Why is this Important for You?

Experience Modification Factor

• Overview of workers’ compensation coverage
• Overview of the experience modification (mod) factor
• Risk management’s role

Overview of Workers’ Compensation

• Workers’ compensation (WC) insurance began in 1915 and is a regulated, mandatory benefit to protect individuals injured on the job.
• Pays for medical bills and lost wages from work-related injuries.
• WC is a no-fault system; employees cannot sue their employers for work-related injuries when receiving benefits.

Overview of Experience Mod Factor

The Formula Explained:

• Simply expressed, the mod is a ratio of actual losses to expected losses over a 3-year period.
• If your actual losses are more than expected, then your mod is over 1.0.
• If your actual losses are less than expected, then your mod is under 1.0
• A mod of 1.0 is exactly average. How much better than average are you, or would you like to be?

Overview of Workers’ Compensation

• Experience Modification Factor Formula:

Actual Primary Losses
+
(1-Weighting Value) x Expected Excess Losses
+
Ballast Value
+
Weighting Value x Actual Excess Losses

__________________________________________________________________
Expected Primary Losses
+
Ballast Value
+
Weighting Value x Expected Excess Losses
+
(1-Weighting Value) x Expected Excess Losses

Overview of Experience Mod Factor

The Formula Explained:

• The experience rating method is called a split rating system.
• Both actual and expected losses are split into a primary portion and an excess portion.
• Primary losses are an indicator of loss frequency (number of losses) and are used at their full value in the mod formula.
• Excess losses are a measure of loss severity (the amount of each loss) and are weighted in the formula so they are less important.

Overview of Experience Mod Factor

The Formula Explained:

• The value at which an actual loss is divided into primary and excess is known as the split point and changes each year.
• In most states, the split point approved is:
• 2013 – $10,000
• 2014 – $13,500
• 2015 – $15,500, plus an adjustment for claim inflation, for an anticipated total of $17,000 or 17,500
• 2016 and beyond – further increases to reflect claim inflation

Example: If your organization has three claims - $23,000, $16,000
and $3,000 – the first two would be excess claims and the third would
be a primary claim on your 2015 mod.

Overview of Experience Mod Factor

The Formula Explained:

• Ballast Value: This value is placed in the numerator and denominator of the mod formula to move all mods closer to 1.0. This value stabilizes the values in the formula.
• Ballast values increase with the size of the company, and is most impactful on smaller companies.
• If your company has a lower mod, the ballast decreases some of your good efforts by bringing it closer to 1.0. However, if you have a higher mod, the ballast will move your mod lower.

Overview of Experience Mod Factor

The Formula Explained:

• Weighting Value: Determines the percent of the actual excess losses for use in the formula. This factor recognizes that excess losses are less related to the operations of the business (as compared to random occurrence).
• Weighting value is smaller for small companies and increases with company size.
• Weighting value is obtained from a calculation published for each state and correlates to the expected losses of the insured.
• If your company is small, your weighting value will be small and the mod will be computed with a number close to the expected excess losses. If your company is bigger, your weighting value will be larger and the mod will be computed with a number close to the actual excess losses.

Overview of Experience Mod Factor

• Your mod determines your final workers’ compensation costs.
• Your premiums equal the basic, or manual, premium multiplied by your mod.

Example 1 – Debit Mod
Manual premium $100,000
Mod x 1.25
 _________
Premium you pay $125,000

Example 2 – Credit Mod
Manual premium $100,000
Mod x 0.80
 _________
Premium you pay $80,000

Overview of Experience Mod Factor

• Controlling your mod means controlling your premium.

Minimum Mod

• Loss-free rating
• Unique to each employer, generally decreases as payroll increases

Controllable Mod

• Difference between actual mod and minimum mod
• Good loss control practices can save on premiums

Your mod is affected by both the number of losses that your company incurs (frequency of losses) and the amount of those losses (severity of losses).
• The loss values used in the mod calculation include reserves on open claims, so good claims management can be very important.
• The mod compares your organization with other companies in the same industry based on payroll code.

Common Mod Issues:

• Not keeping losses as type 6, medical-only (These are reduced by 70% in the mod calculation in most states)
• Not getting losses closed in a timely fashion, resulting in reserves hurting the mod longer than necessary
• Classifying payroll incorrectly, which can result in your expected losses being higher or lower than appropriate.

Risk Management’s Role

• MAKE LOSS CONTROL A TOP PRIORITY!
• Allocate funds to incidents that occur frequently at your facility.
• Prevent accidents and claims before they occur.
• Implement risk management programs that directly address common losses that are driving up your mod factor.

Risk Management’s Role

• Reduce your frequency of incidents – the number of claims per year through loss control programs.
• Ensure that your loss calculations are correct.
• Ensure that your reserves are not overstated.
• Maintain frequent, proactive communications with adjusters so that they work on your claims.
• Have your experience mod factor reviewed for accuracy.
• Correct reserve errors prior to the Unit Stat Filing (this is typically 6 months after the policy expiration date).

• Assure that your WC classifications are correct.
• Assure that you are using the right risk financing program.
• Bring employees back to work on light duty until they are fully recovered.
• Encourage employees to remain safe on the job and educate them on common workplace injuries.
• Create an accident review committee for accidents and near misses.