The experience factor adjusts a business’s premium rate by comparing its experience with all businesses in the same risk classification. If a business’s actual loss for a year is less than expected loss, L&I will set an experience factor for the next year that is less than 1.0. This means the business is expected to have lower costs per unit of insurance exposure (usually hours) than the benchmark for its class.
However, if the actual losses are greater than expected loss, the experience factor will be greater than 1.0. This means the business is expected to have higher costs than the benchmark for its risk class.
Note: The final experience factor may be different than the calculation if the business:
- Has a compensable-claim-free experience rating.
- Is affected by the limitation on annual changes to the experience factor.
The claim-free discount (compensable-claim-free experience rating)
- Businesses are eligible if, during the 3-year Experience Period, have no compensable claims: time-loss, partial permanent disability, total permanent disability or death benefits.
- Maximum experience factors cap the experience factor for eligible businesses (before applying annual limitations), usually resulting in lower experience factors. These maximum experience factors, by expected loss size of the business, are specified by expected loss size of the business in WAC 296-17-890.
- Maximum experience factors, which are less than 1.0, reflect the lower subsequent claim costs that such businesses tend to have.
- Approximately 80% of all Washington businesses are eligible, the majority of them small (they represent only 20% of the assessed premium).
Limitation on annual changes to the experience factor
Generally, a business's experience factor cannot increase or decrease by more than 25% in 1 year.
Exceptions to the 25% limit on annual change to the experience factor
In some situations, a business's experience factor can change by more than 25% in one year. L&I makes the exception when the new year’s computed experience factor is below 1.0 and the employer had a prior year experience factor greater than 1.3333.
An example of how the 25% limitation would affect an annual increase
Suppose a business had:
- An experience factor of 0.9000 last year.
- A computed factor of 1.1971 this year.
- A compensable claim in its 3-year experience period, making it ineligible for the claim-free discount.
This year’s computed factor is 33.01% larger than last year’s factor (1.1971 / 0.9000 = 1.3301). However, due to the 25% limitation on the annual increase, the new experience factor for this business would be 1.1250 (= 0.9000 x 1.25).
An example of how the 25% limitation would affect an annual decrease
Suppose a business had:
- An experience factor of 1.7000 last year.
- A computed experience factor of 1.1971 this year.
- A compensable claim in its 3-year experience period, making it ineligible for the claim-free discount.
This year’s computed factor is 29.58% smaller than 1.7000, last year’s factor (1.1971 / 1.7000 = 0.7042). The 25% annual limitation limits this year’s experience factor to 1.2750 (= 1.7000 x 0.75).
Although the prior factor (1.7000) is greater than 1.3333, the computed factor (1.1971) is above 1.0000, so the exception to the 25% annual limitation doesn't apply. The final factor for this year is 1.2750.
An example of when the exception to the 25% limitation would apply
Suppose a business had:
- An experience factor of 1.4663 last year.
- A computed factor of 0.7000 this year.
- A compensable claim in its experience period so it isn't eligible for the claim-free discount.
The computed factor is 52.26% (0.7000 / 1.4663 = 0.4774) smaller than 1.4663, last year’s factor. The 25% limitation on annual change would normally limit this year’s experience factor to 1.0997 (= 1.4663 x 0.75).
However, since the computed factor (0.7000) is less than 1.0000 and the prior year experience factor (1.4663) is greater than 1.3333, the exception to the 25% annual limitation applies. The final factor for this year is 1.0000.