A few years ago, a multiple location apartment complex owner with 25 properties in six states and an experience modification factor (EMF) of 1.65 asked American Safety for a proposal for services. An EMF of 1.65 meant that the company was paying 65% more than its average competitor with the same risk profile. The company asked us to demonstrate a three-year payback on the investment in our services.
Since workers compensation premiums are experienced-based, actuaries have developed a rather complicated formula for determining experience modification factors and for establishing premiums. The EMF for a given year is based on losses in the three oldest of the last four years, so it is essentially a rolling average. Frequency of injury counts more than severity of injury. However, for all practical purposes, claims dollars drive the EMF.
We performed a detailed analysis of past losses and made some assumptions about future losses in order to project the EMF in future years. We knew that the EMF for year 2 would go up because a higher loss year replaced a lower loss year in the equation. We assumed losses would decline with our expert guidance to $100K in year 1, $75K in year 2, and $50K in year 3, and we projected that the EMF would hit 1.0 by year 5.
1 1.65 Current Actual
2 1.8 Projected
3 1.3 Projected
4 1.2 Projected
5 1.0 Projected
We achieved our objective sooner than projected. In the four years prior to American Safety’s assistance, losses averaged $267,000 per year for the 24 properties. In the four years after American Safety’s assistance, losses declined to an average of $45,000 per year and the number of properties increased 50% to 37 at the same time.
The company now owns 44 apartment complexes. American Safety continues to visit the properties on a regular basis for physical inspections and employee training. We also advise management and monitor open claims with the insurance carrier.