Workers’ Compensation and the Experience Rating Modification (“X-Mod”)
Experience rating, authorized under the State Insurance Code, is a statistical procedure, which tailors premiums of qualifying employers to fit their organization’s loss (claims) experience.
How Does the System Work?
If your company’s premium is large enough to meet the system’s eligibility requirements, it is assigned an annual experience modification. Eighty percent of the state’s workers are subject to experience rating.
The experience modification (‘x-mod’) is generated by the workers’ compensation Insurance Rating Bureau of California, a nonprofit association of more than 400 workers compensation companies. The bureau is licensed by the Insurance Commission to collect data about injured workers’ claims. The Bureau uses this data to develop workers’ compensation rates and pricing regulations, which are recommended to the Insurance Commissioner for adoption.
An Important part of the Bureau’s duties is determining your organization’s qualifications for an experience modification (‘x-mod’).
Experience Rating Compares Organizations that Have Similar Risks (Exposures)
By comparing your organization’s payroll and claims history with other businesses assigned to the same industry classification, experience rating can determine if your organization’s claims are greater or less than what is expected from an organization in a similar industry.
The Bureau uses this statistical comparison to assign your organization its experience modification. The “x-mod” is a percentage factor, which is applied to your premium. It is used to either increase or decrease the amount of premium your organization pays to your insurance company.
How Workers’ Compensation is Priced
The premium for workers’ compensation insurance is based on a minimum rate that is established by the insurance commissioner.
The manual rates are based on a comparison of past payroll and losses of all of the businesses in a given classification. The rate projects the average cost of paying benefits for all businesses assigned to the classification, per $100 of payroll. If the rating system went no further than manual rating, the loss history or experience rating would not be recognized in determining the premium.
Experience rating, however, refines manual rates by comparing a company’s loss experience to other businesses assigned to the same classification and adjusts the company’s premiums to reflect its actual experience.
If you have any questions regarding workers’ compensation insurance, please let us know, we are here to help.
*This article is intended to be used for informational purposes only and not to be construed as legal advice.