Small business owners in California need to know about the state’s experience rating system for Worker’s Compensation insurance. California is different from many other states in the way they manage Workers’ Compensation. If your business qualifies for an experience rating, you must use it. Understanding this rating system is integral for your small business.
The calculations used to determine your rate based on experience rating differ based on industry and your specific business operations. There is a lot of information to understand concerning how your business will be rated and how your premiums will be calculated using experience rating.
Read on to learn everything you need to know about California’s experience rating system and how to utilize it, then contact the experts at Fusco & Orsini Insurance Services to learn more.
Experience rating is a rating system that uses the policyholder’s past loss history compared with industry averages to return a rating factor used in calculating a premium. This factor increases or decreases the insured’s premium according to their actual loss history, making it an accurate way to predict rates.
Since experience rating is based on actual loss results for a specific business, it is meant to incentivize business owners to reduce their losses. Experiencing fewer losses directly results in a lower premium, making it more attractive for employers to reduce the frequency and severity of Workers’ Compensation losses.
What is the Ex-Mod?
The experience modifier, or ex mod, is a factor that is developed by examining the insured’s actual loss history against the expected or average loss experience for the insured’s class of business. The calculation returns an experience modifier that will result in either a credit or debit to the insured’s premium.
Most businesses in California qualify for an experience rating. It is based on your industry and payroll costs. Your classification code and payroll during the experience period are totaled and multiplied by the classification’s expected loss rate to determine eligibility. If the resulting number exceeds the pre-determined threshold, the business qualifies for experience rating.
It is important to note that you must utilize it once your business is deemed eligible for an experience rating. 80% of California businesses utilize experience rating; therefore, your business will likely need to use it.
You must determine your company’s rating effective date to find your experience period. Your company’s rating effective date is the same as the start date of your policies – if your policies begin January 1, for example, that becomes your effective rating date. Ask your agent for help with determining your company’s rating effective date.
Once you have determined your company’s rating effective date, you can calculate your experience period. The experience period is essential as the losses developed during this period are used to calculate your experience modifier. The experience period’s timeframe begins four years and nine months before your company’s rating effective date and ends one year and nine months before the rating effective date. For example, if your company’s effective rating date is January 1, 2021, your experience period spans April 1, 2016, to April 1, 2019.
Experience rating form
The experience rating form, also called the X-Mod Worksheet, rate sheet, or experience rating worksheet is provided to the insurer from the WCIRB. The completed worksheet details the company’s classifications, payroll, losses, and the experience modifier. Claims details, such as open/close status, type of injury, and the amount paid, are included. The rate sheet also lists the hypothetical loss-free rating factor, the experience modifier that would have been calculated if zero losses were reported during the experience period.
A business may request a free copy of their experience rating form annually using the Experience Rating Worksheet Request. This is the best way the company must view the data the WCIRB has on file for the company. Because the data is confidential, only the business itself may request its worksheet unless they have allowed third party access for their agent or another party.
The WCIRB is a private, non-profit association in California comprised of all companies licensed to provide Workers’ Compensation insurance in the state. This list currently counts over 400 member companies.
The WCIRB provides information and data regarding Workers’ Compensation issues. They offer educational services and advisory services around rates to stimulate a healthy workers’ compensation ecosystem.
Insurance carriers submit data to the WCIRB, which aggregates it and uses it to determine classification codes and expected losses for the classification codes. Its insurer reports every Workers’ Compensation loss in the state with an estimate of claim cost. If the claim remains open, it continues to be reported. This data is used for experience rating purposes.
Ex Mod Calculations and Formulas
The formula to determine your company’s experience modification factor is as follows:
Experience modification = Actual Losses / Expected Losses
Actual losses include the indemnity costs that have been paid or are expected to be paid for Workers’ Compensation losses incurred during the experience period. On the other hand, expected losses are expected to occur based on the company’s industry. Some industries are riskier than others so that expected losses can vary depending on your company’s classification. Companies with higher payroll can expect more losses on average.
Some types of losses incurred during the experience period may affect the calculation differently. Those include death claims and those where another policy is involved either through subrogation or joint claims.
How can Ex Mod Calculations and Formulas Affect Your Premium?
Ex mod factors of less than one represent a good loss history and result in a lower premium. An experience modifier of one means an average loss history for the industry; therefore, premiums remain flat. Ex mod factors over one indicate a higher-than-average loss experience, resulting in higher premiums for the company.
How do Risk Management and Safety Programs Help?
Your experience modifier is a direct result of your company’s individual loss history; therefore, it is easy to control this factor by implementing sound safety and risk management programs. Controlling risk and managing common hazards pays off with lower premiums. Identifying the most common perils in your industry, then managing them better than your competitors results in a lower experience modifier, hence lower premiums. Your agent is a good source of help with identifying risk factors and mitigators.
Managing Workers’ Compensation risk is a win-win situation since losses are costly and should be avoided. The initial costs of the claim plus the resulting higher premium from the increased ex mod factor will cost your small business more in the long run. By reducing the frequency of claims, your ex-mod factor will also decrease. Keeping your ex-mod factor below 1 through risk management and general workplace safety means a lower premium than average in your industry. This can give your business a competitive advantage just by doing the right thing and reducing injury losses.
How do I Learn More?
Now that you know more about California workers’ compensation modification factors, you can contact Fusco & Orsini Insurance Services experts for more information. Our licensed professionals will be happy to answer any questions you have.