- May 31, 2016
- Posted by: Chris Conti
- Category: Blog
Experience Modifiers are used in the pricing of Workers’ Compensation Insurance to adjust the premium upward or downward based on the employer’s claims history. The Experience Modification Factor can be compared to your personal driving record in that you are charged more or less premium based on you past accident experience. Your claim experience modifies your future cost of coverage.
To be eligible for an Experience Modification Factor an employer must meet a certain criteria. For example, in Louisiana an employer must generate a 2 year total of $10,000 or a 3 year average of $5,000 in annual premium. Also, the insurance carrier must be an affiliate of NCCI (which most standard carriers are and many Self Insured Funds, but not all.) An employer that meets these criteria will have an Experience Modification Factor (Mod) calculated every year.
The Mod is a number that compares the accident experience of individual company’s to all other company’s in state and in the industry. The Mod is promulgated or calculated by the National Council on Compensation Insurance (NCCI). NCCI produces an Experience Modification Factor Worksheet. A copy is sent to the carrier who provides the Work Comp coverage and the employer. The carrier will apply the Mod to the premium calculation formula so, Mods impact premium cost.
Unity or having a Mod of 1.00 indicates that your performance compared with your competitors is average and no surcharge or debit is assessed, however, no benefit or credit is given.
Debit Mod is when an employers’ number of and/or severity of accidents is higher than competitors and the cost of insurance will increase. Expected Losses are the amount of claim dollars planned to be spent on injuries and is a compilation of all employers’ experience. Actual Dollars spent is used to compare your experience to all competitors. A modifier above 1.00 such as 1.01, 1.10, and 1.23, etc or any number above 1.00 may result in an increase premium by 1%, 10% or 23%, respectively.
Credit Mod is when an employers’ claim activity is better then industry competitors and the cost of insurance may decrease. This is a Modifier below such as .99, .88, .75, etc or any number below 1.00. The result is to decrease premium by 1%, 12% or 25%, respectively.
There is a floor to the Mod or a lowest possible Mod so it won’t get down to zero and probably never get below .50 even with perfect, no accident experience. However, the cost savings of the best possible credit Mod are significant and come in the forms of:
- lower insurance cost
- improved productivity as non-injured workers keep working
- lower internal cost called indirect cost (as dealing with claim adjusters)
- improved morale as a safe workplace will be a happier environment
The Mod is calculated using employers actual claim data for 3 of the past 4 years with the most recent past year not being included because some claims may have occurred close to the end of the policy year and may still be open.
Data Years used in Mod Calculation:
If your effective date of coverage is 1-01-08 (also called the Normal Anniversary Rating Date) your Experience Modification Factor would use the claims data from the years of:
2010 – Experience Modification Factor uses claims from 3 of past 4 years.
2009- No data used as this is the most recent year and claims are not settled.
2008- Claims data is used -both closed and open (unsettled) claims with
Reserves (called Incurred Losses) have a negative impact on Mod.
2007- Claims data is used -both open and closed data is used.
2006-Claims data is used – both open and closed data is used.
So, the 2009 Experience Modification Factor used the data from 2007, 2006 and 2005. In 2010, the 2005 year falls off and the 2008 year comes into the data mix.
The claims loss data is set to NCCI from the insurance company at the following intervals:
1st Report: 6 months after policy expiration (or 18 months after inception)
2nd Report: 1 year after 1st report (or 30 months after inception)
3rd Report: 1 year after the 2nd report (or 42 months after inception)
An employer must have 21 months of continuous coverage AND meet the required
minimum premium criteria establish by NCCI. For example, a premium of $10,000 for the first two years OR three years averaging $5000 in premium. These rules vary by state.
The Experience Modification Factor Worksheet has several columns of numbers that on first glance may seem complex. To understand the Worksheet it is best to break it down onto big parts. The Mod Worksheet will have 3 years of claim data so it is easy to find the beginning policy year inception date and expiration date in the center of the page. The first column to the left is the class codes, which are the description of the work activity performed at your business which is used to affix a rate to develop you premium. NCCI uses only Subject Premium to develop your premium for Experience rating purposes. Subject rating is only payroll (divided by 100) times the rate. Subject Premium is listed for each year in the middle of the page and is in parentheses. The column titled ELR is the Expected Loss Rate. That is the portion of the rate that is expected to be paid on claim cost. It is “expected” because it is actuarial historical data where statistically these amounts have been paid in the past. The column tilted PAYROLL is just that, the actual audited payroll pickup by the carrier and reported to NCCI. This is important because it is used to calculate the Subject Premium. The Expected Loss rate is multiplied by the payroll (divided by 100) for each class code to generate the Expected Losses. Expected Loss are compared to Actual Incurred Losses (Named: ACT INC LOSSES).
