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The experience modification rate, or e-mod, is a multiplier applied to your workers' compensation premium that reflects how your claims history compares with other employers in the same job classifications. A rate of 1.0 is average, below 1.0 lowers your premium, and above 1.0 raises it.
The experience modification rate is calculated by a rating bureau, NCCI in most states and an independent bureau in others such as California, New York, and Pennsylvania, using three prior policy years and excluding the year just ended. The formula compares your actual losses against the expected losses for a business of your size and classification mix. It deliberately weights claim frequency more heavily than severity, so several small claims hurt your mod more than one large claim of the same total value.
The effect on cost is direct. Premium equals payroll by class code times the rate, times the mod, plus any scheduled credits or debits, a chain worth walking through when you review how workers' comp rates are set. A mod of 1.25 makes every payroll dollar 25 percent more expensive to insure, and many general contractors and public agencies will not accept bidders above a set threshold.
Two things drive most avoidable damage. The first is leaving reserves unchallenged, since the mod uses reserved amounts rather than paid amounts, so an inflated open reserve on the loss run inflates premium for three years. The second is misclassified payroll, which distorts expected losses. Review the bureau worksheet before it takes effect, and run a return-to-work program so medical-only claims never become lost-time claims, which also keeps days-away cases off the log you maintain under OSHA's injury recordkeeping rule.
It means your losses have run higher than expected for a business of your size and classification mix, so your premium gets multiplied upward. A mod of 1.25 makes each payroll dollar 25 percent more expensive to insure. Many general contractors and public agencies also refuse to accept bidders whose mod sits above a set threshold.
Because the formula weights claim frequency more heavily than severity. A pattern of small losses signals an ongoing exposure the employer can control, while a single large loss reads more like chance. Cutting the number of claims usually moves the mod faster than cutting the dollar size of the claims you already have.
About three years. The calculation uses three prior policy years and drops the year just ended, so a claim keeps influencing premium until it rolls out of the experience period. Reserves matter as much as payments, because the formula uses reserved amounts, and an inflated open reserve inflates premium for that whole stretch.