By Gregory Deems, CRIS, DSDP
While the experience modifier (or mod) may be a foreign concept to many, to the business owner it can have a huge effect on the bottom line as it is a key component of the workers’ compensation premium calculation.
Mods are a way to try to balance out the costs associated with an individual company’s workers’ compensation premiums relative to their losses. This assures that companies with favorable claims experience are rewarded, and companies without favorable claims experience pay their fair share for that usage. Though there are some variations from state to state, the general premise is the same.
An average mod rating is 1.0. This means you pay the rates determined by the state in which you are operating. Each company is compared to similar companies to determine where they land in comparison to the average. To do this, they use the class codes to which an employer’s payroll are assigned. There are two key components to calculating an experience mod – these are primary losses and excess losses.
Primary losses are what drive your mod rating. The amount of loss that counts as primary varies by state, but can be as low as $5,000. This means that only the first $5,000 of any loss counts against your experience mod. To come up with the actual mod, they take the amount of primary losses in a given term and divide it by the amount of expected primary losses as determined by your overall payroll. This ratio becomes your experience mod.
In Massachusetts, there is a second factor as well. This is known as the ARAP and it is a penalty for excess losses. That means they hold you accountable for losses that exceed the primary limit for losses if you have claims larger than the amount that go into the primary losses.
The expected losses are calculated the same way, using payroll and class code to determine the amount of expected excess losses. The total claim amount for excess losses is also capped at $175,000 for any one claim. The ARAP can have a dramatic impact on the bottom line cost for workers’ compensation because it is used as a multiplier after the mod. So to get your bottom-line cost, you take your base (or manual) premium and multiply it by your mod. That number is then multiplied by your ARAP to get your final cost.
One of the reasons that managing claims is so important is that your mod is a three-year snapshot. So a bad year of claims can drive your mod rating up for three years while it cycles through.
The claims reported to the bureau include any reserves outstanding on claims as well, so any overinflated reserves can have a negative effect on the mod rating your company has for a given year. Fortunately, there are methods that allow you to correct for inaccurate reserves after a claim closes. This process is known as Aggravated Inequities. If a claim closes for more than 25 percent less than the value that was used in the mod calculation, you can use this process to have the mod adjusted and recoup the overpayment amount. This is why managing claims throughout the process is vitally important, to make sure reserves are as accurate as possible.
Again, depending on the state you are working in, there are other tools as well. Some states allow for a 70 percent reduction in impact for Medical Only claims. Others, like Massachusetts, allow for a Construction Class Credit of up to 25 percent for certain class codes. This credit has recently changed to incorporate your mod in the denominator of the calculation. So a mod over 1.0 not only affects your premium, but can now reduce the credit you can receive as well.
The most important part of keeping your costs down is management of the claims. You should work with an agent that has the tools to help you understand the impact of each claim.
At Rogers & Gray, we have access to Mod Master, which is a program that allows us to calculate your mod for you and project outcomes and impacts in real time. A decision to settle a claim will carry with you for the three years that claim is used for your mod. A difference in settlement of just a few hundred dollars can cost your thousands each year in extra workers’ compensation premiums. Make sure you know all the outcomes before making a decision, and if your current agent does not have the right tools, give us a call and we can work with you.
Gregory Deems, CRIS, DSDP, is Vice President, Business Insurance, at Rogers & Gray Insurance. He can be reached at email@example.com or (508) 209-6068.