While insurance companies now have more tools to determine the pricing of a workers’ comp policy, the Experience Modification Factor (mod) remains a factor in the pricing determination and impacts perceptions about your company when it comes to underwriters and potentially your customers. Perhaps, most importantly, employers can control their mod and manage their costs by improving workplace safety, reducing injuries, and properly managing those that occur.
The actual process of calculating the mod is complex, but, in essence, its purpose is to compare your company’s claims experience to other employers of similar size operating in the same type of business. Here are some common Q & A’s about the mod:
- Q. My company had no injuries this past year, but my mod went up. How can that happen?
A. In experience rating, the actual payroll and loss data is analyzed over a period of time, usually, a three-year period, not including your most recent completed policy year. For example, a mod effective Jan. 1, 2017 would use policy data from the years 2013, 2014, and 2015. The data from 2016 would not enter the picture until the 2018 mod, when the data from 2013 dropped off.
If the Expected Loss Rate (ELR) goes down from one year to the next, the mod could go up. Your mod may also increase even though you haven’t suffered any injuries if the payroll in the most recent year on the mod is lower than previous years.
- Q. What is the “controllable” mod?
A. Every company has a unique minimum mod that is based on its payroll, the industry risk, and no losses for the entire rating period. The minimum mod will differ from a competitor’s and it may change somewhat from year to year. But it is an important number to know because it enables a company to determine the “controllable” mod. The “controllable” mod is the difference between your actual mod and the minimum mod. So, if the actual mod is 1.0 and the minimum mod is 0.75, the “controllable” mod is 0.25. This is a direct result of the losses that occurred during the rating period and is the piece of the mod that can be changed by a robust loss control program.
- Q. Is a mod of 1.0 good?
A. A mod of 1.0 is average; it means your company’s losses have met expectations. It’s like getting a “c” in school. If your company performs above average, the mod will be less than 1.0 and if you are below average there is a surcharge above 1.0.
- Q. What is the most important date of your workers’ comp coverage (hint: it is not the renewal date)?
A. The most critical date impacting the premium determination is the valuation date or the unit stat date, which occurs six months after policy inception. While most employers are not thinking about insurance at the mid-year point, it’s when they should be highly focused on it because it is when the insurance company sends the loss information to the rating bureau to use in the promulgation of the mod. Ensuring the data is correct is paramount. Once the data reaches the rating bureau, it’s close to etched in stone.
It’s important that the insurance company has an up-to-date understanding of the status and strategy for closure of each open claim since it will be setting claims reserves, the set aside for what the future cost will be.If an employee recently returned to work or a claim is progressing better than expected, the claims adjustor needs to know before the data is submitted.
- Q. Can a company negotiate to minimize the impact of a large, unexpected claim?
A. While each claim needs to be evaluated individually and mitigating circumstances considered, it’s important to remember that workers’ comp is “no fault” insurance, paying even when it is not your fault. According to work comp guru, David Leng, “the only time underwriters will truly and fully dismiss an injury is when the cause of the injury was eliminated or engineered away.” As an example, if the company was using an older production machine where the guarding was not up to standards and an employee was injured and then replaced it with new state of the art automated machinery. This would impact the underwriter’s perception of risk.
- Q. What is an Experience Rating Adjustment (ERA)?
A. In many states, although not all, there is a special rule in the mod calculation called the ERA. This gives a company a 70% credit for each loss in the mod that has a “medical-only” status, which means that no loss wages (indemnity) were incurred. Even if a very small amount of indemnity incurs, the full amount of the loss will count against the mod. The wage waiting period varies by state (usually 3-7 days) and employers should manage return-to-work and lost-time claims with that in mind.
- Q. My company’s mod is 1.2, why have we been disqualified from bidding on several projects?
A.Today, many contractors, property owners, and customers use the mod as a measure of how safely a company operates and will disqualify companies from bidding on work if their modifier is higher than 1.0.
There are strong arguments that this is a mis-use of experience rating as it is not designed to be a proxy for safety performance. In fact, the state of Virginia recently made using the experience mod as a bid qualifier illegal.
That said, if your experience mod is above a threshold for a given job, employers have sometimes found success in working with their agent to construct a compelling story on how the mod doesn’t accurately represent their safety performance. Maybe the risk that caused a large accident has been eliminated. Sometimes you may suffer a large injury that was actually caused by a negligent third party, but workers’ compensation still paid for the injury.
Telling your story can be a powerful tool!
For Cutting-Edge Strategies on slashing Workers’ Compensation Costs visit www.PremiumReductionCenter.com