Understanding your workers’ compensation experience modification factor

One of several elements that comes into play in understanding your workers’ compensation premium is the experience modification factor. 

Calculating this factor is complex, but the underlying theory and purpose are straightforward. A complex, standardized calculation used by all insurance carriers compares actual losses to expected losses, by industry type. 

The calculation incorporates factors that account for agency size, unexpectedly large losses, and the incidence of loss frequency and loss severity. The factor is influenced by both small, frequent losses and by large, infrequent ones. 

It represents either a debit or a credit that is applied to your workers’ compensation premium.  A factor greater than 1.0 is a debit factor, meaning your losses are worse than expected, and this can result in a premium surcharge. A factor less than 1.0 is a credit factor, which means your losses are better than expected, and can result in a discounted premium. 

Again, this is one of several elements that come into play when developing your premium - and resulting surcharges or discounts can be offset or enhanced by other elements, including but not limited to payroll fluctuations and class code rates – but this factor does have a direct impact upon your premium, and you can help control it. 

The key to controlling this factor is reducing the frequency and severity of claims. Workplace accidents will occasionally occur despite our best efforts, but many are preventable. Safety programs and appropriate prevention procedures can help reduce loss frequency, and self-inspection and accident investigation programs are critical to this effort.

The most impactful option for reducing claim severity is to offer injured workers transitional duty following a workplace injury, through return-to-work programs. KACo has an example policy that you can download from our website and make your own.

Talk with your claims or loss control specialist to learn more.