Manage Your Experience Mod

The indirect nature of claim costs from a guaranteed cost workers’ compensation program make them easy to ignore and painful to absorb.  Yet claims incurred today are the most important component of future pricing and availability of coverage.  Consequentially, the element in pricing that can make or break a program is the experience modification factor.  A credit factor, or less than 1.00, is typically a bi-product of a healthy risk management program.  However, understanding the experience mod formula can focus efforts to drive better results.

What’s Included In The Rating Formula

An experience mod factor is a prediction of future loss experience that is used to tailor cost projections to an individual employer and provide an incentive for loss reduction.  Most states today fall under the purview of the National Council of Compensation Insurance, but even those states with their own bureaus share common themes in their promulgation of experience mods.  This article will focus on NCCI mods, but no matter the bureau or their formula, experience mod factors are simply a ratio of actual verses expected losses.  

Insurance carriers report payroll and losses for all employers but not all of the experience counts.  To qualify for a mod, employers must meet minimum size requirements that vary by state and are based on audited premium over multiple years.  The most recent experience for an employer is also discarded from the formula.  For example, NCCI does not include any experience from policies starting less than 21 months from the mod effective date and any policies starting more than 57 months prior.  Large, complex employers like PEOs face further confusion deciphering which parts of their multiple states and multiple policy types are included in a mod calculation. As a general rule, the experience for a policy will apply to future experience mods of the employer whose current mod is listed on the policy.

Expected Losses

An employer’s size is estimated within the mod formula using audited payrolls totaled by classification code.  While premiums are not specifically used in the formula, expected losses are computed in much the same way and commonly follow premium size in ratio to payroll.  Rating bureaus publish a factor called an ELR for each state classification code, which is multiplied by payroll to compute expected losses.  That computation is then split into two buckets, primary and excess, by multiplying times a second class-code specific factor called a D-ratio.  The impact of the excess portion is reduced in the formula for both expected and actual losses based on the total expected losses included in the calculation.  This has the effect of minimizing large losses and reducing large swings in experience mods for smaller employers.

Actual Losses

Claims experience used in mod calculations is also limited in a few ways.  Expenses incurred in claims adjudication do not apply, leaving only medical and indemnity to be included.  All claims coded as medical only are also reduced by 70% in the calculation.  Last, actual losses are split into primary and excess at $16,500 with excess losses being reduced by a weighting factor assigned based on total expected losses.

Focused Risk Management

Traditional risk management measures are productive and necessary for a healthy work comp program, but understanding the mod formula and the experience that is included will help focus those measures for the greatest impact. 

Frequency

Because excess losses are reduced in the mod formula, lots of small claims hurt more than one large loss.  This knowledge can be effectively used by a PEO in prospect risk assessment and to determine where best to deploy loss prevention resources. Employers who frequently experience claims, even lots of smaller ones, should be much less attractive than those with the potential for a large loss but report fewer incidents.

Lag Time

Once a loss has occurred, the single greatest loss control measure available is to get the injured employee back to work as soon as possible.  This is magnified by the experience mod formula as medical only claims balloon into indemnity claims and lose the 70% reduction in the formula.  Mod calculations also give an employer an incentive to report all incidents since those without medical or indemnity costs aren’t factored in.  Suggested tips for PEOs looking to reduce lag time:

  • Track lag time in claims reporting and use it to identify problem areas
  • Communicate to client employers the importance of timely reporting of all incidents and proactively provide tools to make the process easier
  • Train payroll processors to inquire about active employees who don’t report payroll

Other Loss Control Tools  

  • Return to work and stay at work programs, both with client employers and third parties like local charities
  • Direct communication with medical providers to facilitate return to work
  • Proactively address HR issues before a disgruntled employee becomes an injured employee
  • Assign a risk management employee with the responsibility of routine follow up with injured workers to ensure good communication with medical providers and carrier adjustors

Net Reporting

In a number of states around the country, NCCI has provided a secret weapon for employers to reduce the claims experience included in their experience mod factor.  These take the form of a small deductible where the portion of a claim that an employer is responsible for is subtracted from the mod calculation.  For example, a $7,000 loss under a $5,000 net reporting deductible would only have $2,000 applied to the mod.  These plans are designed by NCCI and range in size from $500 to $10,000.  In many of the states that allow net reporting, plans are available that provide both a premium credit and the net reporting feature.   When combined with sound risk management, net reporting deductibles can significantly reduce future experience mod factors and increase program profitability.