Losses are just one factor in your overall workers’ compensation costs. The other is premium. Many calculations are involved in setting the premium; it comes down to how much of a risk the carrier thinks it is taking by insuring your company. One of the biggest components of the premium calculation is the experience modification factor, or ex mod — a perception of risk.
The experience modification factor can add up to significant dollars if it is not properly managed. Fortunately, a basic understanding of the ex-mod and a few tips can help you not only stabilize your workers’ compensation costs but lower them.
What the Experience Modification Rate Is and How it Works
When you’re making a major purchase as a consumer, companies typically look at your credit report. They want to see how much of a risk they’re taking with you, compared to others. A good credit rating close to 800 is golden; you easily get approval for purchases at the lowest interest rates. A credit rating below 500s will cause significant complications.
In the same way, the ex-mod is used as an indication of risk regarding workplace injuries. Carriers look at your company’s ‘actual incurred losses’ and compare them to those of other companies in your industry, to determine your expected losses. If your rate of injuries is higher, your ex mod will be higher, and you’ll be charged a higher premium. The reverse is true if your company has fewer injuries and fewer costs.
It boils down to actual vs. expected costs. Ideally, you want your actual losses to be lower than the expected losses: the lower your ex mod, the lower your premium.
An ex mod factor of 1.0 is average, like getting a ‘C’ on a report card. It means that your company is on par with others in your industry in terms of the number of, and costs of claims. Your goal is to be as close to your minimum experience modification factor as possible.
Tips to Change Your Ex-Mod
The best way to lower your ex mod is to reduce the costs of your losses, both frequency, and severity. Using best practices, such as effective return-to-work strategies, will lower ultimately lower the ex-mod and reduce the premium.
Here are several additional strategies that can help lower your ex mod.
- Experience Rating Adjustment (ERA). Many states have a rule that allows a 70 percent discount on what is reported as ‘actual incurred losses’ for medical only claims.
Example: For a medical-only claim that costs $10,000, just $3,000 would be reported as ‘actual incurred losses.’
Claim total = $10,000 – 70% reduction – ($7,000) = $3,000
The ERA rule was devised by rating bureaus as a way to encourage reporting of smaller claims. It’s important to note that this only applies to medical only claims. Check with your state rating bureau or insurance broker to see if this rule applies in your state.
- Net deductible. About 15 states allow companies to exclude from the ‘actual incurred losses’ any amount paid on a claim that is below the deductible amount, whatever it is. If the deductible is $5,000 and a claim costs $6,000, only $1,000 would be included.
- Injury triage. Many injuries can be handled with self-care. There is no reason for minor cuts or bruises to become full-fledged claims. Using telephonic nurse triage can help separate insignificant injuries from those that require medical attention, meaning many can be kept off the books and not included in ‘actual incurred losses.’
- Unit statistical date. The unit statistical date is the date your total incurred losses are reported to the state rating bureau for the calculation of your next period’s experience rating. Included in total incurred losses is BOTH what has been paid AND outstanding reserves for open claims. Overinflated outstanding reserves can make a significant difference in your total incurred losses.
Unit Statistical Date Example:
- Amount paid to date on an open claim:
- Amount reserved on an open claim:
- $50,000 due to an upcoming surgery
- Amount reported as Actual Incurred Losses to state rating bureau on Unit Statistical Date:
On revisiting the claim, you find that the worker is progressing better than anticipated, and it is clear he will not need surgery. With input from the medical provider, you can determine what treatments the worker will actually need going forward. Since the surgery is no longer needed, that amount reserves could be reduced, for example, to $15,000. That $15,000 now in reserves plus the $1,000 already spent brings the total for ‘actual incurred losses’ to $16,000 — not $51,000.
The key is to identify such a change before the ex-mod is calculated. Six months prior to the policy renewal date is when the numbers must be reported in order to ensure an accurate ex mod. If the policy renewal date is Jan. 1, the unit statistical date would be July 1 of the previous year.
Lowering the ex-mod lowers the premium. It’s important to note, however, that the impact will not be seen immediately. When calculating the ex-mod, carriers have a three-year ‘look back’ period; meaning if the company had many losses last year but has since improved its frequency and severity rates, it will be several years before the ex-mod is lowered. Organizations that have a long-term strategy to reduce injuries, return injured workers as soon as possible, and ensure accuracy in their actual incurred losses, will see their premiums improve.