What Is Experience Modification?

Experience modification is a process that is sometimes used in insurance circles to make some adjustment in the premiums charged to customers. The strategy involves the use of what is known as an experience modifier to determine if those premiums should be increased or decreased based on the experiences of that customer for a period of three calendar years. One of the more common applications of this approach has to do with determining any adjustments in premiums that employers pay for workers’ compensation insurance.

The basic strategy of experience modification is to assess the experiences or incidents sustained by the insured party over a period of three successive calendar years. Typically, the most recently completed calendar year is not considered as part of the evaluation. Attention is paid to the number and frequency of claims that are filed and paid during that three year period. Depending on how those experiences impact the degree of risk that the insurer takes on by continuing to do business with that customer, the premiums will either remain the same, or be adjusted upward or downward. For many businesses, the goal is to make the work environment as safe as possible, which in turn helps to reduce the number of claims that are filed in any given calendar year.

Additional factors also are taken into consideration as part of the experience modification process. Along with the actual experiences with the customer, comparisons are made to other employers in the same geographical region. This comparison helps to provide some additional balance to the assessment, in that if the customer is actually below the average losses sustained by other employers in the area, there is a good chance that the workers’ compensation premiums will not change or at least will be adjusted upward by only a minor amount.

The use of experience modification is one way that insurance providers protect themselves from assuming an unreasonable amount of risk in order to do business with a particular client. By basing the premiums on the results of an experience modification, the insurer is able to keep the level of risk within reason and continue to provide coverage for the employer. One indirect benefit of this process for the customer is that creating and enforcing safety regulations in the workplace helps to keep the number of employee accidents to a minimum, which in turn helps to keep workers’ compensation premiums lower, since the insurer perceives less risk in extending the coverage.