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Understanding the EMR and What it Means to the Small Contractor



EMR—three little letters that carry significant weight when it comes to a contractor’s ability to bid on a construction project. The Workers’ Compensation Experience Modification Rate (EMR) is a number that is generated every year for every contractor by the National Council on Compensation Insurance (NCCI) for insurance carriers. “The EMR provides the insurance industry a number that is supposed to be a representative of how good a workers’ compensation risk a company is,” said Frank Wampol, corporate safety director for BL Harbert International. “They are determining, for a company of your size and the type of work you do what your anticipated workers’ compensation losses are for a given year. So it’s all about what the insurance company, based on industry norms for similar companies of a similar size, predict your losses to be.”

Breaking Down the EMR

Essentially, the EMR is calculated by analyzing numerous variables of a company, including payroll—not manhours—and injury data, then comparing that to what is “expected” based on other companies’ loss data. “The data then goes through additional actuarial weights, ballasts and stabilizers to develop a final experience modification ‘factor’ or ‘rate,’” explained Sonja J. Guenther, ALCM, ARM, CIC, CRM, senior vice president at Willis of Colorado, part of Willis Group Holdings, a leading global risk advisor, insurance and reinsurance broker. “This factor is then applied to their insurance premium calculations at renewal.”

If a company is right in line with what is predicted, it will have an EMR of 1.0, which is considered normal based on a company’s particular discipline in their state. If the company receives an EMR below a 1.0, it receives a credit EMR, so the company will see a savings on its insurance premium. So, for example, if a company receives a .70 EMR, it receives a 30 percent credit on its base insurance premium. If a company receives an EMR higher than 1.0, that is referred to as a debit EMR. A company in this situation would be required to pay more. For example, receiving an EMR of 1.30 translates into a 30 percent surcharge on the base insurance premiums. In addition, the EMR is calculated based on a rolling three-year average, meaning that the EMR rate for a given year is based on the company’s information from the three oldest of the last four policy years.

Because the EMR rate is driven by injuries and measures how much a company pays for workers’ compensation claims, many owners are utilizing the number as an indication of whether they should hire a particular construction company. In fact, the EMR has, unfortunately, become a prime criterion for measuring whether a company is deemed safe. “The EMR is not indicative of how safe a company is,” Wampol said. “It’s to be used to determine how much of a risk you are to an insurance company. But those who hire contractors have decided we need to look at the EMR and use that as a benchmark as to how safe contractors are. So they use the EMR as an indicator of whether to hire contractor ‘X’ over contractor ‘Y’ because they have a lower EMR. It has evolved to the point that many large construction clients have adopted a 1.0 EMR as an absolute cutoff. If a company doesn’t have a credit EMR, they can’t bid on the job.”

Added Guenther, “While, in practice, they are attempting to attract contractors that are performing safely, what they are often doing, inadvertently, is eliminating smaller companies from being able to bid on the jobs—since the EMR is based on payrolls, not manhours, such as the way in which incident rates are formulated.”

In years past, maintaining a credit EMR was much easier, so it was not as problematic that owners required at the highest a 1.0 EMR. Now, that is all changing thanks to the NCCI making change to the way EMRs are calculated. “The formula has always been constant,” Wampol said. “But the decision was made last year to make changes to the way the EMR is calculated. In doing so, it has resulted in the small contractor having a far more difficult time maintaining a credit EMR. So small contractors are finding themselves unable to get work that previously they could bid.”

The major change made by the NCCI is the “split point,” which has been in place for decades. Previously, the first $5,000 of each workers’ compensation claim was weighted the heaviest in an EMR calculation. Every dollar over that amount in a claim was just considered excess loss dollars. “These dollars have weights and ballasts placed against them to lessen the impact of larger, more severe claims to the EMR,” Guenther said. “So, in the past, $5,000 was the ‘split point’ of primary versus excess loss dollars in each claim used in the calculation of the EMR.” As of 2013, the NCCI doubled that number to $10,000. In 2014, the primary losses amount is increasing to $13,500, and in 2015, it will go up to $15,000. This split point change is impacting smaller contractors far greater than larger companies as they have smaller payrolls to absorb these changes. “As payroll grows, it can absorb more injuries,” Wampol said. “So with a smaller payroll, fewer injuries have an even greater impact. It’s a double-edged sword in that in recent years, because of the economy, both large and small contractors have had to make prudent business decisions and most have seen a reduction in payroll. Their pool of payroll dollars is shrinking. Thus, any individual workers’ compensation claim would have an even greater impact on their EMR. To exacerbate this, this is happening at a time when NCCI decided to change the way the EMR is calculated. It has become the perfect storm for the small contractor. There wasn’t much wiggle room to begin with for the small contractor to maintain a low enough EMR to bid on job, and now that wiggle room is gone. A small contractor could have a perfect loss record and still have an EMR too high to get work.”

