Experience Mod & Merit Ratings
If a business’s WC premium falls below a certain threshold (typically between $5-$10,000 and set by the rating bureau) they may receive a ‘Merit’ rating. The Merit rating is a scheduled rating factor that adjusts the business’s premium by 5% (credit or debit factor) based on their experience. They may also not qualify all together (NQ), in which case they are considered ‘neutral’.
If a business’s WC premium exceeds the state’s threshold they qualify for Experience Rating and receive an Experience Mod. An Exp Mod is a numerical rating factor that adjusts a business’s WC premium based on their previous experience. A 1.00 Mod would be ‘par’. A 1.10 would be a 10% increase and a 0.900 a 10% decrease.
The rating is calculated by the state’s respective rating bureau and applies to a business’s WC pricing regardless of who the insurer is. Exp Mods are based on claims cost/experience for a prior 3 year period and exclude the previous year because ultimate claims cost and total premium is not known for that year at the time of calculation. Here is an example:
|3 Years of Experience||Excluded Year||Rating Year|
Experience Mod changes usually have a cap. For example, in PA the max ‘swing’ a Mod can have is 25% in either direction. So if their Mod is 1.00, the most it can increase to is 1.25 and the most it can decrease to is 0.75.
Additionally the rating calculation factors in the amount of exposure (payroll) to ‘weight’ the Mod rating. Put simply, this places a limitation on just how low a Mod can get based on the size of the business, the business’s ‘minimum mod’.
Two businesses with the same history and 0 losses can and will arrive at different Exp Mods if there is a big difference in their payroll. A business with more payroll, generating $100k in premium for example, will ultimately arrive at a lower Exp Mod than the same business with the same experience but is only generating $10k in premium.
Just like comparing a heavy weight and a fly weight fighter – the fly weight can only generate so much power to ‘drive’ the Mod down. The heavy weight has the advantage here, but they also have more overall risk to manage, and that is their (potential) reward.