How Insurers Calculate Comp Rates
Workers' compensation may seem complicated, but only two factors affect your workers' compensation costs: your employees' job classifications and your experience modification factor.
Rating bureaus publish rates for hundreds of different job classifications, shown as rates per $100 of payroll. These rates are based on the relative hazards of each occupation. For example, roofers cost more per $100 of payroll to insure than computer programmers, since roofers are more likely to experience severe on-the-job injuries. To avoid overpaying, you will want to review your company's occupational categories to make sure your employees haven't been misclassified.
Classification vs. Experience Modification
You can't change the job classifications of your employees: if an employee performs the duties of a roofer, then your insurer — or more accurately, the work comp inspection rating service used in your state — will classify him/her as a roofer. But you do have control over the other variable that affects your workers' compensation costs: your experience modification factor, often referred to as an ex-mod.
Stated simply, an ex-mod is a multiplier that measures the quality of your claims experience. By multiplying the base rate for the applicable occupational class times your ex-mod, an insurer can reward or penalize you for your claims experience.
In most states, your premiums must exceed a certain minimum amount for the ex-mod to apply. If you do not pay enough in premiums, your organization will have a "minimum premium policy," in which ex-mods do not apply.
Insurance companies send information on employers' premiums and losses to the state's rating bureau. The rating bureau then calculates ex-mods based on the employer's paid claims and incurred losses for the "experience period," generally the three years prior to the last policy renewal date.
To calculate your ex-mod, which is expressed as a percentage, take your total actual losses for this period and divide by the total expected losses, or average losses by $100 of payroll per job classification. An employer with actual losses of $253,563 and expected losses of $352,051 would calculate the experience modification as follows:
We won't be too concerned here, but that's a bit of simplification since factors that adjust for the severity and frequency of losses also need to be included. You can read about those in the sidebar, if you're interested.
The resulting experience modification factor is expressed in a number that generally ranges from .75 to 1.75. An experience modification of 1.00 indicates your losses reached the expected dollar amount. A number higher than 1.00 indicates that your risk of loss is greater than average, while an ex-mod of less than 1.00 indicates your risk is better than average. If you meet the minimum premium levels, you can control your workers' compensation costs by keeping your ex-mod low.
Keeping Ex-Mods Low
Keeping ex-mods low requires controlling workers' compensation claims. Focus on controlling the smaller, more frequent losses — they will impact your ex-mods more than less frequent, larger losses.
Next, you'll want to periodically review your payroll and claims information for accuracy. Make sure your payroll data is accurate and your ex-mod calculations include data from the proper years. And keep tabs on loss reserves — unused loss reserves affect your experience modification.
We can help you understand your experience modification factor and help you develop loss reduction strategies to lower your ex-mod, which will control your workers' compensation costs. For more information, please call our office.
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In this issue:
This Just In...
Many States Offer Temporary Work Comp Classification Reductions During Pandemic
How the Pandemic Is Changing Workers Comp Forever
How Insurers Calculate Comp Rates
How Losses Get Evened Out to Make Ex. Mods More Accurate