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In the USA in Safety for you Canadians they ask for a EMR and COI Letter!

If you work in the UNITED STATES OF AMERICA, or do business you will be asked for EMR letter before work is allowed to proceed, do you really understand it and what you can do to review the processes! In Health and Safety I get asked this question about once a week, but for some folks they do not understand the process.

An EMR letter is a document issued by your insurance company that contains your EMR or Experience Modification Rate (also referred to as an E-MOD). An EMR is a number that represents the cost of your past injuries and the estimation of risk related to your company. I will not go into how your EMR rate is calculated because it is extremely complicated. It may help you to understand that an EMR of 1.0 is considered to be an average rating of all companies within your industry based on BLS (Bureau of Labor Statistics). That’s why it’s an issue if your EMR is over 1.0, your poor safety performance or risk is above average. Having a low EMR is not only a measure of good safety performance but can also save your company money because it is used as a multiplier when developing your insurance rates. Using simple math for an example, if your EMR is .87 and your industry’s average premium is $100,000, your premium would then be $87,000.

Your EMR is calculated and a new letter is issued annually Experience Modification Rate (EMR) has strong impact upon a business. It is a number used by insurance companies to gauge both past cost of injuries and future chances of risk. The lower the EMR of your business, the lower your worker compensation insurance premiums will be. Have you ever noticed how almost everything depends on your perspective? It kind of works that way with workers compensation experience rate factors too! A 1.2 Emod may be horrible for one employer but not so bad for another. A .90 may be great for one employer and not so good for another. Lets take look at the relationship between Experience Modification Rates, an employers perspective and the Perfect Mod.

The request for a EMR letter often comes somewhere during the qualification period. That’s the time when the hiring entity is either trying to decide who to hire for the job after the bids have been secured or in the pre bid qualification period when they are trying to decide who can actually bid on the job.

It’s often at this time our firm receives a call from the subcontractor asking how they can go about getting a copy of their EMR letter. It’s also at this time that we learn that the employer either hasn’t been taught by their insurance agent about the entire process surrounding experience rating of workers compensation programs and are unfamiliar with the term EMR or EMod or that the employer’s company has not qualified for experience rating.

Not the same as a WCB rating

Experience modifier or experience modification is a term used in the American insurance business and more specifically in workers‘ compensation insurance. It is the adjustment of annual premium based on previous loss experience.

·        If your company works for a larger contracting company, the government, a part of the government, another company, a general contractor or just about any other entity or company that’s hiring someone like you to do work for them…they will always want to have you provide them with documentation of your company EMR. These entities look at your EMR as proof that you provide a safe workplace for your employees. They will often use your EMR as a qualifier when choosing who they will allow to work for them as a subcontractor.

·        If you are trying to secure work from some type of government entity like a state, city or town, you’ll normally find in their bid specs their acceptable EMR number. Frankly, I’ve never seen a EMR over 1.0 on an acceptable list. I’m sure in some circumstances it has but I’ve never seen it done. Just another reason to do everything you can to keep control over your workers compensation loss experience!

·        Just because your company may not be currently experience rated doesn’t mean that you don’t have a factor. It’s not apparent but in fact, every employer has one. For those of you who do not qualify for actual experience rating that factor is known as unity or in numerical terms, 1.0.

Common problems associated with a workers compensation EMR or experience modification rate can lead to unusually high workers compensation premiums. While the EMR, X-Mod, Mod or Experience Rating Factor is designed to provide a more accurate workers comp premium, errors and misapplication do occur during the development and calculation phase. Lets explore some of the common errors and solutions to an Experience Modification, EMR, problem.

Toughest part for any employer is determining if there’s a problem at all! The development of an experience mod, for most, seems shrouded in secrecy.

The formula is complicated and data sources seem hidden behind smoke and mirrors. Rating organizations, whose task it is to calculate and apply the Mod, seem to operate at an unobtainable level usually unknown to the very employers who are effected by the EMR they develop and publish.

Problems associated with an Experience Modification Rate or EMR can occur in many places. They are usually complicated, not easily discovered and very costly when left uncorrected.

§ Claim Data – Claim data is provided to the Rating Organization by each individual workers compensation insurance company that an employer may have had during their experience period. This information includes paid and reserve amounts established for any given claim. Claim data must be reported to the Rating Organization within certain time frame guidelines with well established cut off dates. Medical only claims are typically discounted and large claims are capped. When either the claim data itself is incorrect, over reserving, poor claim handling or if that information is reported outside of the required time line, an error will occur in the EMR.

