As a Strategic Risk Advisor, some of the most commonly asked questions and discussions I have with clients revolve around the experience modification factor often referred to as experience mod. Many business owners know what their company’s experience mod is, but aren’t quite sure what is involved and/or how it is calculated.
First off, who gets an experience mod? An experience mod is generally assigned to an employer whose annual Workers’ Compensation premium is more than a set dollar threshold specified by the state where the employer is based. Experience mods of employers with operations in multiple states are calculated by The National Council on Compensation Insurance (NCCI). Below is a brief explanation of what factors are involved in an experience mod, how it is calculated and how it affects an employer’s Workers’ Compensation Premium.
Essentially an employer’s experience mod attempts to show whether its actual Workers’ Compensation losses are higher or lower than its expected losses. At its core, the math used in determining this is actually quite simple;
“Actual losses” divided by “Expected losses” equals “Experience Modification Factor.”
An employer with an experience mod of 1.00 is exactly average in its loss experience compared to businesses of similar size and industry. An experience mod of less than 1.00 is better than average and subsequently, an experience mod of greater than 1.00 is worse than industry average.
An employer’s actual losses include three years of claims costs, excluding the most recent policy period. So an experience mod for a policy period beginning on February 1, 2013 includes claim costs for the policy periods beginning on February 1, 2009, February 1, 2010, and February 1, 2011. When determining the claims costs however, some claims are excluded.
Medical –only claims – Costs are reduced 70%, so only 30% is included in the claim cost.
Lost-time claims – Typically, the first $10,000 of each lost-time claim is valued at 100%. Any amounts exceeding that are discounted. (Note: the NCCI and state rating bureaus increased this “split-point” from $5,000 to $10,000 beginning in 2013.)
Claim costs include amounts paid and amounts expected to be paid.
This is determined by using the statewide average claims cost for businesses of similar size and industry. Loss information for the same three-year policy period used in the above Actual Losses calculation is used in figuring the Expected Losses as well. In short, state and national rating and data collection bureaus use the statewide data to calculate expected loss experiences.
Calculation and Application
Contrary to what some have believed, the state’s rating bureau or the NCCI, not the insurance carriers, calculates each employer’s experience mod using claims cost data reported by the insurers. These rating bureaus recalculate the employer’s experience mod each year approximately 90 days prior to the policy renewal date, and then report it to the employer’s Workers’ Compensation insurer. The insurer then uses the experience mod factor as a multiplier in calculating the employer’s Workers’ Compensation premium. Simple mathematics will lead you to the conclusion that the higher your experience mod is, the more Worker’s Compensation premium you will pay.
Managing claims as they occur is the most crucial element in keeping your experience mod at, or below, the 1.00 average. In turn this will keep your Workers’ Compensation premium at a reasonable level. Having an effective Return to Work policy in force is one way to accomplish this, by taking advantage of the significant reduction (70%) in claim costs when it is deemed medical-only.