It’s the perfect recipe for disaster. All it takes is a moisture source with little air movement under the right environmental conditions and voila! You have an employee slip and fall. All the medical bills, lost wages and legal expenses mount up to a very significant workers’ compensation claim that is now on your record. Once in your claim experience, this claim follows you and impacts your workers’ compensation pricing for several years through your “mod.”
mod: short for experience modification factor
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. By creating this experience rating component, a mod serves several purposes:
A mod provides an economic incentive for employers to promote employee safety. Employers need to have skin in the game and feel the relationship between employee safety and the cost of coverage.
Rewards from Improved Claims Management
A mod rewards employers for aggressive claim management initiatives. By offering light duty to a worker with work restrictions, you help bring the injured worker back into the workplace as early as possible. This helps the injured worker recognize they are a valuable and productive member of the team. In the meantime, by lowering the lost wages that would be otherwise due to an employee off work, you lower the cost of the workers compensation claim.
Critical Role in Underwriting
Mods play a crucial role in the underwriting process as many insurance companies restrict their appetite by mod limits. In addition, mods are scrutinized by employers as they bid work or attempt to gain access to restricted job sites. A mod is viewed in many settings as an indicator of a company’s safety culture and is expected to predict future experience through historical performance.
Finally, 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. By introducing an experience rating component in a company’s pricing, those who perform best will receive the best pricing.
The end result of a mod calculation is rather simple to interpret:
- 00 = Individual experience that matches 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:
Quantity Over Catastrophe
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.
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:
Take a close look at your loss experience on a regular basis. Investigate how your employees are getting injured. Review these results with your safety team and work with industry and insurance professionals to implement controls to prevent and reduce these injuries. The purpose is not to penalize employees but to learn from past incidences and prevent repeat occurrences.
Open claims need aggressive claims management. Offer light duty and implement a return to work program. Partner with an insurance company that has proven medical cost containment strategies. Most importantly, maintain contact with your injured workers.
Understand your calculation, and take action to improve your mod. Track your progress over time. Request a copy of your mod calculation worksheet and review it with your insurance agent. Understand how each loss is impacting your mod. Calculate and know your minimum mod – it varies by risk.
Mod calculations are rarely revised midterm, but there are instances where revisions are permitted. This includes mistakes in reporting, claims declared as non-compensable, or when subrogation/recovery is recognized. Monitor these types of claims closely and initiate a revision when warranted.
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.