How Experience Modification Factor Impacts Work Comp Insurance Premium

Before we explain how experience modification factor impacts workers' compensation insurance premium, let's first review what experience mod is and how it is calculated.

What is Experience Modification Factor?

Simply put, an Experience Modification Factor (or Experience Mod, or Mod for short) is essentially a company’s safety score in reference to their workers’ compensation insurance coverage. Each day, a company’s employees are performing work that carries risk to their own wellbeing. The stronger the safety measures in place, the less likely it is for an employee to injure themselves. Fewer injuries mean lower mods, more injuries means higher mods. The majority of these scores range from .70 to 1.4.

How is the Experience Modification Factor Calculated?

Ultimately the experience mod is a calculation of actual losses incurred divided by expected losses. Actual losses are workers’ compensation claims that a company has incurred during a 3 year valuation period. The actual losses incurred are made up of the number of claims, and the cost of each of those claims. An expected loss figure is derived from the company’s payroll, and its respective class code(s). An underwriter will examine the class code nationwide, and determine a factor that represents the average number and cost of claims associated with that class code.

Further, there are some underlying components that are considered as well. First, whether the claims incurred are still open with a reserve placed on them, or if the claims are closed and paid in full. Also, the premium paid over that 3 year valuation period has an influence on the experience modification factor as well.

Let’s take a look at why each of these components is considered.

The number of claims and costs associated with the claims tend to speak for themselves. A company with ten $75k claims isn’t going to have access to a policy priced similarly to a company with one $75k claim.

As far as expected losses, the insurance industry has come up with a benchmark for each class code of work performed. That benchmark can be interpreted via the rate associated with the class code. The higher the rate, the more risk believed to be associated with the class code. A lower rate says that the insurance industry believes there is less risk involved than other class codes.

Now, you may be asking, why does the payroll have an impact on the experience mod? This is where exposure comes into play. A company with a higher payroll is going to have more employees doing more work (and thus a higher exposure) than a company with a lower payroll.

Similarly, you may be wondering why an open claim has a negative impact on the experience mod, and a closed claim has a positive impact on an experience mod. This reverts back to the idea of exposure. An open claim carries existing exposure. Even though there is a reserve (an estimated amount to be paid placed on a claim), that estimation isn’t always accurate. Often times personal injuries are never as straight forward as they seem to be since other complications may arise during doctors’ visits, rehab, or surgeries. Therefore, a reserve placed on a workers' compensation claim fluctuates, and the unknown final result causes insurance carriers uncertainty which results in higher premiums. It is important for your agent to keep tabs on an employee’s recovery process to get claims closed out as quickly as possible. 

Now that we’ve covered the basics of experience modification factor, let’s get to the heart of this post.

How Does the Experience Modification Factor Affect Your Workers’ Compensation Premium?

Unlike its definition, the experience mod premium calculation is rather straight forward. If the company has a mod under 1, then the carrier gives a credit or a “reward” to the insured for running a safe operation. If a company has a mod over 1, the carrier sees fit to charge extra premium due to accepting what is perceived to be extra risk. This should be a motivational tactic to encourage the insured to revise their safety measures.

The manual premium calculation starts with the exposure (payroll) multiplied by the standard rate for that class of business. Let’s take a look at an example. ABC Manufacturing (fictional company) has $500,000 of payroll doing business in a class code with a rate of $10.50 per $100 of payroll yields a manual premium of $52,500. (5,000 x 10.5 = $52,500). This is the starting point for workers’ compensation premium. Now the carriers have to add in a number of state and federal regulated fees that add to that premium. In the midst of those fees you will often see a significant increase or decrease in premium related to a company’s experience mod. Let’s say ABC Manufacturing has an experience mod of .80. This is a good thing. It means this company routinely employs safe working practices, and the insurance carriers believe they should be rewarded for this. Now, that $52,500 manual premium receives a 20% discount. (52,500 - (52,500x.20) = $42,000). On the opposite end of the spectrum, let’s say ABC Manufacturing has a mod of 1.20. Now their premium is going to be (52,500 + (52,500x.20) = $63,000).

Ok, I Get it, Experience Mod Plays a Big Role in Determining my Workers’ Compensation Insurance Premium. So How Can I Reduce my Experience Modification Factor?

Reducing the experience mod starts with an exceptional loss control program. How does a company implement a loss control program? A smart strategy is to hire risk management professionals like Connor & Gallagher OneSource (CGO) to guide you through it. An insurance agent will begin by placing coverage with the appropriate carrier. The agent will then work with the carrier to develop the loss control program based on a thorough review of your company’s:

• Safety manuals
• Daily operations
• Safety equipment used during daily operations
• Customer contracts/agreements
• Sub-contract agreements
• Warranties/disclaimers

If there is some work to be done in any of these areas, the carrier will work with the agent to put the correct terms/conditions/language in place to correctly mitigate risk associated with the insured’s operations. Once all of the correct terms are in place, the carrier will take the lead to implement the missing safety work practices. Often times the carrier will host the first couple of meetings, and then relinquish the duty to an employee of the company. The point being, when a company takes time to work with its insurance agent and carrier to put something like this in place, the underwriters know that a strong safety driven relationship is being built, and can therefore offer more competitive pricing, even in a time of a loss.

Many decision makers aren’t fully aware of what they can do to reduce their experience mod factor. It’s not uncommon for some to believe that their only option is wait out the 3 year effect of the mod and hope for no more accidents. As a result, some of these companies try to reduce the impact of the experience mod factor on their premium rather than actually trying to lower it. In this instance, when a claim occurs, the company’s first instinct is to shop out their insurance to see which broker will give the most credit on the high mod, therefore reducing the impact of the mod. In essence, these companies are working twice as hard to beat the system, and as a result see less significant (and artificial) results. We’ve found that companies have the most success when they choose to take a proactive approach by working with their agent and carrier to develop a strategic in-depth loss control program to see meaningful and lasting results. The process of reviewing, revising, and implementing a loss control program has a much more significant impact on premium, especially for the long term, than shopping around looking for the most scheduled credit.

How can we help you? 

Contact info@GoCGO.com