In Florida, businesses that have more than 10,000 in premium over the last two years qualify for an Experience Modification Factor (commonly called an X-mod). This gives the business a rate that is used to calculate the workers’ compensation premium for that business. These experience modifications are computed by NCCI, the National Council on Compensation Insurance.
NCCI’s Experience Rating Plan is an integral part of the final cost of workers compensation. It allows the industry to tailor the cost of workers compensation insurance to the characteristics of an employer and gives the employer the opportunity to manage its own costs.
The Experience Rating Plan predicts whether a qualifying employer is likely to have more or less losses than that of the average risk in the business’ classification. It modifies manual premium by a factor that is designed to more accurately price qualified employers by using the employer’s past experience to project future losses.
Why Use Experience Rating?
If workers compensation rates are designed to predict future losses, why use experience rating? How does experience rating benefit employers?
The Experience Rating Plan provides a way for individual employers to have some influence over the future premiums they pay. Because of that, it provides an incentive for employers to develop loss prevention as well as incentives to have the injured employees return to work as soon as reasonably possible. In this way, experience rating benefits employers by promoting occupational health and safety and rewards those that are successful with lower premiums.
Experience rating is used to refine the premium determination process. It benefits employers by producing a net premium cost that is the best indicator of the employer’s own potential for incurring claims. This means that the insurance premium will be appropriate for the coverage being provided by using sound insurance principles and the employer’s own payroll and loss data.
This is important because if the rating system went no further than manual rating, insurance carriers could seek employers with lower than expected costs and possibly avoid employers with higher than expected costs. To prevent this scenario, the rating system must be further refined and the experience rating system is one of the methods used.
How Are Experience Modifications Calculated?
The average experience modification for each industry is 1.00. The final workers compensation premium on each policy is determined by multiplying your manual premium by your experience mod. If your mod is .85, then your business is saving 15% on your premium. Conversely, if your mod is 1.15, then your business is paying an extra 15%.
NCCI calculates the experience modification for every business that qualifies in the state of Florida. The calculation is computed by using claims and premium data from 3 policy periods skipping the most recent policy. In other words, you look back 4 years and use the three policy periods after that point. This is done because claims and audited premiums are often not completely reported yet on the most recent policy. With this data, NCCI uses a formula to compute the experience modification for the business.