Experience Modification

Every employer in California who pays an annual premium of about $7,500 (varies by company but is based on Loss Cost Rates times payroll totaling $19,900 over 3 years) is subject to Experience Rating by the Workers’ Compensation Insurance Rating Bureau. This is a multiplier of base premiums developed by each insurer. It is developed from an actuarial formula whose basis is the payroll paid by the employer and his actual claim amounts over a three-year period beginning up to 4 years and 9 months prior to the rating date. For example, the experience modification for a policy renewing on July 1, 2000 would typically be based on payroll and claims for the period July 1, 1996 to July 1, 1999. The purpose of experience rating is to apportion total premium costs among all employers by rewarding those with good experience and penalizing those with bad. The theory behind the formula is intended to place the heaviest emphasis on frequency of claims, as opposed to the more serious, but infrequent, ones. Thus, a firm with 20 claims totaling $115,000 could develop an experience modification of 1.36, while a firm with the same size payroll and classifications with 4 claims totaling the same amount could have an experience modification of .89. In no other area of this type of insurance is the benefit of a good loss control program more evident than its effect on an employers experience modification.