A modifier of 1.00 represents average performance for the class. Below 1.00 means better-than-average loss experience and reduces premium; above 1.00 means worse and increases it.
The calculation is performed by a rating bureau using several years of claim and payroll data, and it lags — a claim affects the modifier for years after it closes. The formula weights claim frequency more heavily than severity, so several small claims typically move a modifier more than one large one.
Why it matters at audit
The modifier multiplies everything. It applies to correctly reported payroll and to exposure discovered at audit alike, which is why a classification error at a business with a high modifier costs more than the same error elsewhere.