The experience modification factor is a key component of your workers compensation premium. Understanding where this number comes from and how it is calculated is a very powerful tool to help restoration contractors minimize their workers compensation premiums.
The majority of states work with the NCCI (National Council on Compensation Insurance) for determining the calculation on experience mods. Every year they adjust you mod factor either up or down and your workers compensation premiums are adjusted accordingly.
How is a mod calculated?
While we won’t go through the entire complicated formula for calculating the experience, we still feel its important to provide the underlying theory and purpose of the experience mod.
The purpose of an experience mod is take your company’s actual losses and compare them to similar sized companies from the same industry. Additionally the formula takes into consideration loss frequency and severity to provide an accurate and fair comparison. Companies that experience losses worse than their industry peers and penalized and companies don’t have losses are rewarded.
How does my mod affect my premiums?
Your experience mod will start at 1.0, meaning your losses are the same as other companies within your industry. Then depending upon your losses, your mod will be with adjusted and a credit or debit will be applied to your workers compensation premiums.
An experience mod greater than 1.0 is a debit mod and a surcharge will be added to your premiums. For example, a restoration contractors with multiple claims over the past few years could have a mod of 1.5. That means insurance companies will automatically surcharge the company’s workers compensation premiums by 50%. There is no negotiating this surcharge down.
An experience mod less than 1.0 is a credit mod and a discount will be applied to your premiums. Using a similar example from the last one, let’s say that a restoration contractor doesn’t have any claims over the past few years and they have an experience mod of .75. With that experience mod insurance companies will automatically apply a 25% discount to the companies premiums.
In looking at the two examples above it is easy to see how controlling your experience mod can dramatically affect how much your restoration company pays in premiums.
Next week’s post will dive into the importance of understanding the time period over which your experience mod is calculated, how NCCI evaluates your prior losses, and tips for keeping your experience mod low.