Also, many states have adapted the experience rating adjustment, which reduces all medical only claims by 70 percent before the numbers are utilized in the experience modification calculation. The reason behind this adjustment was to decrease the incentive for employers to pay the small medical only claims themselves and not report them to the insurance company. Insurance carriers and the NCCI feared that these claims could be handled incorrectly and unreported data could skew rates in future years. With this adjustment, indemnity claims have a greater impact than medical only claims and insured’s need to know how much a loss time claim can affect their experience modification factor.

For example, a $3,000 medical only claim will be reported as a $900 primary loss, but a $2,900 medical and a $100 indemnity claim will be reported as a $3,000 primary loss because the indemnity payment prevented the medical only classification.

Because the excess losses are multiplied by the weighting value in the Experience Modification Formula, it reduces their effect on the experience modification calculation. The primary losses are not multiplied by the weighting value and therefore have a more significant impact on the experience modification than excess losses.

Since primary losses are a measure of frequency and excess losses are a measure of severity, we now see that the frequency or number of claims has a greater impact than severity or dollars paid on the experience modification calculation. Multiple claims that total $10,000 will increase your experience modification factor more than a single loss of $10,000. The way the experience modification worksheet is set up, it is easy to do a quick review to see how the insured compares to his industry on frequency and severity. If box (J) is greater than box (h) then the insured has an above average frequency risk. If Actual Ratable Excess is greater than Expected Ratable Excess the insured has above average severity risk. This is a helpful analysis to help you can get a solid understanding of what is driving the losses in a quick time frame.

The experience modification factor is a direct cost or savings to the insured and the insured has complete control on what the modification will be.