If you spend more than $4,500 on your workers’ compensation premium you probably have, as part of your premium calculation, a factor known as the experience modification. It’s a calculation that compares your actual losses to the average losses of companies like yours.
Ask your agent to work with you to review your experience modification worksheet for accuracy. Check the payrolls and losses that are a part of the calculation.
A modification of 1.0 indicates that your losses are average. An experience modification of 1.2 means that your losses are higher than average. A modification of .89 is reflective of loss experience better than average. Your experience modification factor is multiplied by your gross premium. So, a 1.20 mod increases your costs by 20%.
In the illustration you’ll notice that the document appears to be a matrix. It is actually several different charts within one matrix.
Sample Experience Mod Worksheet
Mod Worksheet Upper Section
The top section of the mod worksheet is labeled columns. You’ll notice groupings of policy years. Most experience modification worksheets include three years’ worth of data, each in a separate section of the worksheet. The mod calculation does not include the most recent year, as the claim information is incomplete at the time the worksheet is prepared. The 2008 mod will include payroll and claim data for 2006, 2005, and 2004.
In the first column, “code” means the employment classification. The example above shows codes 3113 and 8810. Respectively, Tool Manufacturing and Clerical. Your worksheet will show your codes as taken from your annual premium audits.
The second column is labeled “ELR,” expected loss ratio. This factor is determined annually by the rating bureau for each employment classification based on actuarial loss data.
The third column is the discounted expected loss ratio, “D-Ratio” for short. A large portion of the experience modification calculation focuses on the frequency of claims rather than severity. This part of the calculation deemphasizes the weight of large claims. The D-Ratio is actually the percentage of expected losses that are classified as expected primary losses.
Column 4 is your payroll, again taken right from your annual premium audits.
Columns 5 and 6 multiply payrolls by the ELR and the D-Ratio.
Columns 7 through 10 deal with your actual claims. Each line is a separate employee accident. The number in column 7 should correspond with the claim number assigned by your insurance company. Take a look at your insurance company loss run and you can identify each claim by its number.
The left side of the next column contains a description of the injury as a code. Here is the secret key:
| Injury Code | Description |
| 1 | Death |
| 2 | Permanent Total Disability |
| 3 | Major Permanent Partial Disability |
| 4 | Minor Permanent Partial Disability |
| 5 | Temporary Total or Temporary Partial Disability |
| 6 | Medical Only |
| 7 | Contract Medical or Hospital Allowance |
| 8 | Compromised Death – CA Only |
| 9 | Permanent Partial Disability |
The injury code is especially important in states where medical only claims are discounted within the mod calculation.
The right-hand side of column 8 indicates whether the claim is open or final. A final claim is a closed claim for which no further expenses are expected.
Column 9 shows loss payments for the specific claim. Amounts shown for open claims include payments made, plus an estimate of future payments, also called a reserve.
Column 10 contains the actual primary losses figure. It’s column 9 limited to $5,000. You’ll notice any claim with an incurred amount (column 9) over $5,000 is brought over in column 10 at $5,000. This is the part of the calculation of actual losses that recognizes the importance of the frequency of claim rather than severity of claim. Four claims at $2,500 has more of an impact on your experience modification than one $10,000 claim.
Mod Worksheet Lower Section
The bottom of the worksheet is where the actual calculation of the experience modification is made.
Math enthusiasts can follow the calculation using the algebraic equations included on the worksheet. In the example above, the final experience modification is 1.29, found at the lower right hand corner of the illustration.
Know Your Perfect Mod
Many consider a mod of 1.00 to be OK. After all, there is no surcharge.
I’m not satisfied with that. An experience modification of 1.00 means the employer is average. It’s the workers’ compensation equivalent of a “C” on a high school report card.
Your objective is the perfect mod, meaning the modification you would have if you had no losses. Measure your performance on that basis. How low your mod goes is a function of your industry and payrolls. Learn what an A+ is before you go patting yourself on the back.
I developed a tool to help insurance buyers understand the idea of the perfect mod. The software performs the calculation so you can see what an A+ would look like. The tool also provides information on the impact loss severity and frequency have on your experience modification. Go to www.Modmanager.com for access to the tool.
Know Your Workers’ Compensation Score
As your payroll and classifications change, your perfect experience modification changes. Frankly, you cannot compare one year to another, objectively, just by tracking your mod. As a factor, the calculation responds to many variables. Each year your perfect mod changes.
I developed what I call the workers’ compensation score. It’s your perfect mod divided by your actual mod. I express it as a whole number by multiplying the factor by 1000. The result is a score similar to a batting average.
W/C Score =
(Your Perfect Mod / Your Actual Mod) x 1,000
So, if your mod is 1.29 and your perfect mod is .906, your score is 623. You can perform the calculation for past years to see how your operation improved or not. This isn’t golf. A score higher than last year is desirable.
The same tool I mentioned in the above section performs the calculation for determining your workers’ compensation score. Go to www.Modmanager.com for access to the tool.
Check Loss Reserves at the Policy Five-Month Point
Your experience modification is calculated based on three years of experience (payrolls and losses). Your modification for 2008 is based upon payrolls and losses in 2004, 2005, and 2006. The calculation is based on losses at, approximately, the halfway (six month) point in the policy. Losses include what has been paid and any reserves on an open claim. (Recall that reserves are an amount the insurer expects to pay during the life of the claim.) Insurance carriers report loss information to the rating authority, The National Council On Compensation Insurance (NCCI). If you can reduce reserves prior to when loss valuations are reported, you can reduce the impact of the losses that go into your experience mod calculation. This reduces your mod and therefore, your premium.
Low Losses = Lower Experience Mod
Your experience mod uses information from your payroll audits. Your total remuneration in each classification is multiplied by several factors as part of the experience modification calculation.
Review your audits for the past three years. Be careful when adjusting payrolls for the past – such could increase your experience mod by spreading the same losses over lower payroll. Software is available to play “what if” with experience modifications. Never make a change to your audit payrolls without understanding the total impact – both premiums returned and any increase in your modification.
Check Experience Modification Losses
Get copies of your loss runs for the past four years. Match the claims on the experience modification worksheet to the losses shown on the loss runs. Do they line up?
Be Careful Changing Your Policy Date
There are times when, for a variety of reasons, insurance buyers want to change the date of their policies. Taking such action could cause your mod to increase. Again, make sure you have all the facts before making a change. Ask your agent to project your experience mod with and without the date change.
0 comments:
Post a Comment