The experience modifier (X-Mod) is one of the most confusing aspects of workers' compensation insurance for business owners. A numeric factor called an X-Mod is used to compute your workers' compensation premium. It's also known as an E-Mod rate, or experience modification rate (EMR). It can be found on the Information Page of your insurance, at the part where your premium is listed. Because your X-Mod can dramatically affect your insurance costs, it's critical to understand what it is and where it originates from.
What is an X-Mod?
X-Mods are a metric that looks at your past claims to modify your current premium. More claims result in a higher modifier, resulting in higher premium payments. A 1.0 X-Mod represents the industry average. Companies with higher risk and more claims will be above 1.0, whereas companies with less risk and claims will be below 1.0. Your X-Mod is multiplied by your workers' compensation premium, which can increase or decrease your insurance costs.
The X-Mod is calculated by dividing the actual losses by the expected losses. if you've had fewer losses than the average, your X-Mod will be smaller than one, lowering your premium. The same is true in reverse. Your X-Mod will be greater than one if your loss history is worse than the industry average, raising your premium. An X-Mod of less than 1.0 is regarded as "excellent," indicating that your loss experience is superior to the industry average.
For example, let’s say your premium before the X-Mod is applied is $10,000 and your X-Mod is 0.9. The fact that your experience modifier is less than one suggests that you have had a better loss experience than the industry average. By having a safe workplace and limiting claims, you’ll receive a $1000 discount on your workers’ comp premium. Instead of the full $10,000 amount, you’ll only owe $9000 (10,000 x 0.9). Now let’s say your X-Mod is 1.1. If your X-Mod is more than one, it means you've had a worse claims experience than the industry average. Because your company is riskier than others in the industry, you will have to pay $1000 extra. Instead of the original $10,000, you will owe $11,000 (10,000 x 1.1).
Workers Comp Rating System
To better understand X-Mods, it’s beneficial to have some knowledge about the worker’s comp rating system. Employer classification and rating systems exist in all states. The National Council on Compensation Insurance (NCCI) created a classification system that is used by the majority of states. The remaining states, including California, have their own method of classification. The NCCI categorization system is similar to most state-specific classification systems.
Employers are classified into classifications by the NCCI rating system based on their occupation. Employers who run similar businesses usually fall under the same classifications. For example, businesses that perform tree trimming services could be assigned the Tree Pruning and Removal class code which is 0601. However, not all codes are created equal. Each of these four-digit codes has a respective rate that affects the workers’ comp premium. Codes that represent more risk have a higher rate and result in a higher premium. For example, an industrial window cleaner who is climbing skyscrapers will have a higher rate than a clerical office employee.
Each workers' compensation class code is assigned a rate, which varies by state. Workers' compensation premiums are determined by multiplying the class code rate by payroll and dividing the result by 100.
Workers' Comp Premium = (Class Code Rate x Payroll)/100
Below is an example of how premium would be calculated under certain rates:
Clerical Office Employees
How is an X-Mod Calculated?
As previously stated, your X-Mod is applied to your premium in order to determine any savings or additional charges. Your experience modifier is determined by comparing your loss experience to other firms with similar class codes. The rating formula considers premiums paid and losses suffered over the previous three years (known as the "experience period"). The most recent expired policy period is not included in the experience period.
Assume your current policy is in effect from January 1, 2021 to January 1, 2022. The X-Mod for your existing insurance will be determined by the premiums you paid and the losses you experienced between January 1, 2017 and January 1, 2020. Because any claims submitted during that time period may still be pending, the formula will exclude premiums and losses for the most recently expired period (January 1, 2020 to January 1, 2021).
When calculating your X-Mod, a rating bureau compares your actual losses to your expected losses. The losses you actually suffered are considered actual losses. Your expected losses are a statistical estimate of the losses the insurance carrier is expected to pay for a business with your assigned class codes. If your actual losses are significantly higher than your predicted losses, your X-Mod will almost certainly surpass 1.0.
Your loss frequency and the severity of the loss are two other criteria that rating bureaus assess. The number of claims that have occurred is referred to as loss frequency, whereas the extent of the losses is referred to as loss severity. A company that has a high loss frequency means that they have a lot of minor claims. A company that has had one major workers’ comp claim has a high severity loss.
Small losses happen far more frequently than large ones, making them easier to predict. Random events are more difficult to prevent than predictable events. As a result, the rating bureau holds the frequency of loss with more weight than the severity of the loss. The rating bureau penalizes you more for a series of little losses than for a single large loss. It separates substantial losses into two categories: primary and excess losses. The bureau utilizes all of your primary losses but only a fraction of your excess losses when determining your modifier. This reduces the negative effects of a huge loss on your X-Mod.
