California’s experience rating system is intended to provide Employers a direct financial incentive to reduce work-related accidents. The experience rating system objectively distributes the cost of workers’ compensation insurance more equitably among employers by determining which employer’s are more likely to experience future losses (work comp claims). This is measured in a data point that goes by many names: the experience modification, experience modification rating, EMR, X Mod, XMod, the mod, and more.
The Ex Mod is the numerical figure that represents a company’s likelihood to have future injuries, with company size and industry taken into account as well. We’ve seen X Mod’s as low as the 30’s and as high as the 800’s – although most of those are extreme outliers. We will get deeper into how the X Mod is calculated later in this article, but to put it simply – the X Mod is a comparison of expected losses vs. actual losses, with expected losses being determined by your class codes and payroll and actual losses determined by the claims you experience. If a company has exactly as many actual losses as expected losses, the X Mod would be 100 = the average X Mod. If a company has more actual losses than expected losses, the x mod goes up. The farther these actual losses are from the expected losses, the higher up it goes. The same effect happens in the other direction as well, if actual losses are lower than expected losses.
How to Interpret the Experience Mod
As we just established, to calculate the experience modification, you must compare the actual losses of a business to the expected losses of that same business. Actual losses are the medical costs and the indemnity costs resulting from a work-related injury or claim that an insurance company has paid or expects to pay in the future. Expected losses are representation of the statistical average losses of companies or businesses of similar size and within the same industry, measured by their classifications and payroll. The larger the business’s payroll (within industry held constant) the more losses that the business is expected to incur. Larger businesses and those businesses that are considered more risky also have a larger variance in potential X Mods. A large construction company with little to no claims could have a mod as low as 45, where as a small accounting firm is likely limited to lows around 80 (even with no losses at all).
By examining the losses incurred by groups of businesses in the past, it is relatively straightforward to predict the frequency and cost of workplace injuries for those businesses moving forward. Businesses must be of a certain size to qualify for an experience modification rating. If a small business incurs a loss, the effect on its experience modification using the comparison of actual losses to expected losses would result in an unreasonably high experience modification for the year. This could greatly increase workers compensation insurance costs. This and other factors have led to modifications that have been made to the experience modification rating formula to prevent extreme swings in the experience modifications from year to year.
Primary Losses vs. Excess Losses
To go into detail on calculating the experience modification, it’s critical to understand the difference between primary losses and excess losses. The split point that determines which part of a loss are “primary” and which part are “excess” is called the Primary Threshold. The primary threshold serves as a “cap” on primary losses – any costs over the primary threshold are considered excess losses. The primary threshold value has been calculated a few different ways in the past. Calculating the experience modification rating prior to 2017, the first $7,000 in losses for each claim was considered primary and used at full value. Anything above the primary loss value of $7,000 was considered excess. Prior to 2017, a portion of the excess loss value was used in the experience modification calculation which varied from zero for small businesses to 78% for large businesses. employers’ primary loss threshold varies based on the size of the employer and the type of work their employees do. Now, there are over 90 different primary loss values ranging between $4,500 and $75,000. The experience rating formula used today places the full weight on the primary portion of the claim cost, with no weight given to the excess loss value – no matter company size. In 2019 the Experience Rating Formula was simplified again and an additional modification was made stating that the first $250 for each claim is removed from calculation.
The Formula Prior to 2019, the following formula was used to calculate the experience modification rating:
From 2019 forward, this following formula is used to calculate the experience modification rating:
As you can see, the formula was simplified greatly for calculations post-2019.
The Rating Period The data used to calculate the experience modification for each upcoming year is determined by your company’s rating effective date. The renewal date, also known as the start date, is the determining factor of your company’s rating effective date. If your policies always start on January 1, your rating effective date would be January 1. The rating effective date determines the experience period and the effective date of your experience modification. In almost all cases, all payroll and losses that occurred under any policy that began within the experience period will be used in determining the experience modification. This “experience period” begins 4 years and 9 months prior to the rating effective date and ends 1 year and 9 months prior to the rating effective date. If the rating effective date is January 1, 2022, the experience period would be from April 1, 2017 – April 1, 2020.
Who uses your X Mod?
For all businesses that are large enough to be experience rated, a completed Experience Rating Form (X Mod Worksheet) is provided to your insurance company when a policy is written. The X Mod is directly factored into your Worker’s Compensation premiums. This completed X Mod Worksheet provides detailed information about the classification codes assigned to a policy by the WCIRB, the payroll reported for each of those classifications, summaries of claims amounts, and the current experience modification.
For those looking to read on, we’ll do a quick overview of the worksheet here as well. The X Mod Worksheet is divided into different sections.
The Header shows the WCIRB assigned classifications for the company, listed below the company name and address. The effective date and issue date are also included in the header section of the worksheet, along with the insurer and policy information.
The next section shows the summary of payroll and the expected loses which includes the following information:
Primary Threshold – the maximum primary loss value used in the calculation. The Primary Threshold is determined based on the total expected losses for the experience period.
Policy Information – the insurer code for the insurer that wrote the policy, along with the policy year, is shown above the payroll and claims information for that policy. Payroll and loss information is grouped by policy.
Classification Codes – the classifications listed on the X Mod Worksheet represent the operations of the business during the experience period.
Payroll – payroll is listed on the worksheet by classification code, reported for policies beginning within the experience period. Payroll is associated with the year the policy began, not the year in which it was paid.
Expected Loss Rate – the anticipated cost of benefits, per $100 of payroll, for a classification during the experience period. Expected Loss Rates are subject to change yearly.
Expected Losses – determined by multiplying total payroll (per $100) for each classification by the Expected Loss Rate. This amount reflects an estimation of the cost of losses expected to arise during the expiring period for your company based on the payroll reported for each classification.
Discount Ratio (D-Ratio) – the mechanism used to divide Expected Losses into Primary and Excess amounts. The severity of the average claim for certain classifications is significantly higher than the average claim found in other classifications. There are over 90 different D-Ratios for each classification based upon the Primary Threshold, and they are subject to change yearly.
Expected Primary Losses – determined by multiplying the Expected Losses for a classification by the D-Ratio for the same classification. The Expected Primary Losses are totaled for all classifications and the difference between the Total Expected Losses and the Primary Expected Losses is the Expected Excess Losses.
Expected Excess Losses – this represents the average excess losses expected for similar-sized employers within the classification.
The next section shows the summary of claims and the actual losses. This section shows the claim number, the type of injury, and whether it is open or closed. It will also show the actual losses, which is the total claims value, including medical and indemnity, as of the last valuation date. Actual Primary Losses are listed in this section, which is the total amount of the claim value up to the Primary Threshold.
Lastly, the final section shows the Experience Period totals (totals of all the columns), the Experience Modification Rating (your current X Mod Rating given the information on the above worksheet), and the Loss-Free Rating (what your rating would have been if you calculated $0 actual losses during the experience period).