The following is an excerpt from an article from 2008 entitled, "The Basics of Experience Rating". Links to the complete articles part one and two appear below.
Primary Losses Are the Most Expensive
"Every time you report a claim to your insurance company, a reserve is set for the claim. ...
The first $5,000 of each claim is considered primary. Any amount of reserve above $5,000 is considered excess loss. ...
So what does this mean? Experience rating places more emphasis on the frequency of injuries than on the severity. An employer with one large loss ($100,000) will pay less for future insurance than an employer with 10 smaller lost time claims of $5,000 each a total of $50,000 in losses -- because the full $50,000 is primary loss in the premium calculation for the second employer, while there is only $5,000 in primary losses for the first employer. Experience rating cushions the blow of the large loss, but hammers employers with frequent losses.
(Note: in California Primary Loss = Actual Loss if Total Loss is less than $7,000;
= $7,000 if Total Loss is equal to or greater than $7,000.)
Note: As of Jan 2012 the first $7000 is now considered primary and there is an individual claim limitation of $175,000.
Small Employer, Big Trouble
Here's where a lot of smaller employers get caught: if you have a frequency problem (a lot of relatively small injuries involving at least some lost time) and just one big loss, the primary losses add up in a hurry. You quickly exceed the expected level of primary losses. As a result, your experience rating pushes up into the debit zone. You start paying a lot more for insurance."
Later on in this article it states:
"When it comes to determining the experience rating for your next policy year, there is only one day that really counts. About six months after the end of your policy year, a summary of your losses (the unit stat report) is prepared by your insurance carrier(s) and submitted to your rating bureau. For employers with open claims in prior years, it is essential to make sure that the numbers contained in the unit stat report are accurate and reflect an up-to-date understanding of the status of each open claim."
If you would like to read the whole article here are the links Part One and Part Two
Here is a link to another detailed article about dealing with disputes Workers Compensation Insurance Premium Disputes
If you would like to get into the "nuts and bolts" of experience mod calculation download this article published by Zenith Insurance.
For an overview of experience rating see the NCCI article here.
The following is an excerpt from the above article:
The second factor limiting market rate competition is “experience rating.” Insurance Code 11730(c). When insurers report claims under the policies they issue, the WCIRB compares each employer’s claims history to that of its industry competitors. This calculation produces a merit rating called an “experience modification” for every employer large enough to have a minimally statistically credible claims history.
The purpose of experience (aka “merit”) rating is to provide an economic incentive (or penalty) for safety. Indeed, employers with high experience modifications are assessed to pay for special Cal/OSHA inspections and consultations Labor Code 62.7, 6314.1, 6354(a). An employer may not enter into an employee leasing arrangement Labor Code 3602(d) to evade application of its experience modification. Insurance Code 3600(d).
The WCIRB’s calculation of experience modifications is governed by the California Experience Rating Plan, or “CERP,” 10 California Code of Regulations 2353.1. Rather than making their own projections of a policyholder’s likely claims experience, as they do for most other types of insurance, insurers must apply to their policy the WCIRB-promulgated experience modification for the policyholder. Insurance Code 11734(a). Generally, an employer receives its first experience rating at the beginning of its third year in operation.
Soon thereafter, the WCIRB inspects the employer’s premises and operations to confirm that the insurer is reporting the employer’s payroll under the correct classification(s). The USRP also governs both insurer reporting and classification assignments. Both the CERP and the USRP are posted on the WCIRB’s website, www.wcirbonline.com.
Insurer data reports to the WCIRB under the USRP, called “unit statistical reports” or “USRs,” reflect data deemed accurate as of eighteen months after insurance policy inception. Since premium is based, in part, upon the employer’s actual payroll during the policy term, final premium can’t be determined until the insurer conducts an “audit” or physical examination of the employer’s books a few months after policy expiration. Insurers must then submit updated USRs, typically tracking developments in claim value estimates, annually for nine more years, as necessary."