Definitions for "Experience Modification Factor"
Keywords:  mod, ncci, premium, factor, credibility
The factor applied, in experience rating, to reduce the premium amount when the loss experience in the particular class of policies is better than anticipated.
Most policyholders will be given an “experience modification factor” by their carrier once they have been in business at least two years. The “experience mod” is a comparison of a given employer's actual losses with the “expected” losses for the average employer in a specified classification code. The “factor” itself is calculated by means of a somewhat complicated formula that may vary slightly from one insurance carrier to another due to the use of differing “expected loss rates,” but follows the same general format developed by the insurance industry nationally. That formula generally tends to penalize employers more for the frequency of claims than the severity of claims. An employer will be fully experienced rated once three years of loss history is available for comparison. Those employers whose premiums are too small to qualify for experience rating are usually subjected to a “merit rating” plan developed by their specific carrier.
In experience rating, the factor applied to reduce the premium when loss experience is better than expected.