Can I Control My Experience Mod - Part 1

Too often I hear that an experience modification factor is prepared by the state, and there is nothing a client can do to control that factor.  I would like to discuss what I believe to be two erroneous points in that statement.

First, the state doesn't prepare the experience modification factor.  In Indiana, there is an Indiana Compensation Rating Bureau which is charged with administering the workers' compensation rates and experience modification program.  However, they rely on the NCCI for statistical calculation and preparation of the actual experience modification.

Second, insureds have a great deal of control in influencing the experience modification factor.  I am a math nerd, so I Iove the calculation formulas and get geeked up about looking at the possible fluctuations of an experience modification factor. However, I recognize most of my audience will not be as geeked up as I am and so I will try to keep the math to a minimum.

Let's examine at a high level what an experience modification factor calculates. In brief, it compares three years of loss experience for a company to the same three years for all companies in the state that are in the same industry as the client.  By averaging all the experience in the state, an EXPECTED amount of losses (in dollars)  is generated.  By dividing a company's ACTUAL losses by the EXPECTED losses, we arrive at a factor known as the experience modification.  If the losses are better than average, the mod is below 1.00.  If losses are worse than average, the mod is above 1.00

That brings me to the first point that can be controlled by an insured.  Increasing the amount of EXPECTED losses will by definition lower the experience modification given the same amount of ACTUAL losses.  How, you might say, would I increase my EXPECTED losses?  EXPECTED losses are calculated by applying payroll to the rates for class codes that are assigned to a company.  Class codes are the numerical codes assigned to an employer based on the duties performed by their employees.

While there is a pretty strict interpretation of the eligible class codes for a given business, there is still some wiggle room.   Most decisions to place employees in a particular class code center around getting them in the cheapest code that is possible.  I would argue that is wrong.  First and foremost, place them in the correct class code according to their duties.  When there is a grey area, and therefore a decision to be made, choose the higher rated class code.  The additional amount of premium charged can be offset by the lower experience modification factor.  

I personally worked with a client to get their entire operation reclassified by the ICRB with the express purpose of getting them correctly classed and lowering their experience modification.  At the end of the day, an underwriter will be looking at hard dollars that need to be collected.   In this case, the underwriter agreed to a premium amount, and after all the changes the client payed the same premium, but was in a position to be more attractive to other underwriters due to the lower mod.

If your premium is artificially low, but the experience modification is high, that doesn't look good. When assessing class codes assignment for employees, I recommend you use the code that contemplates the majority of their work, even if it is the higher rated code.  

Next, we will talk about how I can affect my mod once a claim has occurred.  Stay tuned.