In a previous article, we reviewed workers’ compensation classification codes commonly used in residential construction operations. The Workers’ Compensation Rating and Inspection Bureau of Massachusetts (WCRIBMA) reduced the rates for most class codes applicable to homebuilders and remodelers effective July 1, 2020; notably, the rate for 5645-Residential Carpentry dropped by 10.5%. The rate decrease is generally a good development for the residential construction industry; however, it may have also indirectly had an adverse impact on your Experience Modification Rating factor (EMR).
Your EMR, in very general terms, results from a comparison between actual claims (as the numerator) vs. your expected losses (as the denominator) over a three year period ending with your most recent closed and audited policy term; so, for EMRs effective 11/1/2020, payroll/claim data for the 11/1/2016-17, 11/1/2017-18, and 11/1/2018-19 policy periods are used for the calculation. Employers with actual losses that are equivalent to expected losses will generally have an EMR of 1.00; employers that outperform expected losses will have an EMR under 1.00, which results in a credit to manual premium, whereas employers that exceed expected losses will have an EMR above 1.00, and a debit to manual premium.
Just as the WCRIBMA sets manual premium rates per $100 of payroll, it also sets an Expected Loss Rate (ELR) for each classification code, which is then also applied to payroll by classification to arrive at a total for “expected losses.” Most classification codes that were subject to premium rate decrease in the 7/1 revision also saw their ELR decrease. Take 5645-Residential Carpentry, for example: the premium rate decrease from $7.10 to $6.35 per $100 payroll was accompanied by a decrease to the ELR from 2.96 to 2.67 per $100 payroll. For companies with claims, the same actual loss payments used for calculating last year’s EMR seem worse relative to expected losses; for companies with little or no claims, the gulf between expected and actual losses narrows—both scenarios typically result in slightly higher EMRs for the employer. The good news is that in most cases, the decreased rate makes up for the premium impact tied to the EMR.
If your Workers’ Compensation insurance premium volume qualifies you for “experience rating,” then you probably already know how crucial the EMR can be in determining the final WC final premium charge. This article is not intended to serve as an exhaustive overview of Experience Rating, but as a primer to help you establish a better understanding of your EMR.
Given the fact that the EMR is calculated in part based on historical loss data, some incorrectly assume there is nothing that can be done to control this important variable. In a subsequent article, we will address how a conscientious owner or manager, in conjunction with a good insurance partner, can maintain some level of control over this figure. In the meantime, for more information regarding experience rating, please visit the following links:
- MA Only: WCRIBMA Experience Rating Plan
- Multi-State: ABCs of Experience Rating