Home » General Insurance » What is a Workers Compensation Modification Factor?

What is a Workers Compensation Modification Factor?
A key to understanding your workers’ compensation premium is the experience modification factor, also known as your mod.

Home » General Insurance » What is a Workers Compensation Modification Factor?

What is a Workers Compensation Modification Factor?

A key to understanding your workers’ compensation premium is the experience modification factor, also known as your mod.
Understanding your company’s modification factor and the data used to obtain it will help you identify ways to minimize your workers’ compensation premium.

 

Who Calculates the Modification Factor?

Most states use the National Council on Compensation Insurance (NCCI) to collect data and calculate the experience modification factor. The NCCI is a private corporation funded by member insurance companies. The remaining states operate an independent workers’ compensation bureau or set aside a state fund for workers’ compensation. These states may or may not use the NCCI’s classification system to determine experience modification factors.

 

How is a Modification Factor Calculated?

Calculating the experience modification factor is complex, but the underlying theory and purpose of the formula is straightforward. First, your company’s actual losses are compared to its expected losses by industry type. Then, the formula incorporates factors that account for company size, unexpectedly significant losses, and the incidence of loss frequency and loss severity to balance fairness and accountability.

 

How Does my Modification Factor Affect my Premiums?

The mod factor represents either a credit or debit 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. Conversely, a mod factor less than 1.0 is a credit mod, which means losses are better than expected, resulting in a discounted premium.

 

What is the Experience Rating Period?

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, if your anniversary rating date is Jan. 1, 2017, the experience period is 2012 to 2015. 2016 would be excluded.

Three years of data is used to provide a more accurate reflection of the losses, smoothing out the impact of an exceptionally bad or good year for losses.

Both actual and expected losses are divided into primary and excess portions which is called a split rating method. Primary losses are designed to indicate loss frequency (the number of losses) and are used at their full value in the mod formula. Excess losses are an indicator of loss severity (the amount of each loss) and are weighted in the formula to be less critical. The formula’s emphasis on loss frequency over loss severity reflects that loss frequency is a more significant risk indicator and can be improved through proactive loss control programs.

In July 2011, the NCCI announced a proposal to raise the split point from $5,000 to $15,000 over a three-year period to better correlate with claims inflation. Transitioning to the new split point began in 2013, increasing the split point from $5,000 to $10,000. In 2015, the split point included an additional increase due to claims inflation, and the NCCI now makes annual adjustments to the split point based on inflation.

In 2017, the NCCI’s rating system used a split point of $16,500. The first $16,500 of every loss was considered a primary loss; any amount over was deemed to be excess. For example, a $9,000 loss had no excess losses, as it fell below the current split point of $16,500. However, in a scenario of a $25,000 loss, $16,500 would be deemed primary, and $8,500 would be excess.

Expected losses are calculated using your payroll data by state and class code and applying the expected loss rate (ELR). Each state’s rating bureau provides the ELR. These figures are broken down into expected primary and excess losses.

 

How do your Losses Compare?

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 at your business compare to state industry averages, contact InsureGood, LLC to review your experience modification worksheet.

 

How Can you Control your Modification Factor?

Your mod factor has a direct impact on your workers’ compensation premium. The key to controlling your insurance costs is accident prevention.

 

  • The mod is calculated based on past insurers’ data reported to the rating bureau. Incorrect or incomplete data can cause wrong mod factors. Review loss and payroll data to ensure the calculation is complete and accurate.
  • Losses remain in the experience rating formula for three years. The experience modification factor is influenced more by small, frequent losses than by large, infrequent ones.
  • Safety programs, return to work programs, and appropriate prevention procedures can help to reduce loss frequency.
  • An effective self-inspection and accident investigation program is critical to managing claim frequency.
  • Claims management programs can help your business manage outstanding reserves and focus on efficiently resolving open claims.
  • Any claims should be reported to your carrier immediately.
  • All injured employees should be provided with light duty upon their release from treatment so you can close claims and ensure the health of your employees.
  • Supervisory roles should have set safety performance goals. Success in achieving these goals should be measured during performance appraisals.
  • Employees should be trained on their responsibilities for safety and should know to enforce violations.
  • You should frequently communicate with employees on a formal and informal basis regarding the importance of safety.
Understanding your company’s modification factor and the data used to obtain it will help you identify ways to minimize your workers’ compensation premium.

