Most employers dont know they can employ strategies to manage their workers compensation experience mod factor. Most employers dont understand at least the fundamentals of experience rating. Is this you? Dont stick your head in the sand and hope it goes away because its here to stay.
Experience rating is a factor applied to the subject premium to reflect a risks variation from the average risk within the same class code. (Mass WC Bureau). They have a great way of making this sound simple, huh? In short, its just a factor that measures if your WC losses are better or worse than expected of an employer similar to you. A mod less than 1.0 is a credit mod and a mod above 1.0 is a debit mod. For obvious reasons, a credit mod is better than a debit mod.
The mod is calculated based on three years experience not including the most current year. Say your rating date and policy period are the same (almost all are), well use an anniversary date of 1/1/08. Your mod will be calculated using the data from 2004 to 2007.
1/1/04 to 1/1/05
1/1/05 to 1/1/06
1/1/06 to 1/1/07
For the next policy period, youll drop the oldest year (1/1/04) and pick up the newest year (1/1/08).
Workers Compensation experience rating can be intimidating and confusing, especially if you dont know the specifics as to how its done. Dont feel so bad, a lot of agents dont understand it either! In actuality, if you break it down in manageable pieces, its really not so bad. You just have to make sure the information that goes into it is correct.
Im going to attempt to explain the experience modification factor in laymans terms. Im not going to delve into the formula and its components but rather only those pieces that you have direct control over. Ill touch on classifications, payrolls and losses.
Class Codes
Just like anything, without the proper foundation all things will crumble. This is definitely the case with your class code. If you have the wrong class code then youll have the wrong mod. As agents, we use the Scopes manual to give us class code descriptions and rules. You should ask to see the narrative for your specific code(s). Only then can you determine if you are properly classified. Some classifications allow for a division of payroll. In Massachusetts most of the construction codes allow for division of payroll. What I mean by this, if you fit into two (or more) construction codes, you can divide the payroll between them as long as you maintain separate payroll records. It would behoove you to do so, otherwise all of your payroll will go into the higher rated classification. Why pay more if you dont have to?
Payroll
Payroll is another component that you control. Your payroll is your payroll. What you need to make sure of is that the auditor has assigned the proper payroll to each class code. Sounds rather simple doesnt it? Dont let if fool you. Did the auditor include overtime premium pay? He shouldnt have. Is there division of payroll? Dont rely on them to tell you about these things because they wont.
Losses
For those of you whove had a bad experience with experience rating, youre sure to know its the losses that were the primary culprit in your debit mod. Nothing affects your mod more so than the loss component. Do you even know what your losses are? Do you have any open claims? Do you have any losses that will be dropping off your next mod calculation? Are you picking up a bad year? Did your insurer recover any money through subrogation? Were any of your losses over-reserved? If theres one thing to remember from this article, it is to stay on top of your losses.
Losses under $5000 are what we call primary losses and they measure loss frequency. Losses over $5000 are called excess losses and they measure loss severity. The way the formula works is that you get more penalized for frequency rather than severity. Ive found that a lot of companies are paying these small, medical - only claims on their own. This is a good way to control your mod. Let me make is perfectly clear that you must report all claims to your carrier. In Massachusetts theres nothing that says you cant pay those small medical only claims. If the claim involves any lost time, or if it is a soft tissue type of claim, I recommend you let the carrier handle those from the first $1. If you plan on paying the claim, just notify the carrier that the claim is a report only, and you will be paying the medical bill. In fact, you should ask the carrier what you have to pay; because you dont have to pay the hospitals list price but rather the WC rate. Massachusetts actually publishes the WC rate by hospital. For instance, if the bill is for $100 from Hometown Hospital, you might only have to pay 60% (for example).
There is a very important date to be aware of when it comes to your experience rating. That date is six months after the expiration of your policy. It is on that date that your carrier reports both your audited payrolls and losses to the Bureau; so, you basically have the previous six months to make sure the carrier is using the correct information. At the very least, you need to order a currently valued loss run to see what your claims look like. Do you have any claims you didnt know about? Do you have any open claims? If you do have open claims, what is going on with them? Has your agent helped you develop a plan to get the reserves lowered (if possible)? Do you need to have a claims review?
Your agent should also be projecting your mod six months prior to your next policy period. We do this for several reasons. First, it allows you to know what your mod is actually going to be. Second, if its going to be a big increase (or decrease), it gives you plenty of time to prepare for it. Lastly, when the mod is available from the Bureau, it gives you the opportunity to make sure its correct. Compare your loss and payroll data to what the bureau is using. Hopefully its the same, often its not. If its wrong, now you have plenty of time to get it fixed rather than finding out two weeks prior when time is short. Your agent should also be telling you what your lowest possible mod could be.
I hope I was able to demystify the experience mod. It really isnt that scary if you have even just a basic understanding of its components. Your agent should be sitting down and reviewing it with you every year. If he/she isnt, find someone who will. It is simply much too important not to pay attention to.