risk report with Henriott Group, Inc.
chanpipat
March 2012
Workplace and Risk Management topics aimed at business owners, managers and other organizational leaders.
“Good Risk Management fosters vigilance in time of calm and instills discipline in times of crisis.”
~ Dr. Michael Ong
Workers Compensation: Experience Rating
Modification Factors
Henriott News & Updates
A continued discussion of the largest line of business within Commercial Insurance.
Some little know facts about mods.
Read about our recent visitor! And have you read our “C’Mon Man” blogs?
[
WORKERS COMPENSATION:
]
experience rating
Our second installment related to the topic of Workers Compensation deals with the infamous and mysterious “Mod Factor” that virtually every company has and most safety managers and many business owners can rattle off the top of their head! I’d venture to guess that most people are more likely to be able to tell you what their mod is within a decimal point than they are in naming their state senators! However, when you dig a little deeper and start to ask questions such as: 1) what is the purpose of the mod, 2) how is it calculated and 3) what impact does it have on your business….the conversation quickly turns to sports or the weather!
In this edition of the Risk Report, we’re going to strip away the veil of secrecy around this formula and arm you with the information needed to answer the questions I mentioned above....at a minimum you’ll be able to impress your coworkers with this newfound knowledge, but of course we aspire to the higher goal of providing you with information to help you reduce the cost of doing business! So here we go….
W WHHAATT IISS EEXXPPEERRIIEENNC CEE R RAATTIINNG G A AN ND DW WH HYY D DO OW WEE N NEEEED D IITT? ?
Put as simply as possible, Experience Rating allows for premiums to be charged more appropriately and fairly among employers with a good loss history and those with a poor one. Without experience rating, employers with a good loss history would pay too much and vice versa for those with a poor loss history.
After experience rating is applied, the final premiums are a much better reflection of the true costs for each group of risks (poor performers vs. good performers). By giving the employer some control over the final premium they pay, experience rating also provides companies the incentive to invest in loss control and safety practices. Experience rating uses the employer’s past experience (losses) to project future losses by comparing those past losses to the “average” risk in a given classification of business to calculate the employer’s experience modification factor. Clear as mud, right?!
Ë WHAT GOES INTO THE
MOD CALCULATION?
Well that’s the million dollar question isn’t it?! I’m not even going to attempt to walk through the entire calculation and you don’t want me to anyway I’m sure. I will, however, give you the highlights and also provide the following link (http://www.icrb.net/Training_ExpRa ting.php) where you can sign up for a 3 hour training session with the Indiana Compensation Rating Bureau and come away an expert in the mod calculation and very thankful you don’t have to do that for a living! Class Codes: For starters, every company’s payroll is broken down by “classification code” (at last count there were over 600 of these), in other words, what your employees do. Each classification has its own advisory rate…that is, all jewelry stores in Indiana are grouped together, all machine shops, etc. The advisory rate in each class is the average rate and then a debit or credit is applied to reflect each employer’s specific loss history. Takeaway: having the proper class codes for your operation is important and can impact your mod! If you try to pick a class code because it has a lower premium “rate”, guess what, it also expects to have lower claims. If you then have average claims for the classification code that truly fits your operation, you’ll end up with a higher mod – don’t try to game the system! Claim Data: At six (6) months before the renewal date of your work comp policy, your insurance carrier will file the “unit stat” data (fancy words for a claim report showing number of claims, amounts paid and reserved, premium, etc.) with the NCCI (National Council on Compensation Insurance) who calculates the mod.
Takeaway:
Just prior to this report being submitted, it’s a good idea to review the reserves on open claims to make sure they are reasonable since if they change the day after the report is submitted, it’s too late to impact the new mod! 3-Year Rolling Claim History: The modification factor is calculated annually approximately three months before the renewal date of your work comp policy. The premiums and loss data used in the calculation come from the latest available three year period. For example, if you’re work comp policy renews on July 1st, 2012, the new mod will be available around May 1st and will use the loss and premium data from the 7/1/08-09, 7/1/09-10 and 7/1/1011 policy periods. The current policy period is not factored into the 2012 mod calculation since it’s not completed yet.
Takeaway:
a bad claim year will haunt you for a few years! Where there’s smoke there is fire! Which company do you think will have higher claims costs in the future…one that had ten $5,000 claims or one that had just one $50,000 claim? Right you are and as a result, the Rating Plan emphasizes (penalizes) for claim frequency more than severity. In the calculation, claims are separated into “Primary” claims (the first $5,000 of any claim) and “Excess” claims (the amount over $5,000) and very large claims are capped currently at $135,500 and excluded from the calculation.