Consider two employers (X and Y) who run similar firms in the same industry. During the three-year experience period, each had lost $30,000 in losses. Employer X has suffered six $5,000 losses, while Employer Y has suffered a single $30,000 loss. The rating agency will factor in all of Employer X's $30,000 in losses when calculating his modifier. Employer Y's modifier will be calculated using only a fraction of Employer Y's $30,000 loss. As a result, Employer X will have a higher modifier than Employer Y.
When computing X-Mods, many states allow rating bureaus to use a component called an experience rating adjustment on medical-only claims (claims involving medical expenses but no disability). Medical-only claims are reduced by 70% due to the experience rating adjustment. The rating adjustment can considerably lessen the impact of medical-only claims on your X-Mod in states where it's allowed.
Does Every Business have an X-Mod?
Only if your company qualifies for experience rating in your state will it receive an X-Mod. State workers' compensation boards set the conditions for experience rating eligibility. Each state establishes its own standards, which frequently include a premium barrier. If an employer's average premium surpasses a certain threshold, they are eligible for an experience rating. Assume your company operates in State Y, where the premium threshold is set at $7,000. All employers in State Y must be experience-rated if they pass either of these tests:
1. Over the course of the experience period, they've paid an average audited premium of $7,000.
2. In the last two years of the experience period, they've paid a combined audited premium of at least $14,000.
Assume your audited premiums were $6,025, $7,050, and $7,600, respectively, for the years 2018, 2019, and 2020 (the experience period). Because your audited premium for the last two years of the experience period (2019 and 2020) was $14,650, it will qualify for experience rating.
How to get an X-Mod?
X-Mods are calculated by the workers’ comp rating bureaus and then they send them to employers. The bureau that calculates your modifier depends on the state your company operates in. The NCCI will calculate your experience mod if your company is located in one of the 35 states that follow the NCCI rating plan (known as NCCI states). If your business is not in an NCCI state then your X-Mod is calculated by our state’s workers’ comp bureau. The Workers' Compensation Insurance Rating Bureau of California calculates X-Mods for California-based businesses (WICRB). Ask your insurance provider or agent which bureau you should contact if you haven't gotten a modifier and are qualified for one.
Will each state's X-Mod apply if your company does business in two states? The answer is contingent on the states in which your company operates. If your company qualifies for experience rating in at least one of the NCCI states, the NCCI will generate an interstate modifier that includes both states. If one state is an NCCI state while the other isn't, the NCCI will only generate an intrastate X-Mod for the NCCI state. The other state's workers' compensation administration will create an intrastate X-Mod for that state.
Every year, X-Mods are upgraded. The rating organization should provide you an experience rating worksheet after it has calculated a new modifier. The worksheet displays the data that was used to calculate your new X-Mod. Your X-Mod's effective date is usually (but not always) the same as your policy's effective date.
How to Lower Your Mod
You have a financial incentive to maintain your X-mod as low as possible because it directly influences the cost of workers' compensation insurance. By lowering workplace injuries, you can lower your modifier. Keep in mind that a series of little losses will have a bigger impact on your X-Mod than a single major loss.
Implementing a workplace safety plan is the greatest method to avoid on-the-job injuries. If you don't have a plan and need assistance getting started, contact your workers' compensation insurer. You can also consult the Small Business Safety and Health Handbook published by OSHA. Reducing your X-Mod takes time, but the payoff is sweet: a lower workers' compensation insurance premium.
The best and easiest way to lower your X-Mod is by using a Professional Employer Organization (PEO). A PEO enters into a co-employment agreement with your company. This means that your employees fall under the PEO’s EIN but you keep full operational control of your employees. If your business suffers a claim, then it is the PEOs X-Mod that is affected, not your company’s. That’s why many companies in riskier industries or businesses with a bad loss history turn to PEOs to get their worker’s comp costs under control.
The Cornerstone Advantage
Cornerstone is a full-service PEO that specializes in helping risky companies get control of their workers’ comp costs. Some other advantages of using a PEO for workers comp include a lower X-Mod, all claims handled on your behalf, and no annual audits.
Like other PEOs, Cornerstone will help you save significantly on employee benefits, automate your payroll, lower your experience modifier, and help with certain employee related compliance. However, unlike other PEOs, our focus is on excellent customer service.
Other PEOs will just add you to their system and send you an invoice. At Cornerstone we assign a professional customer service rep to work with your account. This not only adds more of a human touch, but it also allows us to create custom solutions unique to your business. Got questions? We have a rep to help you answer them. A problem occurred? You have a rep who understands your business and can create an effective solution.
Contact us here for a FREE consultation.