The only constant in life is change, and the workers’ compensation experience modification (e-mod) is no exception.

The e-mod is one of many factors that determine workers’ compensation premium. This factor is calculated by a rating bureau—the National Council on Compensation Insurance (NCCI) or an independent state bureau—and is used to reflect an individual company’s loss history in the cost of workers’ compensation insurance. Companies with better than average experience will see a credit and reduced premium, while companies with loss experience above the industry average will see a debit and an increase in premium.

The e-mod is calculated with a formula that uses actual and expected losses. Three years of loss history are evaluated in total and in a limited or primary layer. Primary losses are small losses that have a minimal impact on the e-mod. Losses above the primary level, or split point, have a larger impact on the e-mod. Expected losses are determined by rates and the discount ratio (d-ratio), which splits expected losses into total and primary layers. Rates and d-ratios are adjusted each year based on industry experience. In addition to rates and d-ratios, the split point is being updated after a long period of being fixed at $5,000 per claim.

The split point was last adjusted more than 20 years ago; to put that in perspective, a gallon of gas cost $1.06 back then. Medical and indemnity costs for workers’ compensation claims have increased just like fuel prices but unfortunately show no sign of following the recent drop at the gas pump. For 2010, the core Consumer Price Index (CPI) was 1 percent, while the medical CPI was 3.4 percent. Medical costs have been rising faster than overall costs for some time.

Indemnity costs also have increased since the split-point was last adjusted. Twenty years ago, the average workers’ compensation claim was $2,500. Today, it exceeds $9,000. As medical and indemnity costs have risen, more claims are in the excess layer of the e-mod calculation, causing all e-mods to increase over time. Because of increasing claim costs, the NCCI has decided to increase the split point to $10,000, with additional increases planned during the next few years.  

Impact on Premiums

How will this change impact workers’ compensation premiums, as well as contractors’ ability to bid on jobs that use the e-mod as a qualifier?

The split point change is just another variable among many that impact the e-mod each year. Rates are being updated as they are each year, and the d-ratio (which determines the primary and excess portion of expected losses) will be adjusted for the new split point. The impact of the split point change likely will be minimal, with disruption to e-mods in line with normal annual shifts. Some e-mods will rise, but increases are much more likely to be caused by changes to a contractor’s loss history than by the change to the e-mod formula.

Eventually, the split point will be tied to inflation. Various states will implement the new split points as they adopt new rates. As a result, this change will be ongoing.  

Maintaining a Low E-Mod

The best way to maintain a low e-mod is to control losses by creating and implementing an effective safety program, as well as a robust return-to-work program, and by working closely with the company’s agent and insurance company to manage claims. A return-to-work program can have a great impact on the e-mod because many states discount medical-only claims by 70 percent when calculating e-mods. By making sure an injured employee returns to work as quickly and safely as reasonably possible, indemnity costs can be controlled and a good e-mod can be maintained.

Some contractors with an e-mod close to 1.0 may be impacted in terms of job qualification. If this is the case, try pushing back. This may only work for smaller general contractors and project owners, but there are several arguments against using the e-mod as a job qualifier. Reserves for claims that are still open (and may decrease) are included in the e-mod calculation. Also, claims included in the calculation may be from up to four years prior and thus do not reflect recent improvements in safety. Additionally, the e-mod was never intended as a job qualifier, but it has been adopted as such due to its widespread use and availability.

As things continue to change, know that the e-mod is changing a bit more than usual this year. But also know that by controlling risk and managing claims, a business can make a change for the better in its e-mod.

Aaron Kock is underwriting consulting director for CNA. For more information, call (312) 822-5226 or email