Next up in our “Explain Like I’m 5” series, we are going to cut the experience modification factor (or Mod) into bite size pieces.
An experience mod is a measurement of your company’s individual claim performance against other companies of similar size in your industry. It is calculated by your state’s regulatory authority, which collects your audited payroll and loss data to produce this annual figure.
Mods serve a multitude of purposes. A mod provides an economic incentive for employers to promote employee safety. Mods also reward employers for aggressive claim management initiatives, for example, bringing injured workers back into the workplace as early as possible by offering light duty. This helps the injured worker recognize they are a valuable member of the team and lowers the lost wages which, in turn, lowers the cost of the workers’ compensation claim. Mods play a crucial role in the underwriting process as many insurance companies and employers utilize it as an indicator of a company’s safety culture and a predictor of future experience based on historical performance.
In addition, a mod delivers an individualized pricing component that can be used to deviate from base/expected rates. All else equal, those with best-in-class performance deserve best-in-class pricing. The result of a mod calculation is rather simple to interpret:
- 1.00 = Individual experience that matches the industry average experience
- <1.00 = Individual performance is better than average loss experience
- >1.00 = Individual performance poorer than average experience
All things equal (payroll x rate), those with higher claim experience will pay higher premiums. For example:
Regardless of which state you call home; all mod calculation formulas penalize frequency over severity. Calculation formulas limit larger loss amounts, shielding employers from the effects of that one “shock” loss. However, formulas are not so kind to those employers who produced many smaller claims. Smaller claims are not subject to limitations and have a greater impact on the mod calculation due to their potential to become larger claims. Additionally, classification codes, which are generated when states compile all the losses from insurance carriers and break them down by class code or type of business, are the final factor that influences mods.
Controlling your mod makes your company not only more safety conscious but also more competitive by lowering overhead costs. The mod remediation process consists of the following:
- Inspection: Look at your loss experience regularly, investigate injuries and find ways to prevent them. Review these results with your safety team and work with industry and insurance professionals to implement controls to prevent and reduce these injuries.
- Containment: Aggressively manage open claims, offer light duty and a return-to-work program, and maintain contact with injured workers. Partner with an insurance company that has proven medical cost containment strategies.
- Restoration: Understand your calculation, track your progress over time, and request a copy of your mod calculation worksheet and review it with your insurance agent to gain an understanding of your losses. Finally, calculate and know your minimum mod – it varies by risk.
- Monitor: Closely monitor situations where revisions are permitted such as mistakes in reporting, claims declared as non-compensable, or when subrogation/recovery is recognized.
- The Bottom Line: Controlling your workers’ compensation costs starts with recognizing the importance that your experience mod plays in your pricing. Minimize your mod to reduce insurance overhead and bid rates. Reduce rates: win work.
Finally, what can you do to improve your experience mod? Invest in safety programs and foster a culture of safety. Be continuously aware about your mod, know what is impacting your losses, and communicate with your carrier. Most importantly, make sure that you have an agent that advocates for you with the claim’s representatives of insurance companies. If you are interested in learning more about insurance but don’t know where to start, check out our last “Explain Like I’m 5” blog about Captive insurance.