What does the term 'experience modification factor' relate to?

The term 'experience modification factor' is specifically associated with workers' compensation insurance and reflects the claims history of a business. It is a ratio that compares the company's past claims experience to the expected claims experience for similar businesses within the same industry. If a company has fewer claims than average, it will have a modification factor below 1, potentially leading to lower premium rates. Conversely, a company that has more claims than expected will have a modification factor above 1, resulting in higher premiums. This factor serves as an incentive for businesses to maintain safer workplaces and reduce injuries, ultimately influencing the cost of their insurance coverage based on their performance in managing risk.