§ Classification Code – It’s just as important for an employer to have the correct classification code used on their experience rate calculation as it is on their policy. Each classification code that applies to an employers workers compensation program will have its own unique rating factors. Factors that produce an employers expected losses, a major part of the experience rating calculation. An incorrect class code will skew the calculation and lead to an incorrect EMR.

§ Payroll or Remuneration – Properly assigned payroll to the correct classification code will produce the correct expected losses in the formula. If the payroll is reported incorrectly by the insurance company, or if an adjustment due to an audit dispute has not been corrected by the insurance company, the EMR will be wrong.

§ Incorrect ELR and D-Ratio – These are specific classification code rating factors, different for each code, different for each state that change, for the most part, every year. If incorrect ELR and/or D-Ratios are used the EMR will be wrong.

§ Split Point – Experience rating formulas are designed to discount large shock type or severe claims and emphasize frequency problems. The split point is the numerical point, in claim data, where claims are split into primary and excess losses. Primary losses being those more heavily weighted in the formula. For those states using NCCI as their rating organization the split point is changing from $5,000 to $15,000 over the next 3 to 4 years. Refer to this previous post for more details how split point changes effect premium. Incorrect split points will cause the EMR to be wrong.

§ Incorrect Combination of Entities – Specific rules govern the actions taken and the effect combining entities and changes of ownership will have on an experience modification rate. When common ownership of two or more entities exist it is possible to combine those entities where the experience of both are used to calculate a common EMR. The key here is “specific rules apply!” Costly EMR problems may develop when entities are not properly combined.

Items that impact the EMR:

§ Job Classification Codes;

§ Payroll;

§ Experience Period; Experience Period

§ Frequency of Claims;

§ Severity of Claims;

§ Large Loss Limitations;

§ Medical Only Discounts;

§ Excluded Losses;

§ Modifications or Changes to the Rating Formula;

The basic EMR formula:  Actual Losses / Expected Losses = EMR. Actual losses will include reserves established by the insurance company for future payment of open claims; will be subject to discount factors applied for primary and excess losses and will be subject to loss limitations for large, severe losses. Expected losses are calculated and impacted upon by payroll size.

Here’s a few reasons why the EMR is not a good current safety indicator:

§ Experience Period: The experience period, usually three years, does not take into account the most recent year of claim activity. A contractor with a .90 EMR may have had last year a series of significant claims or maybe just a frequency of small claims, but enough to cause their EMR to go above 1.0. Qualifying for a contract today and using the EMR, which is developed from a three year period starting two years ago, does not give an accurate reflection as to the effectiveness of a current safety program.

§ Open Claim Reserves: Claim reserves established by the insurance company carry over from year to year. This is the amount that an insurance company thinks they will have to ultimately pay for the claim.

§ Subrogation Effect: Large workers comp claims may be drawn out over many years and subrogation on workers comp claims, when successful, may not occur for many years past the EMR experience period, usually three years, causing any reductions to reserves or credits due to subrogation to not be reflected in the current EMR.

§ Non-Specific Work Claims: Claims may occur that do not reflect work or safety conditions. For example automobile accidents where the injured employee was not at fault creates a potential subrogation effect but the initial claim will impact the EMR.

§ Formula Calculation Changes: Rate making authorities are constantly modifying EMR formulas to better represent changing economic conditions. A change in the way the formula is applied or a change in the formula factors may have a negative impact on an EMR without any cause or imput from the employer. Split point changes by NCCI to their EMR formula now effective may have this effect on many employers.

§ Payroll Reductions: One of the factors in determining Expected Losses is payroll. When a contractor has reduced payroll, for whatever reason, there will be a likewise increase in their EMR.

§ Contractor Incurrs No Losses, EMR Increases: Yes it is possible for a contractor to have had no losses during his experience period, three years, and still have his mod increase! Remember, multiple factors are considered within the EMR formula. Any combination of these may cause the increase. Certainly when payrolls are down, advisory rates are down, base rates and expected losses have decreased you can expect to see a gradual increase in the EMR.

