Workers' Compensation Experience Modification Rating (EMR): Actuarial Weighting & Premium Impact

## Mathematical Foundations of the NCCI Experience Modification Rating

Workers' Compensation premiums are dynamically scaled by the Experience Modification Rate (EMR or MOD). A baseline mod of 1.00 represents industry-average safety performance, while an EMR of 1.25 incurs a 25% mandatory premium surcharge.

### 1. The NCCI Split-Rating Formula

The core actuarial formula balances primary losses against excess severity:

$$\text{EMR} = \frac{A_p + W \cdot A_e + (1 - W) \cdot E_e + B}{E + B}$$

Where:
- $A_p$: Actual primary losses (losses below the $15,000 split threshold).
- $A_e$: Actual excess losses ($A_e = \text{Total Incurred} - A_p$).
- $W$: Weighting value assigned to excess losses (scales with company size).
- $E_e$: Expected excess losses derived from class code payroll.
- $B$: Ballast factor that dampens volatility for smaller payrolls.
- $E$: Total expected losses ($E = E_p + E_e$).

| Classification Code | Industry Description | Expected Loss Rate (ELR per $100 Payroll) | Discount Ratio (D-Ratio) |
|:--------------------|:---------------------|:-----------------------------------------:|:------------------------:|
| 5403 | Carpentry Framing | $4.18 | 0.28 |
| 5022 | Masonry Exterior | $3.62 | 0.31 |
| 8810 | Clerical Office | $0.12 | 0.44 |
| 8742 | Sales Outside | $0.24 | 0.40 |

### 2. Frequency vs. Severity Penalty Discrepancy

Ten $5,000 claims (total $50,000) produce a significantly higher EMR penalty than a single $50,000 claim because every claim under $15,000 is classified 100% as primary loss without excess discounting.