 

Who Calculates the Modification Factor?

Most states use the National Council on Compensation Insurance (NCCI) to collect data and calculate the experience modification factor. The NCCI is a private corporation funded by member insurance companies. The remaining states operate an independent workers’ compensation bureau or set aside a state fund for workers’ compensation. These states may or may not use the NCCI’s classification system to determine experience modification factors.

 

How is a Modification Factor Calculated?

Calculating the experience modification factor is complex, but the underlying theory and purpose of the formula is straightforward. First, your company’s actual losses are compared to its expected losses by industry type. Then, the formula incorporates factors that account for company size, unexpectedly significant losses, and the incidence of loss frequency and loss severity to balance fairness and accountability.

 

How Does my Modification Factor Affect my Premiums?

The mod factor represents either a credit or debit 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. Conversely, a mod factor less than 1.0 is a credit mod, which means losses are better than expected, resulting in a discounted premium.

 

What is the Experience Rating Period?

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, if your anniversary rating date is Jan. 1, 2017, the experience period is 2012 to 2015. 2016 would be excluded.

Three years of data is used to provide a more accurate reflection of the losses, smoothing out the impact of an exceptionally bad or good year for losses.

Both actual and expected losses are divided into primary and excess portions which is called a split rating method. Primary losses are designed to indicate loss frequency (the number of losses) and are used at their full value in the mod formula. Excess losses are an indicator of loss severity (the amount of each loss) and are weighted in the formula to be less critical. The formula’s emphasis on loss frequency over loss severity reflects that loss frequency is a more significant risk indicator and can be improved through proactive loss control programs.

In July 2011, the NCCI announced a proposal to raise the split point from $5,000 to $15,000 over a three-year period to better correlate with claims inflation. Transitioning to the new split point began in 2013, increasing the split point from $5,000 to $10,000. In 2015, the split point included an additional increase due to claims inflation, and the NCCI now makes annual adjustments to the split point based on inflation.

In 2017, the NCCI’s rating system used a split point of $16,500. The first $16,500 of every loss was considered a primary loss; any amount over was deemed to be excess. For example, a $9,000 loss had no excess losses, as it fell below the current split point of $16,500. However, in a scenario of a $25,000 loss, $16,500 would be deemed primary, and $8,500 would be excess.

Expected losses are calculated using your payroll data by state and class code and applying the expected loss rate (ELR). Each state’s rating bureau provides the ELR. These figures are broken down into expected primary and excess losses.

 

How do your Losses Compare?

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 at your business compare to state industry averages, contact InsureGood, LLC to review your experience modification worksheet.

 

How Can you Control your Modification Factor?

Your mod factor has a direct impact on your workers’ compensation premium. The key to controlling your insurance costs is accident prevention.

 

  • The mod is calculated based on past insurers’ data reported to the rating bureau. Incorrect or incomplete data can cause wrong mod factors. Review loss and payroll data to ensure the calculation is complete and accurate.
  • Losses remain in the experience rating formula for three years. The experience modification factor is influenced more by small, frequent losses than by large, infrequent ones.
  • Safety programs, return to work programs, and appropriate prevention procedures can help to reduce loss frequency.
  • An effective self-inspection and accident investigation program is critical to managing claim frequency.
  • Claims management programs can help your business manage outstanding reserves and focus on efficiently resolving open claims.
  • Any claims should be reported to your carrier immediately.
  • All injured employees should be provided with light duty upon their release from treatment so you can close claims and ensure the health of your employees.
  • Supervisory roles should have set safety performance goals. Success in achieving these goals should be measured during performance appraisals.
  • Employees should be trained on their responsibilities for safety and should know to enforce violations.
  • You should frequently communicate with employees on a formal and informal basis regarding the importance of safety.

The Last Word

Establishing a proactive safety program effectively reduces losses, positively impacting your mod and workers’ compensation premium. We have the loss control experience to help you promote safety and control your workers’ compensation premium.

For an easier approach, get in touch with an InsureGood Advisor today to help you manage the complexities of workers’ compensation.

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