Experience modification formula

The Experience Modification Formula is the calculation that is shown on the bottom of the experience modification worksheet. It is important to not be intimidated as you look at this formula but to concentrate on understanding the individual components of the formula. In looking at the formula below, you have basically six values that you need to be concerned with.

Experience Modification Factor

Actual Primary Losses + (Weighting Value x Actual Excess Losses + (I – Weighting Value) x Expected Excess Losses + Ballast Value

Expected Primary Losses + (Weighting Value x Expected Excess Losses) + (j – Weighting Value) x Expected Excess Losses + Ballast Value

Actual Primary Losses: This is the first $5,000 of each loss. Actual primary losses are how the experience modification calculation takes into account claims frequency because as the insured has additional claims the actual primary losses will increase. On the experience modification worksheet the amount of actual incurred losses are in Column 9 and the actual primary losses are in Column 10.

Actual Excess Losses: This is for loss amounts more than $5,000 on each loss. Actual excess losses are how the experience modification calculation takes into account claims severity because as the insured has large dollar claims the actual excess losses will increase. In some cases a large loss will exceed a particular state’s per claim accident limitation and will therefore be limited in the experience modification calculation. On the experience modification worksheet the amount of actual excess losses are the difference between actual incurred losses (Column 9) and actual primary losses (Column 10). The actual excess losses can be found in Column F on the worksheet.

Expected Primary Losses: Actuaries at the rating bureau calculate expected loss rates (Column 2) for each classification, which are multiplied by the insured’s payroll (column 4) to get the expected losses (Column 5) for the insured in each class code. The expected losses are multiplied by a “Discount Ratio” (Column 3), which represents the amount of expected losses that are expected primary losses. The expected primary losses on each individual claim can be found in Column 6 of the worksheet and the sum of expected primary losses can be found in Column E of the worksheet. The expected loss rates and discount ratios are published in National Council Compensation Insurance (NCCI) tables.

Expected Actual Losses: The difference between the sum of expected losses (Column D) and the sum of expected primary losses (Column E). The expected actual losses can be found on the experience modification worksheet in Column C.

Ballast Value (Column G): This will limit the effect of any single loss on your experience modification. The ballast value increases as the expected losses increase but at a rate slower than expected losses. These values are published in the NCCI table of ballast values.

Weighting Value (Column A): This value is a ratio and limits the effect of your excess losses on the experience modification factor. The weighting value increases as the as the expected losses for a risk increase. Therefore, the larger the risk, the more weight is placed on the actual excess loss experience. These values are published in the NCCI table of weighting values.