There are 4 sets of rates or percentages used in the calculation of a mod.
Expected Loss Rate (ELR; by classification-applied to each $100 of payroll)
D-Ratio (% factor applied to expected losses and determines what portion of the expected losses are primary)
Weighting Value (determines amount of actual excess losses and expected excess losses are used in the calculation)
Ballast Value (stabilizing element to limit the effect of any single loss and is added to both actual and expected primary losses).
The two main data inputs developed by the employer are:
- Audited Payroll by classification code
- Actual Losses in the experience period
The CLAIM DATA Column is the claim number that the carrier uses on the loss runs to identify claims. Sometimes these claims are aggregated and an asterisk will appear next to the aggregated data in that case.
The column titled “IJ” stands for Injury. There are six identifiers of injures:
1 = Death
2 = Permanent Total Disability
5 = Temporary Partial Disability
6 = Medical Only
7 = Contract Medical or Hospital Allowance
9 = Permanent Partial Disability
In the same column is the letters “O” and “F” which stands for Open case or Final
representing a closed case. To actually calculate the Mod the expected losses are compared to the actual losses and generates an amount used that is less that expected (mod credit) an amount where the expected losses = the actual losses (unity mod of 1.00) or a debit mod where the actual losses exceed the expected losses.
Each state has set amount to use a ratable excess, the amount of loss over the primary $5,000. The first 5K of the loss is used at 100%. Then the rest is used a set percentage roughly between 7 and 14% but only up to the state mandated claim cost cap which is $262,000 per claim in LA for 5/1/082007. For USLH cases the NCCI mandated claim cap is $351,000 so this is the largest case cost that will be used in the Mod. The percentage or Ratable Excess also depends on the size of the company in relation to its payroll. These amounts change as actuaries seek to achieve rate adequacy and rate adequacy is a function of historical losses which vary every year. The percentage amount that the NCCI will use above the first 5K is found in box “A” at the bottom of the second page. To determine the state cap on losses you would take the number is the SRP box and multiply it times 100 and that is the cap for that state for that year. This amount is based on loss trends and fluctuate as the cost of claims do each year. Also, there is a Multiple Accident Limitation per claim occurrence limit. Which means if an employer had one incident that resulted in multiple claims those claims are capped. For example, a Motor Vehicle Accident (MVA) with 3 occupants would indicate 3 claims but the total losses used in the formula are capped at an amount that changes every year, approximately $450,000.
In addition to promulgation of Mods, the NCCI also establishes the base rates that insurance company’s use to calculate premium. These are called manual rates and are the starting point in premium calculation. The next step is to divide payroll by 100 to establish payroll units.
Then the base rate is multiplied by the payroll units to determine Manual Premium. From there the Manual Premium is multiplied by the Mod to arrive at Standard or Modified premium.
How the Mod affects Premiums:
Premium = Rate x Payroll/100 x Mod
Let’s assume:
Rate = $8.00 for every $100 of payroll
Payroll, total annual payroll for workers doing the same job = $500,000
Mod for a given year = 1.00, 1.20 and .95
This is a Unity Mod:
Rate x Payroll/100 x Mod = Premium
8.00 x 5000 x 1.00 = $40,000
This is a Debit Mod:
Rate x Payroll/100 x Mod = Premium
8.00 x 5000 x 1.20 = $48,000
This is a Credit Mod:
Premium = Rate x Payroll/100 x Mod
Premium = 8.00 x 5000 x .95 = $38,000
The $10,000 difference between a credit Mod and a debit Mod in this example goes straight to the bottom line to increase profit as the insurance expense is now reduced. This information on Experience Modification factors ignores all other techniques that Underwriters may use to adjust premium such as Schedule Rating and Premium Discounts.
The following states are Independent Rating Bureaus- which means they do not
report data to NCCI, therefore the payrolls and losses for these states are not in the NCCI Mod. The states are:
- PA
- WV
- DE
- NJ
- MI
- CA
- ND
- OH
- WA
- WY
- NC
- Puerto Rico
The state of NC does not use NCCI EXCEPT when as risk is Interstate rated.
Five states only use NCCI with Interstate Rated risk: NC, MA, MN, NY, WI.
*Check out Definitions for Experience Mod Factors for further reading.