Workers Compensation Insurance is a necessary evil. The state of California requires that businesses have Workers Compensation Insurance even if they only have one employee, so everyone should have it. Federal law and other states laws may vary slightly, so check with your state or the Department of Labor for specific requirements.
Workers Compensation Insurance rates are set by the state and based on the classification of your workers. That means that all roofers pay the same rate per employee, all banks pay the same rate per employee, all sales offices pay the same rate per employee. It might seem like there is no wiggle room for rates.
There are a couple of factors that can affect your Workers Compensation Insurance rates, and the most important one is the Experience Modification Factor. So what is this Experience Modification Factor (Mod), and why should you care about it?
What the Mod Is
The Experience Modification Factor is a complicated calculation that is based on the last three (3) years minus the current year of your workers compensation claims payouts to policy premium. The factor is affected not only by the dollar amount of claims you have (severity) but also the number of claims you have in a given policy period (frequency).
Your Mod Can Cost You Money
The standard Mod is 1.0. This means that when your policy premium is calculated, the premium is not affected by any modification factor.
However, a high ratio of claims to premium can result in a higher Mod factor, above 1.0. If there are very large claim payouts or a high number of small claims paid out in a policy period, a Mod of above 1.0 may apply.
Two identical retail stores with the same amount of payroll can pay vastly different premiums because of Mod. Store A’s premium is $5,000 per year with a couple of very small claims. Store B has several high dollar claims resulting in a Mod of 1.7, so Store B would pay $5,000 x 1.7 or $8,500. This is incentive to make sure your safety measures and claims handling procedures are exemplary.
Mods can be affected negatively by not only paid and closed claims, but also claims that are still open and have large reserves on them. The good news is that if a claim is closed lower than the reserve, your Mod may go down in later years.
Your Mod Can Save You Money
Just as high claims payouts can cause higher Mod factors, low or no claims can result in lower Mod factors. That’s right! Your Mod factor can be less than 1.0.
Now back to those retail stores. There are now three stores, and all 3 have base premiums of $5,000 due to employee payroll. Store A has a modification factor of 1.0, so they pay $5,000 per year. Store B has a modification factor of 1.7, so they pay $8,500 per year. Store C has exemplary safety standards resulting in little or no claims vs. the amount of premium they pay so they have a modification factor of 0.90. Their premium would be $5,000 x 0.9 or $4,500.
How can you get a Mod of less than 1.0? The magic word is “safety”. Make sure that all recommended safety features for your business are implemented and being carried about by your employees. This can reduce workplace injuries, which reduces claims. You can also implement other programs such as a Return to Work program that gets injured employees back to work faster, resulting in smaller claims payouts. Contact your Hayes Broker for more information about these programs.
If your experience modification factor is 1.0 or higher, even implementing new procedures won’t reduce your Mod right away. Mods are calculated over a period of three years, so it may take a few years before the fruits of your labor can be harvested.
Your Mod Can Be Wrong
Your insurance carrier provides information to the National Council on Compensation Insurance (NCCI) with regard to premium and claims so that NCCI can calculate your Mod. Sometimes information is not the most up to date, and sometimes human error occurs, so it is important to review your Mod worksheet with your Hayes Broker to make sure that all calculations are correct.
A Hayes client recently saw a significant bump in their Mod – from 0.87 to 1.95 – due to a $700,000 reserve on a 2.5 year old claim. The injured employee refused to settle stating that the injury was significant. Hayes kept an eye on the claim and noticed doctor reports stating there was no permanent injury. In fact, the employee had gone to work for a competitor doing the same job! The information was brought to the attention of the insurance company and they investigated. The claim was settled for far less than the reserve, and when it is closed the Mod will be retroactively reduced due to fraud.
A Mod factor can either be a source of frustration or a source of motivation to improve workplace safety for lower premiums. Either way your Hayes Broker can review your Mod and help you decide how to manage it.