Customers often want to know your EMR before awarding a contract. Your EMR, or Experience Modification Rate, is an insurance term used to predict a company’s potential for future losses. Every company that purchases workers’ compensation insurance has an EMR. The EMR is simply an adjustment multiplier included in premium calculations.
Every company starts with a neutral rate of 1.0, which indicates that the company has not exceeded the average losses for the job classification. Over time, the company develops a claim history, which is compared to the average expected losses for the same type of company. Although a complicated set of calculations is used to determine the EMR, it is basically the ratio of actual losses to expected losses. If a company’s losses are above average, the EMR will be greater than 1.0. If losses are below average, the EMR will be less than 1.0. Companies with higher loss ratios pay higher premiums, while lower loss ratios translate into lower fees. If your company has fewer workplace injuries than average, an EMR of less than 1.0 will reflect this, a credit will be included in the premium and you will pay below average for your workers’ compensation (WC) insurance. In short, keeping your people safe will save your company money.
Realizing a Safety Dividend
As the leading provider of workers’ compensation information, the National Council on Compensation Insurance (NCCI) maintains a comprehensive classification system that compares the past performance of similar companies in the same industry. Most states (but not all) use the NCCI rates. However, all states use some form of the EMR.
The EMR is calculated by using the claims data for three consecutive years, beginning four years before the current year. For example, the EMR for 2017 is calculated with data from 2013, 2014 and 2015. Whenever a high-loss year can be replaced with a low-loss year, the employer should benefit from lower premiums. Therefore, investing in an effective safety program can literally pay for itself over time.
Contrary to what many believe, accident frequency often affects a company’s EMR more than accident severity. The EMR recognizes that the cost of a specific accident is statistically less predictable than the fact that the accident occurred. Therefore, the contractor who experiences a high number of small claims will be penalized more than the contractor who experiences a few small claims and an occasional large claim.
The insurance industry recognizes that an accident’s severity is unpredictable. For example, a worker could fall from a ladder and twist an ankle resulting in a loss of a few thousand dollars, or he could break his back and be disabled for life resulting in hundreds of thousands of dollars in losses. Statistics also tell them that very large claims don’t happen very often, which insurance companies take into consideration.
Accident frequency is another risk measurement. Because any incident can result in high losses, a company with a high accident frequency presents a greater loss potential. These companies are also more likely to eventually have a large claim. The EMR calculation is adjusted to give primary consideration to the claim frequency and secondary consideration to the claim severity. All claims less than $5,000 (known as primary loss) are assessed in full. Amounts greater than $5,000 (known as excess loss) are discounted up to a maximum amount, known as the state accident limit. Assuming equal losses, companies with lower frequency rates benefit from lower premiums.
Controlling Your EMR
The most obvious way to reduce and control your company’s EMR is by implementing a comprehensive safety program to prevent employee injuries. Diligent claims handling and management can also help control claims cost. Check the workers’ compensation boards in any state where you work to determine if they allow employers to pay minor medical claims with company funds. Paying minor medical claims is similar to having a high deductible, and it keeps your company’s frequency rate down. Companies that pay minor medical claims will often see an EMR reduction within two to three years from that alone.
To guard against error during EMR calculations and claims handling, make sure accurate payroll figures and claims information are reported to the insurance carrier. Every claim reported is assigned a reserve, where the insurance carrier puts aside a set amount of money to pay future expenses associated with the type of claim reported. Monitor these reserves because they are charged against the company’s EMR until the claim is closed. Work with your insurance carrier’s claims department to get claims closed as quickly as possible. Once an employee returns to work and is no longer receiving medical treatment, notify the insurance company immediately so the claim is closed. It may take time to work with your insurance agent to get a claim closed, but it is worth the time and effort.
Make a habit of obtaining and reviewing insurance loss reports from your insurance carrier to ensure that claims were closed accurately and promptly. If you find discrepancies, discuss them with your insurance carrier or your agent. Data about losses should coincide with the losses used to calculate the EMR. You have a right to review the information, so take advantage of it.
Claims management includes programs to get an injured employee back to work as soon as possible. Inform the employee’s physician of your company’s back-to-work or light-duty programs. If the physician approves, find light-duty work your employee can do to return to work. For example, a worker with a broken finger may not need to stay home because he is not able to use a shovel, but with the doctor’s permission he could be a flagman or direct traffic within the work zone. Studies show that the sooner a worker is back at work, the sooner he or she will return to a full-time position. This will benefit both the worker and the company.
Many managers, including top-level ones, don’t understand how the company’s EMR affects company premiums. Work to ensure that all managers have at least a layman’s understanding of why preventing all injuries (small and large) can have a big effect on insurance costs. It’s important for managers to understand that insurance is more than just the cost of doing business. All claims can affect your company EMR, and a high EMR can affect the bottom line of a bid and cost the company a job. Educating managers about the EMR will help them understand why, from an insurance cost perspective, it is imperative to implement and enforce your company’s safety program, policies and procedures. A well-run safety program will prevent frequent small claims, which can do the most damage to your EMR. Even if you try to lower your insurance costs by shopping companies, your EMR will always affect your premiums, regardless of your insurance provider.
In today’s highly competitive market, a high EMR will not only affect your ability to keep bid costs down, but many owners and general contractors want to know a company’s EMR and OSHA incident rate before awarding a contract. Make sure you know your EMR and how it is affecting your company’s bottom line, set annual EMR goals and rely on your company safety and health program to prevent claims and lower your EMR.
George Kennedy is NUCA’s vice president of safety.