How can you better manage the cost of workers’ comp?
As a business owner, understanding your workers’ comp experience modification factor, also referred to as your mod, is a huge deal. Knowing your company’s mod and how it is calculated will help you identify ways to minimize your workers’ comp premium, which can make or break your bottom line.
How is your workers’ comp mod calculated?
The process of calculating the experience modification factor (mod) is complex and is known to cause employers some big headaches. But the underlying theory and purpose of the formula is straightforward. Your company’s actual losses are compared to its expected losses, based on your industry. The formula takes into account your company’s size, any unexpected large losses, and the frequency and severity of loss. The intention is to achieve a result that provides balance between fairness and accountability.
How does my mod affect my insurance costs?
Now for what really matters to business owners: the mod factor represents either a debit or credit that is applied to your workers’ compensation insurance premium. A mod factor greater than 1.0 is a debit mod, which means that your losses are worse than expected. Thus, a surcharge will be added to your premium. A mod factor less than 1.0 is a credit mod, which means losses are better than expected, resulting in a discounted premium (win!).
There is more more behind the scenes than this diagram shows, but you hopefully get the gist.
What period of time is considered?
Your mod is calculated using loss and payroll data for an “experience rating period.” The experience rating period typically includes data for three policy years, excluding the most recently completed year. For example, if your anniversary rating date is Jan. 1, 2022, the experience period is 2018 to 2020. 2021 would be excluded. Three years of data is used to provide a more accurate reflection of the losses, so if you had a bad year, the impact can be smoothed out over time.
Both actual and expected losses are divided into a primary and an excess portion in what is called a split rating method. Primary losses are designed to be an indicator of loss frequency (the number of losses) and are used at their full value in the mod formula. Excess losses are an indicator of loss severity (the amount of each loss) and are weighted in the formula so that they are less important. The emphasis is on loss frequency over loss severity in the formula so that they are less important. The emphasis of loss frequency over loss severity in the formula reflects the fact that loss frequency is a more significant indicator of risk and can be improved through proactive loss control programs. Ask your Peel & Holland advisor how we can help with that.
Expected losses are calculated using your payroll data by state and class code and applying the expected loss rate (ELR). The ELR is provided by each state’s rating bureau. These figures are also broken down into expected primary losses and expected excess losses.
See How You Compare
Your final mod calculation compares your actual primary and excess loss figures to those expected for a company of the same size and industry type. To understand how workers’ compensation losses at your business compare to state industry averages, ask your Peel & Holland advisor to review your experience modification worksheet.
Controlling Your Mod
This is a big deal. The key to controlling your insurance costs is accident prevention. Your mod factor has a direct impact on your workers’ compensation premium.
- Any claims should be reported to your carrier immediately.
- Safety programs, return to work programs, and appropriate prevention procedures can help to reduce loss frequency.
- An effective self-inspection and accident investigation program are critical to managing claim frequency.
- Claims management programs can help your business manage outstanding reserves and focus on efficiently resolving open claims.
- All injured employees should be provided with light duty upon their release from treatment so you can close claims and ensure the health of your employees.
- Supervisory roles should have set safety performance goals. Success in achieving safety goals should be used as one measure during performance appraisals.
- Employees should be trained on their responsibilities for safety and should know how to enforce violations.
- You should frequently communicate with employees on a formal and informal basis regarding the importance of safety.
- The mod is calculated based on data reported to the rating bureau by past insurers. Incorrect or incomplete data can cause incorrect mod factors. Review loss and payroll data to ensure the calculation is complete and accurate.
To reduce losses and positively impact your mod and workers’ compensation premium, let us help you establish proactive measures. This definitely impacts your workers’ comp premium. Peel & Holland has helped numerous companies to better manage their workers’ comp program.
Let’s talk about ways we can help you too.