“We’ll just pay the small claims ourselves”. Oh, if I could only have a dollar for every time we hear that statement as a way to reduce the mod! A couple of things to know. First, claims that are Medical only (no lost time or “indemnity”) are reduced by 70% in the mod calculation. Second, if you pay claims yourself, you don’t take advantage of discounts negotiated by the carriers. Third, if you pay a claim yourself that later becomes a bigger claim (this happens regularly), the carrier is going to have a real issue with late reporting of that claim. I could go on, but I won’t! Takeaways: report all claims to your insurance carrier and have a functioning Return-to-Work program to keep claims at the Medical only level whenever possible! Bringing home the Report Card: We often talk about the modification factor as a grade like you received in school. A mod of 1.0 is average….or a C like I got in that pesky Calculus class (not really, but probably should have)! Anything below a 1.0 is better than average…above a 1.0 and there’s likely no TV for a week. So, a mod of 0.9 is 10% better than the average employer in that classification. Takeaway: Once again, the kids with the better grades win!
Takeaway:
Ongoing loss control and safety practices aimed at preventing claims from occurring in the first place will positively influence your mod. There are several other factors that go into the mod calculation (things like ballast, ratings, credibility and so on) that I won’t bore you with here (I know…you’re bored already), but the factors above are the most important because they are, for the most part, within your control!
Ì HOW DOES THE MOD
Other Little Known Facts!
IMPACT YOUR BUSINESS?
There are a few ways the mod can impact your business, depending on the industry you are in, the type of work comp program you have in place and so on, but the main drivers are as follows: The mod factor is used in the pricing of your work comp program…in other words, how much premium you are going to pay. After multiplying your payroll, by class code, times the average rates determined by the state (giving you the “manual premium”), the mod factor is applied in the determination of your final premium. So, if your manual premium is $100,000 and your mod is 1.1, you get the pleasure of paying another $10k due to the mod. The reverse is also true (and preferred) if you have a credit (below 1.0) mod!
Did you know every company has a “minimum mod” (and no, it’s not Zero!)? The minimum mod changes from year to year but the graph below is an exmple of a company with a 1.14 mod, what their “minimum mod” is, and the difference is their “controllable mod” (i.e., money left on the table!):
In the construction industry as well as others, the mod is frequently used as a screening mechanism to pre-qualify vendors from working on projects. So, in many cases, a mod of higher than 1.0 (or whatever the customer requires) can prevent you from even bidding on certain jobs. The Indiana Compensation Rating Bureau issued a “white paper” in July 2011 discussing the issues related to this topic and if you’re interested, click HERE to view the article. So there you have it…all you wanted to know about the Experience Modification Factor and then some! Bottom line that I hope you took away from this Risk Report is that there is plenty a company can do to positively impact its mod. The details of the calculation itself may be interesting and helpful, but by focusing on the Take-a-Ways highlighted above, you’ll be able to minimize your company’s mod factor while improving your bottom line.
This illustrates the range of mods in Indiana in 2009:
The Latest … Henriott News & Updates In January, we were fortunate to have a guest in our new office space. Dr. David Schmidt, a cardiologist with The Care Group, has an “evolving passion for photography”. He has been quietly watching our space on the 6th floor of the Renaissance building transition from an empty shell to an open concept office space. His interest in this space comes from the fantastic view it offers of our great city of Lafayette. When he walked in our front doors in January, it had recently snowed (one of the very few times this unusually warm winter) and he graciously asked if he could photograph some of the views we are now so lucky to be exposed to daily. We want to share David’s wonderful pictures with you so we have posted them to our website. Click here and enjoy! Our thanks and appreciation to David!!! Photo by David Schmidt, M.D.
For previous Risk Report issues, click here! See you next month!
Check out our website blog series for real-life claims or lawsuits that we hear about in our work and make us sit back and say…C’Mon Man…Really?! Did you know that we also issue monthly reports for Employee Benefits and Personal Insurance? For a preview of these, click the following links! Live Well, Work Well Home Matters If you would like to subscribe to either of these, simple send an email to info@henriott.com and specify which you are interested in receiving!
Henriott Group’s Milestone Risk Management program is aimed at helping your company lower its Total Cost of Risk. Talk to your Henriott professional for more information about this proprietary process.
Client Focused. Results Driven.