Effect of Frequent Claims on Experience Rating

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Experience rating is a tool used for pricing workers compensation insurance. An employer's loss experience is compared to that of other employers in the same classification. If the employer's losses are lower than the average for the group, the employer will receive a credit. The reverse is also true.


Experience rating formulas do not treat all workers compensation claims in the same manner.

Frequent small claims are given more weight than a single large one. The reason for this has to do with loss predictability.

Numerous employees are injured every year in work-related accidents. Many injuries have similar causes, such as overexertion, falls and auto accidents. Because on-the-job injuries occur with some frequency, they are relatively easy to predict. Predictable losses can be controlled by the employer through proper maintenance, training and other accident-prevention techniques.

While accidents may predictable, the outcomes of those accidents are not. For instance, slips and falls are a common cause of workplace injuries. Yet, it is difficult to predict whether a slip-and-fall accident will result in a sprained ankle or a broken hip. The cost to treat an ankle sprain is significantly less than the cost of treating a hip fracture.

Experience rating plans recognize that the occurrence of a work-place injury or occupational disease is more predictable than its cost. Thus, claim frequency has more impact on experience rating than claim severity.

An employer that has sustained numerous small claims is subject to a greater penalty than an employer that has incurred one large claim.

Split Losses

Most experience rating plans split large losses into two pieces, the primary part and the excess part. The plans specify a cut-off amount. All of the loss up to that amount constitutes the primary portion of the loss. The remainder of the loss is the excess portion. The cut-off amount varies from state to state. For the purposes of this article we'll assume that the cut-off point is $15,000.

Suppose that one of your employees sustains an injury that results in a $50,000 workers compensation loss. The loss consists of both medical expenses and disability (lost wages). The first $15,000 is the primary portion of the loss while the remaining $35,000 is the excess part. The experience rating formula applies more weight to the primary portion than to the excess part.


The following example will demonstrate how frequent losses are treated differently than large losses under experience rating plans. Dave and Cherie are friends. Each owns a small chain of delicatessens. Dave's business is called Deli Delights while Cherie's is called Cherie's Charcuterie. Each business owner has purchased a workers compensation policy that runs from January 1, 2015 to January 1, 2016. The payrolls of the two businesses are the same.

Both policies are subject to experience rating. The experience modifier  for each policy is based on losses that occurred between January 1, 2011 and January 1, 2014.

Over this three-year period, nine of Dave's employee's sustained minor injuries. Three were injured by a meat slicer, three fell on a slippery floor, and three incurred a back strain from heavy lifting. Each claim involved both medical expenses and disability.  The claims are summarized below.
Jan. 1, 2011-2012 Jan. 1 2012-2013 Jan. 1, 2013-2014
Claim 1                3500Claim 4             2800Claim 7               3300
Claim 2                2500Claim 5             3700Claim 8               3100
Claim 3                4000Claim 6             3500Claim 9               3600
Total                   10,000Total                 10,000Total                  10,000


In contrast to Deli Delights, Cherie's Charcuterie has incurred only one workers compensation claim within the last three years. In 2012 a worker was injured by a robber in a workplace violence incident. The incident resulted in a $30,000 claim for both medical expenses and disability. 

Both Deli Delights and Cherie's Charcuterie have incurred $30,000 in losses over the last three years. However, all of Dave's losses are below the $15,000 cut-off point. Thus, the entire $30,000 will be considered in experience rating Dave's business. Cheri's loss exceeds $15,000. Consequently, the first $15,000 of the loss is the primary portion. This amount will carry more weight in the experience rating process than the remaining $15,000 excess portion.

Because Dave has incurred many more losses than Cherie, his experience modifier is likely to be significantly higher than Cherie's. As a result, Dave will pay more for workers compensation coverage than Cherie.

Medical-Only Claims

In the scenario described above all of the claims incurred by Deli Delights and Cherie's Charcuterie involved medical expenses and loss of income. If these claims had involved medical expenses only (no disability), it is likely that only a small portion of them would have been used in experience rating.

Most states have approved the use of a factor in experience rating called the Experience Rating Adjustment (ERA). This factor is applied to medical-only claims, reducing them by 70%. Only the remaining 30% of the claim amount is used in experience rating. This reduction applies to both the primary and excess portions of a claim.

For example, suppose that the $30,000 violence claim incurred by Cherie's Charcuterie involved medical expenses only. Once the ERA was applied, the primary part of the loss would be $4500 (15,000 X .30). The excess portion would be also be $4500.

The ERA rewards employers who get injured employees back to work promptly. It also encourages employers to report medical-only claims to their insurer rather than pay them out-of-pocket.
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