What does the experience modification factor accomplish in Workers’ Compensation insurance?

The experience modification factor plays a significant role in Workers' Compensation insurance by rewarding employers with a strong safety record or above-average loss experience. This means that employers who have successfully minimized workplace injuries and claims can benefit from lower premiums. It is calculated based on the employer's claim history compared to other similar businesses within the same industry. The lower the frequency and severity of claims an employer has, the more favorable their experience modification factor will be, which in turn leads to reduced insurance costs. This serves as an incentive for employers to invest in safety measures, ultimately contributing to a safer workplace for employees.

This understanding emphasizes the importance of a company maintaining a strong safety culture, as it not only protects employees but also reduces overall costs associated with Workers’ Compensation insurance. The other options do not accurately reflect the function of the experience modification factor, as it does not penalize all high payrolls, provide basic coverage, or adjust coverage limits solely based on employee count.