Help in our program

But here’s a few things that should be considered:

§ Have a Claim Review conducted. You can’t do this by yourself. It requires an experienced consultant who knows what to look for, when to look for it and how to have it corrected. A claim review conducted by an outside consulting firm will identify problems in poor claim handling, improper claim reserving or over reserving, improper data reporting and improper data usage in the EMR calculation. All workers compensation claims should be reviewed!

§ Have a Classification Code Review conducted. Codes and their accompanying rate factors must be reviewed. Not only do they effect current policies in place, but have a significant effect on the EMR calculation. Have a code review conducted.

§ Have a Workers Compensation Audit Review conducted. Properly applying payroll to the correct class code directly effects the calculation of Primary and Excess Losses which are used in the EMR calculation. An Audit Review will reassure you this is being properly done.

§ Have an Experience Modification Review conducted. Ask an independent workers compensation consultant to conduct this review for you. Certain areas of your E Mod will be reviewed for accuracy. They can even help you with future experience rating projections!

Using the workers compensation EMR or E-Mod as a safety qualifier has been a common practice in the contracting world for some time. It’s not unusual to find that a general contractor will require a mod of 1.0 or less of a subcontractor working on their job. Many times this will be a condition of the contract or, at a minimum, part of the qualifications required of the subcontractor in order to be able to bid on a job or contract.

The primary/excess split point, an experience modification rating factor item, has changed for those states using NCCI. This change will take place over a three year period starting in 2013 and will be adjusted by these values:

§ First year – 2013 – $10,000

§ Second year – 2014 – $13,500

§ Third year – 2015 – $15,000

The last time the split point was adjusted was in 1993 when it was set at $5,000. Here’s a quick description of how the split point effects the experience mod calculation; the experience mod calculation is a complicated calculation that takes into consideration a clients payroll size, expected losses and actual losses incurred. Excess actual loss is the dollar amount of a claim over the split point. Excess losses effect the experience mod calculation at a much lower level that the primary losses.

Under the $5,000 split point a single claim with a dollar value of $20,000 would be divided showing $5,000 as primary losses and $15,000 as excess. Under the $10,000 split point the same claim would show $10,000 as primary losses and $10,000 as excess. Primary losses carry the weight and have the most impact on the E-Mod calculation while excess losses are significantly discounted within the formula. In very simple terms, the increase of the split point will result in a higher E-Mod.

The effect of the split point change will be different for each experience rated client. Individual client factors will determine the ultimate effect. It’s projected that about half of the experience rated clients will see a decrease in their mod of 2 or more points; one third will see a modest change between a decrease of 2 points to an increase of 2 points; and the rest experiencing a larger swing. Based on the average, approximately one in every seven will see an increase of 5 or more points. As you can see, this change can be a significant turning point and has great potential to effect the bottom line of many employers.

Let’s get back to the contractor who relies on his E-Mod remaining below 1.0 in order to secure work for his company. It’s those clients who may lose work contracts that they may have been able to secure that will feel an extra punch from this change. Sure the change needed to happen. There’s a great deal of evidence that the old split point was not responsive and created a skewed reflection of the true claims experience of an account. And with this change comes a more responsive experience rating formula, according to NCCI.

But lets not forget the contractor who prior to this change would have earned a 1.0 or lower and who after the change may no longer qualify to bid on projects because their E-Mod increased to over 1.0. What if their E-Mod change was strictly due to the formula change and not a change in risk. Maybe those using the E-Mod as a safety qualifier should revisit their stand on this and take into consideration the true impact this formula change may have, at least from a contractors point of view!

What’s a “perfect mod?” It’s the lowest mod an employer can possibly have. It’s the EMR for any individual employer who has gone claim free within their experience period. Again, the EMR is very specific to each individual employer and will not be the same for other employers.

The importance of achieving your perfect mod. While many employers struggle with experience rating issues and out of control EMR’s, to some, the very fact that their mod has gone above 1.0 may be critical to the survival of their business. I’m talking about construction employers who provide work on certain government contracts. I’ve written about this in many other blogs but thought that this would be a good place to again point out the importance of maintaining control over the experience modification factor. Many government contracts require the performing contractor to maintain a 1.0 or better EMR in order to keep their contract. If anything, this single fact drives home the point that an employer should strive to achieve their perfect mod.

COI just stands for Certificate of Insurance. This document issued by your insurance company or broker and is used to verify the existence of insurance coverage. It will list the effective dates, type and amount of coverage list on your policy.

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