In the California workers’ compensation system, experience rating is a merit rating system with the primary statutory goal of providing a direct financial incentive for employers to promote a safe workplace.
An experience modification, also called an X-Mod, compares the claims history of one employer to the average expected of other employers of similar size in the same industry. All things equal, an X-Mod greater than 100 percent increases the cost of an employer’s workers’ compensation insurance, while an X-Mod less than 100 percent decreases an employer’s premiums.
The key assumption underlying experience rating is that some employers will respond to significant experience rating events. Specifically, becoming experience-rated or experiencing changes in X-Mods, especially increases that cross the 100 percent threshold, is assumed to incentivize employers to address emerging work-related hazards to lower premiums and promote a safer workplace.
However, there is limited research validating the efficacy of experience rating in promoting safety and reducing work-related injuries. Prior research tends to support the safety incentive of experience rating mostly based on aggregate injury data or using a proxy measure for the experience rating status of employers, but results were somewhat limited in scope and not always conclusive.
To further analyze the effectiveness of experience rating in reducing work-related injuries, the WCIRB conducted a study based on over a decade of employers’ loss and payroll experience and published X-Mods to evaluate the independent impacts of experience rating on work-related injuries. The study used regression modeling to better understand whether employers respond to significant experience rating events and take action to reduce work-related injuries.
Specifically, this study focused on two types of “shock” experience rating events that would potentially provide safety incentives to employers: an employer becoming initially qualified for experience rating and an increase in an employer’s X-Mod from below 100 percent to above 100 percent. This study also analyzed whether impacts of experience rating events vary by employer size and industry.
The key findings of the study include:
– – Qualification for experience rating led to a larger decline (-17%) in claim frequency for newly rated employers relative to non-rated employers of similar size and industry in the first year of experience rating. The impact on claim frequency persisted for the study period, three years after the first X-Mod was issued (Figure 4)
– – For experience-rated employers, an increase in X-Mods from credit (less than 100%) to debit (greater than 100%) is associated with a larger decline in the likelihood (-2%) of having any claims. The difference adjusts for employer size and industry sector and is statistically significant (Figure 5)
– – A credit-to-debit increase in X-Mods is also associated with larger declines in future claim frequency for experience-rated employers for three years after the X-Mod increase. The difference in claim frequency change is statistically significant and the difference grew to 8% by the third year after the X-Mod increase (Figure 6)
– – The construction, manufacturing and hospitality industries have a relatively high share of X-Mod eligible employers In these three industries, employers that had an increase in their X-Mods from credit to debit had a larger decrease in future claim frequency than other experience-rated employers whose X-Mods did not increase from credit to debit In particular, construction employers with an X-Mod increase had a larger decline (-15%) in claim frequency by the third year of the X-Mod change than other experience-rated construction employers of similar size (Figure 7)
– – The impact of a credit-to-debit X-Mod increase on future claim frequency varies by employer size While an X-Mod increase is associated with a larger decline in claim frequency for employers of all sizes, medium- sized employers1 appear to have the largest relative decline (-8%) in claim frequency (Figure 9)
The full report is available in the Research section of the WCIRB website.