A Proven Formula for Reducing Costs

March, 2005

Experience Modification Factor Consulting

An often-overlooked opportunity for employers to reduce their workers’ compensation costs is hidden within the calculation of their Experience Modification Factor (EMF). The EMF is used by insurance companies to determine whether a premium is adjusted up or down. Anyone who works in safety or workers’ compensation should understand the EMF calculation process and the key issues impacting their EMF.

Business people are often unaware that they can make strategic decisions to lower their EMF and therefore reduce their insurance premiums. A dedicated combination of safety programs and workers’ compensation cost control programs are needed for businesses to control and reduce their EMF.

Calculating the Experience Modification Factor

There are three factors which are used to calculate an EMF:

• Class Code
• Payroll
• Claims cost—Paid plus reserves

The calculation of the EMF begins by grouping employers within the same industry as determined by their class code. The claims experience of each employer within their respective group is compared against all of their peers. If an employer’s actual losses are lower than expected, that employer will have a credit EMF and receive a premium reduction. Employers with losses above expected claims experience will have a debit EMF; and they will pay a higher premium because of that score.

A good way to grasp the significance of the EMF is to consider the claims experience of two employers who are in the same industry and with the same payroll.

Experience Modification Factor Calculation Example

Class Code Rate x Payroll x EMF = Standard Premium

Class Code Payroll

Rate = $4.00 per $100.00 of payroll $2,000,000

Employer A: EMF of .90 the standard premium is $81,000.00

Employer B: EMF of 1.10 the standard premium is $99,000.00

A 20-point swing in the EMF results in a premium difference of $18,000.00. Credits and other changes will be added to arrive at the final premium.

Experience Modification Factor Calculation Guidelines

Following are some essential aspects of the Experience Modification Factor calculation process that can help companies reduce their costs.

• The EMF for most employers uses data for three policy years. For renewals in 2005, data from policy years 2003, 2002 & 2001 are used. For the 2006 renewal, 2001 falls off and 2004 comes into the data mix
• The data for EMF Calculation is submitted to the rating agency six months before the policy renews. For a business with a renewal date of January 1, 2005, the data will be submitted by June 30, 2004. Any changes in the data, e.g. claim reserves, which occur after June 30, 2004 will not be considered in this renewal calculation. Cost control file reviews need to be completed by this deadline so that files are closed and reserves are at their proper level on time.
• Lost time claims have a greater weight than medical claims when used to calculate the EMF. Employers who offer a structured return-to-work program for disabled employees will reduce their EMF.
• Since the EMF is composed of data from payroll and claims, the EMF worksheet is an important document that must be reviewed for accuracy. It is common to find errors in the data, which causes an incorrect calculation of the EMF.
• Employers need to verify that they are using the proper class codes. Incorrect codes generally result in a higher premium.
• Employers with a high frequency of claims will be penalized greater than employers who have had a single severe loss. Proactive processes and corporate-wide training are essential to the reducing frequency of claims.

Workers’ compensation is not a fixed expense. It is an opportunity to improve net income. The above EMF planning strategies are an example of how much power the employer actually has to reduce and control these costs. However the EMF is only one cost driver.

At Blue Ridge Risk Services, we employ Fortune 100 metrics to evaluate all workers’ compensation cost drivers. Through our comprehensive process, we identify tremendous areas of waste and opportunities for increased productivity.

If you would like additional information on EMF Calculation or any other workers’ compensation issue, please contact Tim Cummings at: office@blueridgeriskservices.com. Our Web site, www.blueridgeriskservices.com, offers additional workers’ compensation cost control information. Blue Ridge Risk Services is the employer’s advocate. We are dedicated to achieving excellence in workers’ compensation.

Employers who operate within the state of North Carolina can view the North Carolina Rate Bureau’s EMF calculation process here: www.ncrb.org.