Experience Rating Plans

Experience Rating Plan (“Plan”) is an integral part of the final cost of workers’ compensation. It is a method for tailoring the cost of insurance to the characteristics of an employer. It gives the employer the opportunity to manage its own costs through measurable and meaningful cost saving programs.

The Plan predicts whether a qualifying employer is likely to develop loss experience that is better or worse than that of the average risk in a particular classification. It modifies manual premium by a factor that is designed to more accurately price qualified employers.

The Plan uses the employer’s past experience to project future losses.

In workers compensation experience rating, the actual payroll and loss data of the individual employer are analyzed over a period of time. Usually, the latest available three years of data are compared to similarly grouped risks to calculate the experience modification.

In general, an employer with better than average costs receives a credit, while an employer with worse than average experience carries a debit rating. Experience rating takes the average loss experience and modifies it based on the individual’s own loss experience.

The two primary benefits of experience rating are:

  • It tailors the cost prediction and final net premium cost to the individual insured more closely than does manual rating alone
  • It provides added incentives for loss reduction that are absent from manual rating alone

The Experience Rating Plan recognizes and measures both accident frequency and severity. Although severity of losses is also recognized in experience rating, very large losses are less likely to occur and are seen as more fortuitous than smaller claims. In fact, very large losses are so infrequent that including the entire portion of the claim beyond a certain level in the experience period reduces the predictive ability of the Plan. One very large claim does not imply a pattern of claim frequency. So each individual claim is capped by a state accident limitation.

Medical-only claims do not have as much of an impact on the experience modification, because most states have approved a procedure that limits the amount of such claims in the experience modification calculation. Only 30% of the actual primary and excess portions of an individual medical-only claim is included in the calculation of the modification factor. As a result, medical-only claims are reduced by 70%.

Experience rating is a mandatory plan that applies to all employers that meet a state’s premium eligibility criteria for the Plan.

Experience rating is a standard measure not impacted by individual carrier pricing programs. An employer qualifies for experience rating if, in the most recent 24 months of the experience period, the subject premium exceeds a premium eligibility point.

Because experience rating is based on past loss experience, each risk is evaluated based on its own period of prior experience. Since the modification is calculated during the term of the current policy, it is not applied to the renewal policy.

The experience period could range from 21–57 months, ending one year prior to the modification effective date. This constant updating ensures a stable historical record for the individual employer, while also using the most recent available reflection of operating characteristics. In this way, meaningful changes in safety programs or improved technology can be reflected in the costs paid by an employer.

Once the employer meets the qualifications for rating, the Plan formula is applied and a credit or debit modification is published by the rating organization. The experience modification factor must be used by any carrier insuring the business. Generally, it applies for one year, and a new modification is calculated for the next year (as long as eligibility requirements are met).

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