Your modification factors can significantly influence your premiums for workers’ compensation. Often called simply the “mod,” knowing the factors that affect your mod can help you reduce your payments. Here is what you need to know about workers’ comp modification factors:
Who Calculates Them
The most common tool for calculating modification factors is the National Council on Compensation Insurance (NCCI). This body is specifically funded by the insurance companies that use it and is classified as a private corporation. There are some states, however, that use their own bureaus instead of the NCCI, including New Jersey, New York, North Carolina, Pennsylvania,Wisconsin, etc. Other states, like Texas, are moving away from the independent system and are starting to use the NCCI.
How They Are Calculated
Understanding how your modification factors are calculated can allow you to take actions that reduce your overall payments. The problem is, understanding exactly how these modifications are calculated can be difficult, as they are multifaceted and sometimes not explained well. What you should know is that, in general, the bureau in charge of calculating your factor takes a look at your organization and its losses, compared to what your organization is expected to have lost, depending on the industry. It takes into account the size of your organization, any unexpected losses, how often your organization experiences a loss, and how severe that loss is.
How This Affects Your Rates
Your modification factor is essentially used to credit or debit your workers’ comp payments. If your modification factor is a debit (meaning that the losses you experienced were greater than what was expected), you are charged more on your premiums. If your modification factor is a credit (less than 1.0), you did not lose as much as you were expected to lose, and your premiums could go down.
When Is This Calculated?
Your modification factors will likely be calculated during what is called an experience rating period. This period covers three years, but does not include the most recent year. For example, if you obtained your policy on the 30th of June, your experience rating period for 2015 would be between June 30, 2011 and June 29, 2014, excluding the year between June 30, 2014 and 2015. Most bureaus use three years because it gives a much more accurate picture of not just your actual losses, but your average losses, which is great for an organization that had higher than average losses one year, but had better losses the other two years.
All of your losses are then split into two sections. The first section is primary losses and is used to indicate how often you have a loss. These are used at full value when calculating your modification factor. The other section is comprised of excess losses, and is used to determine how severe your losses were. These are weighted and are generally less important than primary losses, as most bureaus would see frequent losses as more detrimental than one very severe loss.
How are your losses categorized? Primary losses make up X amount of every one of your claims. The X depends almost entirely on what state you are in and when your policy was purchased. The excess losses are any amount of the claim over X. This is designed to prevent one very large claim from being given too much weight in the formula. In some states, claims that only cover medical bills are reduced in importance even further.
Right now, most bureaus are starting to adjust by splitting primary losses from excess losses, as more and more claims have started to roll in. In many states, instead of a split point of $5,000, there is now a split point of $10,000. As claim inflation continues to be an issue in the insurance world, it is believed that this point will continue to increase.
Whatever your numbers are, those numbers are then compared to what is called the Expected Loss Rate (ELR). This ELR is determined by the state and is derived from an average of organizations in your industry.
How Can You Lower Your Mod?
The best way to reduce your rates is to prevent accidents that will require you to file a claim. The fewer losses you have, the less likely you will have a debit applied to your premiums. Safety should already be your priority. You can further improve safety by instituting a supervisor for safety goals and by emphasizing the importance of safety both on an institutional and an individual level.
Conclusion
All of this data can be difficult to digest. Please feel free to call me with any questions and we can lead you in the right direction. To contact us, click here.
