Experience Modification Factor: Reducing Workers’ Compensation Premiums

In most states, any workers’ compensation policy that generated an average of $5,000–$10,000 in annual premium over the past 2–3 policy periods is issued a mandatory “experience modification factor,” based on your company’s claims and payroll history.

What the factor does

An experience modification adjusts your annual workers’ compensation premium based on your own experience. It can be a credit, such as .85 (a 15% credit), or a debit, such as 1.15 (a 15% surcharge). NCCI or each state’s Workers’ Compensation Rating Board governs the rules and calculations, and every insurance company offering a policy in the state is required to apply the published factor assigned to its policyholder.

How it’s calculated

The calculation generally uses three years of your experience. Your audited payroll by class code, and your claims for each year, are the primary basis. Claims are valued at a specific date and include the actual amount paid on closed claims plus estimated reserves on open claims.

The three years used are the three years preceding your last policy expiration. For example, if your policy effective date is 1/1/18, your experience period includes 1/1/16–17, 1/1/15–16 and 1/1/14–15.

When it can be corrected

If your experience modification was calculated with an open $100,000 reserve on a claim that ultimately closes with total payouts of only $50,000, the modification will not be adjusted. However, there are a few complicated exceptions where an experience modification can be adjusted and recalculated, resulting in a premium reduction or credit.