Insurance companies use an Experience Modification Rate (EMR) formula to calculate your workers comp premium, based on the cost of past claims and the probability of future accidents. The higher your EMR, the higher your premium– and the converse.
Here’s how the formula works:
- To set a base premium, the company divides your payroll in each job classification by 100, and then by a “class rate” set by the National Council on Compensation Insurance that reflects the risk in this classification. For example, because structural ironworkers have a much greater risk of injury than receptionists, their class rate is significantly higher.
- The company compares your claims history during the past policy period to those of similar firms in your industry. The formula factors in the ratio between expected losses in your industry and those you actually incurred, together the frequency and severity of losses. The formula “penalizes” businesses that suffer a single large loss less severely than firms that have many smaller (statistically more likely) losses.
- The result is the EMR, which the company multiplies against the manual premium rate to set your workers comp premium for the next policy period.
If your business has an EMR of 1.0, your premium would remain unchanged. A rating of 1.2 would mean that might pay as much 20% more than a competitor with an EMR of 1.0 – a difference that you would have to swallow by cutting costs and/or raising prices. Conversely, if your EMR came to .8, you would enjoy a competitive advantage over competitors with higher ratings.
The good news: a comprehensive safety program can lower your EMR by reducing workplace hazards and injuries. We’d be happy to help you design and implement a plan tailored to your needs.