Restoration Insurance News: Understanding Your Workers Compensation Experience Mod (Part 2)
Last week’s post briefly describes your workers’ comp experience mod and how it affects your premiums. This week we will discuss the importance of understanding the period over which your experience mod is calculated, how NCCI evaluates your prior losses, and tips for keeping your experience mod low.
What is the experience rating period?
An experience mod is calculated using loss and payroll data for an experience rating period. The experience rating period typically includes data for three policy years, excluding the most recently completed year. For example, for a mod factor calculated on January 1, 2013, data would be used for January 1, 2009-2010, January 1, 2010-2011, and January 1, 2011-2012 policy periods. The data for January 1, 2012-2013 would be excluded. This is important to note because even if your restoration company’s most recent year was claims-free, your mod doesn’t take that into account and could still be adversely affected.
NCCI uses three years of data because it provides a more accurate reflection of the losses, smoothing out the impact of any exceptionally bad or good year for losses.
How are losses calculated?
Prior loss data is separated into primary and excess pools. Direct losses, which are the first $5,000 of every loss, measure frequency. Excess losses or amounts more than $5,000 measure severity. The NCCI formula penalizes loss frequency by including all loss amounts in the calculation. The reason for this is that these types of claims can be controlled through proactive loss control programs. Losses over $5,000 are capped at levels that vary by state. This minimizes the impact that any single claim can have on your premium. In approved states, medical-only claims figures are reduced by 70 percent.
The actual loss data is then compared to expected losses (the number of losses a company of your similar size from the same industry can expect to have).
Your expected losses are part of the ELR (Expected Loss Ratio), a ratio calculated by your company’s class codes and payroll data. Each state rating bureau provides the ELR. These figures are also broken down into expected primary losses and expected excess losses.
How do your losses compare?
Your final experience mod calculation then compares your actual primary and excess loss figures against the ELR. If your calculation is better than industry averages, you will have a credit mod, and if your losses are worse than average, you will have a debit mod.
How can you control your mod?
Your experience mod factor has a direct impact on your workers’ compensation premium. The key to controlling your insurance costs is accident prevention, specifically claims frequency issues.
Develop a sound safety program, return to work program, and appropriate prevention procedures to reduce loss frequency.
Implement an active claims management program to manage outstanding reserves and focus on efficiently resolving open claims.
An effective self-inspection and accident investigation program is critical to managing claim frequency.
Losses remain in the experience rating formula for three years. The experience modification factor is influenced more by small, frequent losses than by large, infrequent ones.
Set safety performance goals for supervisory roles. Success in achieving safety goals should be used as one measure during performance appraisals.
Train employees on their responsibilities for safety and enforce violations.
Take an aggressive approach to provide light duty to all injured employees upon their release from treatment.
The mod is calculated based on data reported to the rating bureau by past insurers. Incorrect or incomplete data can cause wrong mod factors. Review loss and payroll data to ensure the calculation is complete and accurate.
If you would like to learn more about the experience mod and your workers' compensation premiums, please get in touch with our office.