Workers’ compensation coverage is a necessary cost of doing business in America—and for good reason. Employers must address the needs of employees who are injured on the job while keeping premiums down.
One way to manage workers’ compensation insurance costs is to control the areas of risk that influence a company’s experience modifi-cation factor, also known as an “e-mod” or “experience mod,” which is used to adjust premiums based on actual claims and expense experi-ence. In all circumstances, but especially in a declining economy and competitive pricing environment, under-standing and monitoring factors that influence a company’s experience mod can make a real impact on the bottom line.
In business, everyone strives to be above average. This same principle applies to experience mods, which compare a company’s workers’ compensation claims and losses to other busi-nesses within the same industry. In other words, this factor indicates whether a firm’s losses are better or worse than expected for its industry.
If its losses are lower than anticipated, its experience mod rating should be less than 1.0. This low rating, also known as a credit modifier, lowers premiums. (Most employers enjoy experience rating modification credits.) If a company has higher losses than anticipated, its experience mod should be greater than 1.0. This higher rating, also known as a debit modifier, raises premiums.
Calculating E-Mod Understanding how an experience mod is calculated can help a company manage workers’ compensation costs as well as improve safety. With the exception of a few states, the National Council on Compensation Insurance calculates experience mods.
The experience mod calculation compares actual losses during an experience pe-riod with expected losses for actual payroll and classification codes. The experience period usually includes three years of data, excluding the most recent year. For example, a 2009 experience mod would use data from the policies effective in 2005, 2006 and 2007. The data from the 2008 policy would not enter the experience period until the 2010 mod, when the data from the 2005 policy would drop out. Company size and unpredicted large losses also are con-sidered in the calculation.
The following are used to calculate an experience mod:
- Class codes and payroll. Make sure to understand the definitions of the classification codes assigned to a policy. If the wrong classifications are used on a policy or the payrolls for individual employees are assigned to the wrong class code, errors may occur in the calculation of an organization’s experience modification factor. When in doubt, ask for clarifications on which rating class is applied to a specific employee or job.
- Claims history. Losses are categorized as primary or excess. Primary losses are the first $5,000 of any loss. These losses carry the heaviest weight in determining the experience modification factor because claim frequency is more predictable than claim severity. Excess losses exceed $5,000. These losses carry increased weight in determining the experience modification factor for larger employers. They are capped at maximum values that vary by state.
Most underwriters believe increased frequency indicates increased potential for a large loss. If a company can reduce its frequency of claims, it may reduce its chances of having a large loss and potentially reduce its experience modification factor.
An outcome-focused safety program includes benchmarks for the incidence rate of claims in the construction industry and practical steps to beat those benchmarks.
Managing E-Mod A company’s experience mod is maintained through changes in insurance carriers and through most changes of ownership. Focusing on loss prevention can reduce an experience mod and make a business more efficient, as well as more attractive to insurance carriers. Here are additional ways a company can manage its experience mod:
- Auditing reports. An experience mod is determined from data reported to the rating bureau by the firm’s workers’ compensation insurance carrier. Reporting inaccurate information may lead to an inaccurate experience mod. Companies should obtain a copy of their experience rating modification worksheet to review their losses and payroll data for accuracy.
- Claim reports and loss control programs. Work with an insurer to discover the fastest, most efficient way to report claims and take advantage of programs that deliver the best outcomes and cost savings. For example, most insurers have preferred provider networks and pharmaceutical discount programs. The quality of these programs and the savings they deliver can vary considerably.
- Return-to-work programs. Provide transitional duty programs that help injured employees return to a productive position as soon as medically approved. If an injured worker can return to work in less than seven days (the waiting period for loss wage payments in most states), the medical loss included in the experience rating formula is discounted by 70 percent in many states, including Florida, Kentucky, Maryland, North Carolina, South Carolina, Tennessee and Virginia. The transitional duty program allows a business to achieve productivity while an employee recovers from an injury or illness. Plus, the employee will recognize his presence at work, even in a limited capacity, is valuable to the organization.
The cost of workers’ compensation injuries—particularly medical costs, which represent more than half the total claim payments in most states—has been rising consistently. Effective management of the factors that influence an experience mod can help deliver better outcomes and lower a company’s premium.