Managing business expenses is challenging enough—but one often-overlooked factor can quietly drive up your costs: your workers compensation experience modification factor, or “E-mod.” This hidden metric can significantly influence your premiums, yet many business owners don’t fully understand how it works—or how to control it.
Understanding Experience Modifications
In our recent podcast episode, Jeremy Morrison, Director of Underwriting at Berkeley Industrial with 20 years in the workers’ compensation space, shared valuable insights about these critical metrics. One striking fact that emerged early in our conversation was that claims reported late (in the fourth or fifth week following an injury) are typically 45% more expensive than those reported in the first week. This statistic alone highlights why understanding experience modifications is crucial for any business with employees.
At its core, an experience modification factor is a component of workers’ compensation pricing that reflects your company’s claims history compared to similar businesses in your industry. The National Council on Compensation Insurance (NCCI) or independent state bureaus calculate these factors by examining your loss data and payroll information from the past three years, excluding the most recent year. The resulting factor is then applied to your premium calculation – factors above 1.0 increase your premium, while factors below 1.0 reduce it.
For example, if your business has a base premium of $20,000 and your experience mod increases from 1.0 to 1.10, you’ll pay an additional $2,000 in premium. Conversely, if your experience mod improves to 0.90, you’ll save $2,000. While these numbers might seem manageable for some businesses, they can represent significant financial impacts for others, especially as premiums scale with company size.
Common Misconceptions
A common misconception many business owners have involves the handling of small medical-only claims. There’s a tendency to pay these out-of-pocket rather than reporting them to the insurance carrier, based on the belief that this practice will prevent increases in insurance rates. However, this approach often backfires. Medical-only claims are significantly discounted in the experience mod calculation, and carriers can typically negotiate much lower payments through their provider networks than employers can manage on their own. More importantly, claims that start small but develop into more serious issues later will cost substantially more when reported late.
Claim Frequency vs. Severity
The experience modification formula also treats claim frequency differently than severity. Multiple small claims can potentially impact your rating more negatively than a single large claim, as the formula caps the impact of any single large loss. The rationale behind this approach is that businesses with frequent claims, even if they’re small, may have underlying safety issues that need addressing.
Importance for Contractors
For contractors, maintaining an experience mod below 1.0 is particularly crucial, as many job sites and prime contractors require this as a condition for employment. This creates additional pressure to manage claims effectively and implement robust safety programs. The most successful businesses approach this challenge through partnership with their carriers – working closely with claims adjusters, risk management specialists, and underwriters to ensure everyone is aligned on goals and strategies.
Accurate and Timely Claims Reserving
Accurate and timely claims reserving also plays a vital role in experience modification management. When reserves are set appropriately from the beginning, they provide underwriters with a reliable picture of anticipated claim costs. Significant reserve increases years after a claim occurred can create pricing challenges and potentially lead to premium surprises at renewal time.
✅ Tips to Improve Your Experience Mod:
- Report claims within the first week
- Don’t pay small claims out-of-pocket—report them
- Focus on reducing claim frequency, not just severity
- Partner with your carrier and broker for proactive risk management
- Ensure accurate and timely claim reserving
Conclusion
Your E-mod isn’t just a number—it’s a reflection of your company’s safety culture and claims management strategy. By understanding how it works and taking proactive steps, you can reduce costs, stay competitive, and protect your workforce.