by Safety Management Group
There’s a small number that has a profound effect on every contractor’s ability to be competitive and maintain profitability. That number also gives owners and construction managers (CM) insight into how that contractor makes key decisions about his or her business. In fact, many owners and CMs will use that simple number as an arbitrary way of determining which contractors will be allowed to set foot on their sites. And despite its impact and importance, far too many contractors do not have a solid understanding of what that number means, how it’s computed, and how their own decisions can impact it.
That number is the Experience Modification Rate (ERM). More commonly known as EMR, it is a multiplier that allows insurance companies to factor your company’s workers’ comp history into your premium amount. A high EMR can drive your workers comp rate through the ceiling, while a low rate may make it easier to outbid your competition and stay profitable.
Just as important, there are owners and CMs who examine EMR as part of the process of selecting and approving contractors. If your company’s EMR is high, they make take it as a sign that your company’s work is sloppy or that your approach to jobsite safety is lax. Conversely, they view a low EMR as the sign of a well-managed company with high-quality employees. That’s why it’s important for contractors to develop a working understanding of this multiplier.
Exactly what is EMR?
The Experience Modification Rate is simply a comparison of your company’s injury rate with those of other companies in your industry. The overall average in your industry is assigned an EMR of 1.0. A company with more injuries than average will have an EMR of above 1.0, and a company that has a better-than-average workers’ comp claim history will have an EMR below 1.0.
Insurance companies follow this practice for the same reason they review your driving history when you apply for vehicle insurance. Their records show that a driver who has already been in a number of accidents is more likely to experience additional accidents than the average driver. Similarly, someone with multiple speeding tickets is statistically more likely to be involved in an accident than someone with a perfect driving record.
An EMR above 1.0 tells the insurer that your company has had more recordable injury claims than would normally be expected for a business like yours. Using no other framework but pure statistics, that suggests that your company isn’t doing enough to maintain safe jobsites, so it’s more likely that you’ll rack up additional injury claims in the future at a higher rate than normal.
You may think that’s unfair — and it may be — but it’s a reality of how insurance companies operate. It’s like seeing your vehicle insurance premium jump after you get a speeding ticket. You may not think that’s very fair, either, but there isn’t much you can do about it, besides driving more slowly.
How EMR is computed
To understand how your business practices can affect EMR, you need to develop an awareness of how that number is computed.
In the most basic terms, your manual (base) premium is determined by dividing your company’s payroll in a given job classification by 100. That number is then divided by what’s known as a class rate. Class rates are set by the National Council on Compensation Insurance (NCCI) to reflect each job classification’s inherent risk. For example, structural ironworkers have a higher risk of injury than receptionists, so their class rate is significantly higher.
Next, the insurance company looks back at the past three years to see your history of claims, and compares your history to that of comparable companies in your industry. Again, they assume that a higher number of claims in the past suggests that you’ll have claims in the future. Typically, they examine the three full years that end one year before the expiration of your current policy.
Their computation doesn’t stop at total amount of claims. They also consider how often those claims occurred (frequency) and how major each of the claims was (severity). If your company had just one major injury over that three-year period, you’ll be impacted less seriously than a competitor with ten smaller claims. That’s because the insurance company will view your competitor as having a pattern of claims that suggests an underlying problem, while giving you the benefit of the doubt.
This entire process will result in a number, and that number is your EMR. As noted earlier, an EMR of 1.0 reflects a claims rate that’s average in your industry. An EMR above 1.0 says you’ve had more claims than average, and one that’s lower indicates that your claims history is better than average.
How EMR affects your premiums
When determining your premiums, insurance companies consider the likelihood that they’ll have to pay out a claim on your behalf. If the risk is lower than normal, you’ll pay a lower premium, and vice versa. EMR gives them a simple way to make that adjustment.
The insurance company takes the manual premium and multiplies it against the EMR to determine your actual premium. That’s it. If your EMR is 1.2 and your competitor’s is 1.0, you’ll essentially pay 20 percent more for your workers comp coverage. But if your EMR is 0.8, you pay 20 percent less than they do (any special discounts or credits your insurance company offers are discounted after this computation).
You can see how having a lower EMR translates to higher profitability, because contractors with a high EMR have to build that additional premium cost into their bids. Lower insurance rates provide a significant competitive advantage. (Studies also show that companies with lower claims rates also achieve additional profitability through higher worker productivity and lower turnover.)
How your actions can impact EMR
The bad news about EMR is that any loss you report will stick with you for three years, having a negative effect on your EMR and your insurance premiums. Suppose your company had a spotless injury record for a decade, but recorded two big claims in 2011. Even if you resume your accident-free performance, you’ll pay extra for those claims each time you negotiate new policies through 2015.
Fortunately, there’s good news. You can lower your EMR by preventing accidents, and the best way to do that is through an effective safety program. If your workers follow safe work practices, the likelihood that they’ll be injured on the job drops significantly.
But even with the best safety program, accidents do happen from time to time. However, the way you respond to those accidents can also have an effect on EMR. The key is developing a plan to manage injuries and the claims they create.
First, take an objective look at your claims history. Remember that multiple small claims can have a big effect on your EMR, so look for patterns. For example, you may notice several injuries that could have been prevented if your workers were wearing the correct personal protective equipment. A program to encourage compliance could be the answer.
What you do when workers are injured matters, too. Many contractors automatically rush all of their injured employees to the nearest emergency room, but that can result in an expensive claim. You may be able to negotiate an agreement with a local occupational care center or walk-in clinic that gives you a smaller per-visit fee in return for sending all but seriously injured employees there. On larger jobsites, it may even be more economical to staff an onsite clinic.
Getting employees back to work quickly can also help. Don’t automatically send a worker home when a doctor says he or she can’t perform a certain task (such as no lifting for ten days). Instead, find a lighter duty that the worker can perform until he or she is fully recovered. Your EMR will benefit when workers spend less time recovering at home.
Finally, be willing to accept a deductible on your workers’ comp policy. If you pay smaller claims out-of-pocket, they won’t appear in your claims history for the insurer to see. It’s like paying for a small auto repair, rather than turning the claim into your insurer. However, if you take this approach, be sure that you tell the insurer how you handled it, in case complications arise. And even if you don’t report the incident to your insurer, you may still need to report it to state work-safety officials.
