October/November 2020  Volume 18, Number 5        
 

How Losses Get Evened Out to Make Ex. Mods More Accurate

Not all losses are the same.

Small, frequent losses need to be handled or "weighted" differently than one-off severe losses that happen only occasionally. So, rating bureaus use "weighting values" and "ballast values" to arrive at ex-mods that more accurately predict your company's losses.

Below is the actual formula for calculating an experience modification factor:

Actual Primary Losses + Ballast Value + Weighting Value X Actual Excess Losses + (1–Weighting Value) X Expected Excess Losses
Expected Primary Losses + Ballast Value + Weighting Value X Expected Excess Losses + (1–Weighting Value) X Expected Excess Losses

What do these terms mean?

  • "Primary losses" are the first $5,000 of any loss; "excess losses" are all loss amounts over $5,000. Losses up to $5,000 are included in full. Losses in excess of $5,000 are included on a discounted basis. In practical terms, this means that smaller losses have a bigger relative impact on your ex-mod than larger ones do.
  • The "ballast value" and "weighting value" attempt to correct for the size of the risk. In statistics, the larger the pool sampled, the more accurate the sample is. Calculating ex-mods works in the same way — the larger the payroll base, the more accurately you will be able to predict your losses.

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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

 

 


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