BUSINESS
How an Insurance Rating Could
Unfairly Cost Contractors Jobs
A complicated calculation for determining workers compensation premiums
has evolved into a do-or-die benchmark on whether contractors are qualified
to bid on many jobs, and some say that’s not fair, especially for smaller
contractors
It’s called the experience modification rate (EMR), and it’s
based on previous workers compensation claims versus payroll
and other factors. The rate can lead to a reduction or increase
in a company’s workers compensation premiums. But over the
years, the rate has come to mean much more in the construction
industry, where the number has often become the final word on a
construction company’s safety practices.
“It’s not the ‘Holy Grail’ of safety indicators as some would
think it is,” said Frank Wampol, vice president of corporate safety
and health for B.L. Harbert International, a general contractor
based in Birmingham, Ala. “It’s one of many things that one should
be looking at to determine the effectiveness of a contractor’s program.
The way it has over time become the do-or-die indicator, that
was not the intent.”
Setting bid prequalification on EMR can also be unfair to
smaller contractors because part of its calculation is based on the
size of the company’s payroll.
“When that small contractor who has a small payroll has a
minimal loss, then there are fewer dollars to absorb that loss, thus
it has a much greater impact on their EMR,” said Wampol. “The
more payroll you have, the more claims you can absorb.”
What EMR does and does not do
Many large projects and government contracts require bidders to
have an EMR of no more than 1.0, which represents the industry
average. The thinking is that a rating above 1.0 would be a safety
risk, and the lower the EMR, the safer a company’s work practices.
But that’s not always the case.
The National Council on Compensation Insurance (NCCI),
which calculates EMR for most states, even warns against using the
rate for anything other than its intended purpose – setting credits
or debits for workers comp premiums.
NCCI sets EMR by assigning a classification code or codes
to a company, says Dean Dimke, NCCI marketing communication
director. Jobs with higher risks, like those in construction,
are weighted more heavily than say clerical positions. NCCI then
factors in the payroll for each classification and any workers comp
claims over the past three years to calculate EMR.
In general, a 1.0 EMR would be neutral to workers comp
premiums. A 1.20 EMR would lead to a 20 percent increase in
premiums, and a 0.8 EMR would result in a 20 percent reduction
in premiums.
The rate’s overall purpose is to gauge past costs of injuries at
a company to its risk for future injuries. But insurance companies
don’t just stop at that when assessing a potential customer.
Deron Cowan, senior risk engineer for Zurich Service
Corporation Risk Engineering, says EMR is just one of about 30
benchmarks his company looks at when assessing a contractor for
its insurance products.
“When we’re looking at companies that are a good risk, that
doesn’t mean that because they have an EMR that’s over 1.0 that
they’re a bad risk,” said Cowan. “You have to take a look at…other
By Frank Wampol
rawpixel / 123RF Stock Photo
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