If you're an Eastern client or agency partner who is interested in learning more about how you can control your EMF, register for our webinar, Experience Mod 101, that is set to take place on 3/27 @ 10 am!
Now, back to the interview...
What does the employer’s EMF represent?
The employer’s experience modification factor predicts, based on past experience, whether the employer is likely to develop loss experience that is better or worse than average. A period of 3 years of experience is considered, excluding the most recent policy term. For that time period, the employer’s claim data is compared to the average claim data for employers of similar operations and size. If the employer’s claim experience is worse than average, an EMF of greater than 1.0 is generated and acts as a surcharge to the workers compensation premium. If the employer’s claim experience is better than average, an EMF of less than 1.0 is applied to the premium and provides a discount. Keep in mind that since 3 years of experience is considered, each claim impacts the employer’s EMF for three consecutive years.
What impacts an employer’s EMF more: frequency or severity?
In NCCI states, frequency definitely impacts an employer’s experience modification factor more than severity. The NCCI calculation uses a split point where all claim dollars below the split point are considered primary (frequency driven) and all claim dollars above the split point are considered excess (severity driven). The excess claim dollars are heavily discounted in the final calculation. Currently, the split point is transitioning from $5,000 to $15,000 over a 3 year period. Most states are around $10,000 today. Consider Employer A with one $40,000 claim; and Employer B with 4 claims at $10,000 each, totaling $40,000. Each has the same amount of total losses, but Employer A would have a lower EMF because the first $10,000 would be included at full weight, and the remaining $30,000 would be discounted as excess. Employer B would have a higher EMF because each claim would be counted as primary, resulting in $40,000 included at full weight in the calculation.
In PA and DE, the impact between frequency and severity is more even. Both states apply a cap instead of a split point. All claim dollars in excess of the cap are excluded entirely from the EMF calculation. The current cap for PA is $42,500, so the impact of highly severe claims is reduced. For example, if an employer has a $50,000 claim, only the first $42,500 is included in the EMF calculation. The remaining $7,500 is excluded. In the case of Employer A and Employer B described above, however, there would be no difference in the EMF as the full $40,000 would be included in the EMF calculation in both cases. The cap value for DE ranges from $31,000 to $470,000 and depends on the classification and size of the employer. The largest employers with the highest rated classifications will have the highest cap values.
How does the impact of lost time claims differ from medical only claims in the calculation of an employer's EMF?
In NCCI states, lost time claims have a much greater impact on the EMF than medical only claims. In fact, medical only claims are reduced by 70% in the NCCI calculation. For example, a $10,000 medical only claim counts as $3,000 in the EMF calculation. Lost time claims do not get discounted.
In PA and DE the impact of lost time claims is less obvious as there is no distinction in the actual EMF calculation. We all know, however, that lost time claims are more costly than medical only claims. And higher claims costs equal higher EMF regardless of jurisdiction. The merit rating program in PA and DE is for employers who do not meet the premium requirements to qualify for an EMF. Merit rated employers will receive a 5% discount on premium if they had no lost time claims during the experience period. If they had one lost time claim during the experience period they would receive neither a discount nor a surcharge. Employers with two or more lost time claims during the experience period receive a 5% surcharge on premium.
One of the best ways to improve your EMF is to not experience claims in the first place. While that is ideal, it is not realistic -- incidents occur. Once they do happen, however, using medical cost management techniques such as provider panels or networks, as well as RTW programs and offering modified duty can directly reduce the amount of claims dollars that will be impacting your EMF.
In reference to the caps in PA and DE -- don't let these change your mind about offering modified duty if the claim costs have already exceeded the cap. Dollars over the cap may not directly impact your EMF, but if you need to shop for insurance that $115,000 loss will remain in your loss history and impact a prospective insurer's decision, and premium rate, as well as your agent's ability to shop for the best deal. When an underwriter reviews an employer's loss history, they are able to determine whether or not an employer just experienced an unusually costly claim, or if there is a pattern that may represent a lack of RTW initiatives or safety programs.
Again, if you are an Eastern client or agency partner who is interested in learning more about EMFs, register for our webinar, Experience Mod 101, that is set to take place on 3/27 @ 10 am!
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