How an Experience Mod Analysis leads to dramatic savings

What is a good experience modification factor (mod)? It's an important question because the mod is one of the main components used to calculate workers comp premiums. The actual process of calculating the mod is complex, but, in essence, its purpose is to compare your company's claims experience to other employers of similar size operating in the same type of business.

A common but overused and somewhat misleading definition of a "good" mod is any mod under 1.0. It is true that a mod of 1.0 is the industry average (like a "C" in school) and a factor below 1.0 means that losses were less than expected and generally will lower the premium. Conversely, a factor over 1.0 means losses were worse than expected and a surcharge is applied to the premium. While many insurance companies now use pricing to target, this gives a general picture of how it works:

As an employer, you want to have effective coverage but pay as little as possible in work comp premiums. It's obvious that the 0.85 mod is the best in this example, however, is it the best the employer can do? To answer this question, it's necessary to look at two other aspects of the mod - the minimum mod and the controllable mod.

Every company has a unique minimum mod that is based on its payroll, the industry risk, and no losses for the entire rating period. It's often referred to as the loss-free rating. The minimum mod will differ from a competitor's and it may change somewhat from year to year. But it is an important number to know because it enables a company to determine the controllable mod.

The controllable mod is the difference between your actual mod and the minimum mod. So, if the actual mod is 1.25 and the minimum mod is 0.70, the controllable mod is 0.55. It's the bridge between what the company is doing now and what it could be if claims were handled differently or changes were made to its loss control program. By better managing the losses, the employer with a 1.25 Mod and $100,000 premium could save up to $44,000:

If the company has a profit margin of five percent, it will take a whopping $880,000 in sales to offset the $44,000 surcharge.

The data used to calculate the mod contains a wealth of information that can help employers reduce the frequency and overall costs of claims, but it can be daunting to understand. An annual mod analysis enables employers to understand how each individual injury impacts the mod and ultimately the premium. It helps answer questions such as how a Recovery-at-Work program reduces claim costs, how a safety program needs to be strengthened, the impact of attorney involvement on costs, and whether a wellness program could reduce expensive medical claims.

Each loss will typically impact the Experience Mod for three years and several small claims can impact the mod to a greater extent than a single large loss. While small claims can have a significant surcharge effect on premium, it's easy to dramatically reduce the impact by avoiding indemnity costs. In many states, although not all, there is a special rule in the mod calculation called the Experience Rating Adjustment (ERA). This gives a company a 70 percent credit for each loss in the mod that has a "medical-only" status, which means that no loss wages (indemnity) were incurred. Even if there is a very small amount of indemnity, the full amount of the loss will count against the mod.

As a result, lost time injuries are more detrimental to the mod rating than medical-only claims and have a significant impact on premium costs. The wage waiting period varies by state (usually 3-7 days) and the following indicates why employers should manage return-to-work and lost-time claims with that in mind.

An effective strategy to combat the multiplier effect of lost-time claims is a robust Recovery-at-Work Program for injured workers. Even in states that don't allow the ERA credit, a Recovery-at-Work program saves unnecessary lost wage payments that increase the mod as well as many of the indirect costs that accrue when employees are out of work. Moreover, studies show that return-to-work programs reduce the employee's recovery time and lessen the likelihood of attorney involvement.

Workers Comp is a finance tool and the experience mod acts like a tax. Through the mod you are not only paying for your claims, but for every dollar an insurance company pays on a claim, you will pay back approximately three times that amount over the next three years. Examining the implications of each loss in relation to its impact on the mod and the premium shows the direct financial impact of each injury. It's a valuable way to identify strategies to eliminate surcharges and strengthen loss control programs. As Certified WorkComp Advisors, we are trained to conduct Experience Mod Analyses and develop actionable insights,which will reduce the number of incidents, lower claim costs, and drive down work comp premiums. To learn more, contact us.