An Experience Mod lesson
Why small, frequent claims can be more costly than one severe claim
The formula for Experience Modification Factors is so complex it
intimidates many. A ratio of the company’s actual losses compared
to the losses that are expected for their company based on their
payroll and industry classification, the Experience Mod is key to
controlling Workers’ Compensation costs.
Included in the formula are actual primary losses – the first $5,000 of
each loss. This is how the formula takes frequency or number of claims into account.
Also included in the formula are actual excess losses – loss amounts more
than $5,000. This is how the formula takes into account severity. These excess
losses are then multiplied by a value set by the NCCI or state rating bureau
that increases as the expected losses increase, but at a slower rate. This limits
the effect of excess losses and the effect of any single loss on the Experience
As an example, multiple claims, each under $5,000, that total $10,000 are counted
as primary losses. A single loss of $10,000 will be treated as a $5,000 primary
loss and $5,000 excess loss. Thus, frequency or number of claims has a greater
impact on the Experience Mod and the overall costs of Workers’ Compensation
It’s important to note that actual losses include not only what the insurance
company has paid out for the claim, but also the reserves, or what the insurance
company expects to pay for the claim in the future. Employers often do not realize
this and it can have a significant impact on the cost of Workers’ Compensation
insurance. For this reason, it’s critical that reserves be set correctly
and carefully monitored regularly.