How The Experience Modification Rate (EMR) Is Calculated
Actual Losses Divided By Expected Losses
Your Experience Modification Rate is very simply your Actual Losses divided by your Expected Losses. On your own Experience Modification Worksheet find the Actual Totals Losses (box J) and divide that by the Expected Losses (box K). In the example below it's 795,181 / 710,011 which equals 1.12.
What makes the EMR calculation complex is how Actual Losses and Expected Losses are determined. Actual Losses are, compared to Expected Losses, relatively easy to explain. However, there are still many rules that "massage" the data so that you can't simply pull this number from a loss run report.
When you review your loss run report your claims are broken down into 3 cost components; medical, indemnity and expenses. If a claim is medical only (no lost time), then there is no indemnity payment. Expenses are not included in your experience modification rate. So, if you go claim by claim through your EMR worksheet, the claims should (most of the time) equal medical plus indemnity or just medical if a med-only claim.
There are rules that can change the values that appear on your experience mod worksheet. And, there are rules that may not change the value of a claim on your worksheet but will nevertheless change the amount that's included in the final calculation. For example, in just about every state medical-only claims appear at full value on your worksheet but are discounted by 70% in the actual Experience Rating Modification calculation. So, if you have a $1000 med-only claim, only $300 of that claim counts again you.
There are programs in various states that discount what's reported to the Rating Bureaus for the production of your Experience Modification Rate. In these cases what appears on your worksheet is not what you'll find on your loss run report. There are some states that "net" out some or all of a deductible reimbursed to a carrier. In such a situation you may have a $5,000 claim and a $1,000 deductible, and, rightly, only $4,000 will appear on your worksheet. There are states with "employer paid medical" programs where you can pay some medical only claims out of pocket, report the incident, and the Rating Bureau won't use that claim in your Experience Modification Rate calculation.
There are plenty of other examples of rules within certain jurisdictions that make the reporting of claim values and, in turn, Actual Losses different from one place to another. Feel free to reach out if you have any questions about states in which your business operates.
An "Expected Loss Rate" (ELR) is the starting point for determining you Expected Losses. The rating bureau that produces your Experience Modification Rate (NCCI for most states) aggregates data from all of it's affiliates (insurance companies) and computes the amount of money spent on claims for every $100 of payroll in every classification code. Additionally, this data broken down by state.
So, if you are a transportation company, have 7229 (Trucking) as a class code, and operate in Missouri and Illinois, the Rating Bureau will know what the ELR is for 7229 in your states. Then, it will multiply the Missouri ELR for 7219 by your Missouri payroll (your payroll / 100 X ELR ) and do the same in Illinois to determine your Expected Losses.
In the example below the ELR for 7229 is $5.97, the client had audited payroll of $2,355,335 for that code, and Expected Losses of $140,613.
2,355,335/100 = 23,553.35
23,553.35 X 5.97 = $140,613
Your final Expected Losses, however, are not that simple to calculate unfortunately. If you go through your entire Experience Modification Worksheet and add up the Expected Losses for every class code - on every policy - in every state that appears on the worksheet, you won't arrive at the number that is used in the final Experience Rating calculation of Actual Losses divided Expected Losses. That number, instead appears in "Box D" of your worksheet (see below).
The final Expected Losses used in your Experience Modification Rate ($587,779 in the example immediately above) is a figure that is actuarially adjusted from the Expected Losses that appears in Box D.
Without going into detail over all of the elements, there are a couple of concepts that are particularly helpful to understand. First, primary losses count against you 100%. Excess Losses count against you at a reduced, weighted rate.
There are 3 terms to be familiar with; Primary Losses, Excess Losses, Split Point.
Primary Losses - The dollar amount of any claim below the Split Point
Excess Losses - The dollar amount of any claim above the Split Point
Split Point - Adjusted annually but $17,000 in 2019
Weight Factor - Determines the percent of Expected Excess Losses included in your Experience Modification Rate.
Primary Losses are included in your Experience Modification Rate at 100%
Excess Losses are included in your Experience Modification Rate at reduced rate adjusted by your Weighting Factor (Box A)
So, you can see in the Ratable Excess box for Expected Losses (where it says "83,881") the figure is arrived at by multiplying A & C. C is Expected Excess Losses and A is the Weight Factor. For this company Excess Losses are included at 21%.m
If you have any questions about any of the other elements or the Experience Rating Algorithm in general, please reach out to us. But, most of the complexity you see is due to mechanisms in place to eliminate volatility in the Experience Rating Algorithm; 1) mechanisms in place to keep your Experience Mod from varying dramatically from one year to the next and 2) mechanisms to keep your mod from going too close to zero or so high that it will put you out of business.