The key to calculating a workers’ compensation premium is the experience modification factor, also known as your mod. Understanding your company’s mod and the data used to obtain it helps you identify ways to minimize your workers’ compensation premium.
Most states use the National Council on Compensation Insurance (NCCI) to collect data and calculate the experience modification factor. NCCI is a private corporation funded by member insurance companies. However, the following states have their own government-run rating bureaus that are separate from the NCCI: California, Delaware, Indiana*, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Texas* and Wisconsin.
The process of calculating the experience modification factor is complex, but the underlying theory and purpose of the formula is straightforward. Your company’s actual losses are compared to its expected losses by industry type. The formula incorporates factors that account for company size, unexpected large losses and the difference between loss frequency and loss severity to achieve a balance between fairness and accountability.
The mod factor represents either a credit or debit that is applied to your workers’ compensation premium. A mod factor greater than 1.0 is a debit mod, which means that your losses are worse than expected and 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.
The 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, for a mod factor calculated on January 1, 2011, data would be used for the January 1, 2007-2008, January 1, 2008-2009 and January 1, 2009-2010 policy periods. The data for the January 1, 2010-2011 would be excluded.
Three years of data is used to provide a more accurate reflection of the losses, smoothing out the impact of any exceptionally bad or good year for losses.
The actual loss data is separated into primary and excess pools. Primary losses, which are the first $5,000 of every loss, measure frequency. Excess losses — or amounts more than $5,000 — measure severity. The formula penalizes loss frequency by including all loss amounts in the calculation. The reason for this is that these types of claims can be controlled through proactive loss control programs. Losses in excess of $5,000 are capped at levels that vary by state. This minimizes the impact that any single claim can have on your premium. In approved states, medical-only claims figures are reduced by 70 percent.
Expected losses are then calculated using your payroll data by state and class code and applying the Expected Loss Ratio (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.
The 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 to your business compare to state industry averages, CFR to review your experience modification worksheet.
Your mod factor has a direct impact on your workers’ compensation premium. The key to controlling your insurance costs is accident prevention.
Establishing a proactive safety program is an effective way to reduce losses, positively impacting your mod and workers’ compensation premium. Contact us today at 800.375.8631. We have the loss control experience to help you promote safety and control your workers’ compensation premium.