is worth noting that the EMR is calculated using data from a company’s three most recent audited policy periods – so claims will impact one’s EMR for a total of three years, and eventually “drop off” in favor of more recent periods.
A company’s EMR has a meaningful impact on operations, as it is a significant factor in determining the ultimate premium charge that is incurred for workers’ compensation coverage. “Manual Premium,” which is calculated based on rates charged within specific employee classification codes, is “modified” by the EMR – an EMR lower than 1.00 will produce a credit, while an EMR above 1.00 will produce a debit.
Experience Modification Rating is intended to encourage employers to maximize safety in their operations by providing a financial incentive, while also helping to spread the cost of the risk across the workers’ compensation system more fairly.
The good news is a company’s EMR is subject to change each policy period based on more recent data. Companies who are unhappy with their EMR can work to improve worker safety to reduce claims, which will lower their EMR—and their workers’ comp insurance premium—at the next policy review date.
About NorthStar Insurance Services
NorthStar Insurance Services, Inc. is an independently-owned insurance agency founded in 1995. As one of New England’s largest independent insurance agencies, we take a hands-on, personalized approach to servicing our clients and providing industry expertise and solutions for businesses, individuals, and families. To learn more about how we can help you with your insurance needs, give us a call at (800) 301-1944.
