Insurance Protection

Understanding Experience Modification

As a business owner or financial manager, it is important to identify and understand every cost associated with doing business. It is especially important to understand the workers compensation modification factor, or experience rating, for your business as it has significant impact on the cost of workers compensation insurance.

 What is the purpose of experience rating?

Experience rating is designed to measure whether your company’s worker’s compensation losses (also known as experience) are better or worse than expected. If the experience is worse than expected, you are punished with a higher mod (ex: 1.25) and you pay more for your insurance. If the experience is better than expected you are rewarded with a low mod (ex: .75) and you pay less for your workers compensation insurance.

The experience rating process compares your company’s actual losses to what would be expected for a company with similar operations.

As explained in previous blogs, the mod is used in determining your final workers compensation cost. The premium you pay will equal the basic premium times your mod. So if the basic premium for your company is $50,000 and your company mod is 1.25, then you would pay a final workers compensation premium of $62,500.

What is the importance of understanding your mod and its effects?

Workers Compensation insurance costs can be several hundred dollars per employee. For a company that is able to lower its mod by twenty or thirty points (ex: going from a mod of 1.25 to .95 would be a thirty point reduction), the cost savings are substantial.

Using the same basic premium of $50,000, now using a .95 mod would result in a final workers compensation premium of $ 47,500. This is a $15,000 savings and there is additional opportunity beyond this example.

Additionally, as your mod increases so does the carrier’s concerns for future claims. This often results in the carrier increasing their issuing rates and/or applying additional charges (known as debit) to your manual rate to budget for any future claims.

A workers compensation claim has two components that are categorized as either Medical or Indemnity expenses.

  • Medical payments are self-explanatory and are incurred upon an employee being treated for their injuries through a medical facility. (Doctor consultation, follow-up, physical therapy, surgery, etc.)
  • Indemnity payments are often the larger amount and what drives your actual losses much higher, resulting in higher claims than expected. These are the payments made to the injured employee for their loss of wages as a result of their injury. The state of Pennsylvania indemnity payment is 66 – two-thirds of an employee’s average weekly wage.

How to control cost

The first step to achieving a lower mod is to understand the mod, how it is calculated, and what is necessary to control the mod. A few tips include:

  1. Audit your experience mod report. This is a critical step in ensuring you are not being misclassified or that any incorrect data is resulting in a higher mod.
  2. Implement procedures that aim to stop fraudulent claims, manage new or existing claims and strengthen the safety culture. Making these efforts is critical in both reducing and keep your mod as low as possible.

This is a complicated subject with a lot of implications, so it may be valuable to talk to a trusted advisor like those at Univest Insurance. Please feel free to give me a call at 610.966.1315. I would be happy to have a conversation about helping you navigate the worker’s compensation insurance process.

Insurance products offered through Univest Insurance, Inc., a licensed insurance agency affiliate of Univest Corporation, are obligations of and underwritten by unaffiliated insurance companies. They are not insured by the FDIC or any other agency of the United States and are not deposits of or guaranteed by any bank.

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