What Can Contractors Do?

So the question is: is there anything contractors, especially small contractors, can do to better their EMR rate? While many contractors believe the EMR is a number they have no control over, the answer is actually yes—there are numerous steps contractors can take that can lead to an improved EMR. “To a great degree, the EMR is more of a litmus test of a company’s claims management than actual safety,” Wampol said. “There are claims management best practices that most small contractors don’t have in place but could put in place that could help with the situation.”

The first major step contractors can take to improve an EMR rate is talking with their insurance broker to get a better understanding of what the EMR is and the information that is being reported for them. “The insurance broker or carrier wants you to understand because once you do, you will implement best practices that will make you a better risk,” Wampol explained. “It’s a win-win situation. So talk to the people writing your insurance. Use those resources—you’re paying for them.”

Another imperative change contractors should make is analyzing how they are reporting their payroll to their insurance carrier. “Oftentimes, there are large components of payroll that go unreported to NCCI,” Wampol said. “Sometimes it can be as simple as a management glitch that is easily corrected that doesn’t cause more overhead, it’s just how the numbers are crunched that can affect the EMR.”

Establishing an open channel of communication with the insurance adjuster can also lead to an improved EMR rate. “Many contractors assume the adjuster will take care of everything and don’t question anything,” Wampol said. “Contractors need to look at their current outstanding claims and have conversations with their carrier on an ongoing basis. For example, look to see why the adjuster put $50,000 in reserve on a claim when it’s a claim you thought was closed out two years ago. That money being left out there is calculated into your EMR. It takes time to do this, but there’s a huge return on it.”

In addition, contractors should conduct a policy review. Many insurance carriers send all pertinent information to NCCI for the EMR to be determined approximately six months before a company’s policy renewal date, so contractors should look at any outstanding claims prior to that. Wampol suggests contractors should plan on a quarterly review at minimum. “It’s little things like understanding when your carrier is going to send all the information to NCCI that can really matter,” Wampol said. “So talk to your carrier and see how their system works so that you can be better prepared and reduce as many claims dollars as possible.”

Not to be overlooked as well are programs companies can implement, like safety programs and return-to-work programs. “Obviously, the best way to help your EMR is for people not to get hurt,” Wampol said. “It’s important to incorporate safety components so the possibility of injury is reduced. When there is a work-related injury, communicate with that injured worker that you care about them and want them back on their feet and at work as soon as possible. If you do that, the claim is far less likely to be litigated.”

Educating the Owners

In addition to contractors taking more of a hands-on approach to maintain a better EMR, there are also steps that need to be taken by owners as well. “This benchmark that the insurance industry designed to be used as an indicator of how much of a workers’ compensation risk a company is has evolved into a safety performance indicator for the industry,” Wampol said. “Owners are, quite frankly, improperly using the EMR as a safety indicator when it’s not indicative of safety performance. So what should they focus on instead? That is a great debate in the industry right now.”

While the answer isn’t clear cut, there are numerous other factors about a contractor that owners could—and should—analyze instead, such as a copy of the company’s safety program and the company’s recent injury history. “Everybody wants a magic number that’s quick and easy to look at, but you have to talk to people,” Wampol said. “And when I look at a company’s recent injury history, for example, I need to pick up the phone and call them about the five guys that got hurt last year. If I’m a huge Fortune 500 company about to build a multi-million dollar facility, I think it’s worth my time to sit down with the contractor I’m potentially hiring and say, ‘I want to understand your safety culture. How do you address these things? How do you train your personnel?’ If owners would have those kinds of conservations with their contractors, it would be much more meaningful. Focus on the presence of safety, not the absence of injuries. That’s what we’ve got to focus on.”

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