In an earlier post, I lamented that many clients (and some agents) feel the experience mod is uncontrollable. Today I would like to discuss a similar sentiment that I hear too often. Many clients (and agents) feel that the state rates and mod determine the premium and that is that. No deviation.
It is true the state sets rates by class codes. It is true your class codes are pretty narrowly defined meaning all carriers will use the same code and the same rate for your business. In underwriting language, multiplying the payroll by the rate for the class code(s) and totaling it gets us a "manual premium". The word manual comes from the "rate manual" as published by the state.
After we have a "manual" premium, we apply the experience modification. Guess what we call the premium after applying the experience "modifier." Yes, you guessed it, the "modified" premium. Again, I concede the point that 95% or more of the carriers operating in Indiana will get to this same modified premium. But that is not where pricing adjustments end.
In addition to the rates that are adopted by most carriers, the state sets out a schedule rating plan that is also adopted by the carriers. This plan allows an underwriter to apply credit (or debit) to the modified premium based on specific characteristics of the insured they are reviewing. The maximum deviation is 50%, though we aren't seeing those kind of pricing modifications in this market.
The reasons listed for the various credits are very specific. In reality, pricing decisions are often made based on profitability evaluations, competitive reasons, and losses. Then the specific discount is applied based on the amount of credit or debit needed to arrive at that price.
What it means to you is that all workers' compensation isn't priced the same. If a carrier views your business as a good one, discounts can be applied. Some companies are more liberal with discounts, and some are more conservative.
It is fair to say that these discounts are harder to come by the smaller the premium. There isn't enough validity in the experience to justify additional credits when one loss could wipe out the profitability. But if you have a large enough premium, and consistent enough loss experience, then your agent should be able to find you a carrier who can adjust premium accordingly.
How much credit should you expect? Well most insurance companies are going to want a loss ratio at or below 50% on their book of business. That means the most they will accept is 50% on your account. Average your loss experience, and double it. That is a premium target you could shoot for. If your "modified" premium is greater than that, you might need to ask for some credit. Just be sure to have the schedule rating plan memorized so that you can justify your request.
Showing posts with label Class Codes. Show all posts
Showing posts with label Class Codes. Show all posts
Monday, February 24, 2014
Monday, February 10, 2014
2014 Rate Changes
As previously mentioned, the overall 2014 rate change in the State of Indiana was a 7.7% decrease. That average means very little to the individual client. The rates on an individual class code could have changed up or down over 20%!
A few industries increased over 15% in their base rate. Those include Window Cleaners (over 2 stories), rostered volunteers of municipalities, and a variety of manufacturers such as: Oil, pulp, battery, glue, and cottonseed.
A fairly new classification, inventory counters, was at the top of the list. The fluctuation in that rate is somewhat expected as the experience will tend to even out over time. The newness of anything being measured results in a a larger deviation as samples are added.
The winning class codes, with the most percentage reduction for the year, are
Following right behind those two codes with favorable base rate reductions were
All the standard exception classifications (Clerical, Drivers, Outside Sales) took a small rate reduction in between 5% and 10%.
So how exactly does all this information affect our clients?
While the rate reduction shows a positive trend in claims costs for the previous years, we shouldn't get too far ahead of ourselves in assuming all premiums are coming down for our clients. If the advisory rate is down, then the expected loss rate is down too. That means mods could jump slightly as the denominator has been reduced mathematically.
The converse is true when looking at the rate increases. Those industries will probably have a drop in the mod, not counting the change in split rate that applies this year.
In the end, there is no golden rule in predicting an individual client's premium change based on rates. Each case needs to be specifically evaluated, but that can be done about 120 days before their renewal. Researching their mod and the revised rates prior to your renewal meeting can put you in a position to be viewed as a proactive advocate on their behalf.
The data is out there, you just need to go look for it.
A few industries increased over 15% in their base rate. Those include Window Cleaners (over 2 stories), rostered volunteers of municipalities, and a variety of manufacturers such as: Oil, pulp, battery, glue, and cottonseed.
A fairly new classification, inventory counters, was at the top of the list. The fluctuation in that rate is somewhat expected as the experience will tend to even out over time. The newness of anything being measured results in a a larger deviation as samples are added.
The winning class codes, with the most percentage reduction for the year, are
- Asphalt Plants operated by the paving contractor
- carpet manufacturers.
Following right behind those two codes with favorable base rate reductions were
- Liquor Bottling
- Architechts & Engineers
- Pipe Mfg
- Paperhanging.
All the standard exception classifications (Clerical, Drivers, Outside Sales) took a small rate reduction in between 5% and 10%.
So how exactly does all this information affect our clients?
While the rate reduction shows a positive trend in claims costs for the previous years, we shouldn't get too far ahead of ourselves in assuming all premiums are coming down for our clients. If the advisory rate is down, then the expected loss rate is down too. That means mods could jump slightly as the denominator has been reduced mathematically.
The converse is true when looking at the rate increases. Those industries will probably have a drop in the mod, not counting the change in split rate that applies this year.
In the end, there is no golden rule in predicting an individual client's premium change based on rates. Each case needs to be specifically evaluated, but that can be done about 120 days before their renewal. Researching their mod and the revised rates prior to your renewal meeting can put you in a position to be viewed as a proactive advocate on their behalf.
The data is out there, you just need to go look for it.
Monday, January 6, 2014
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.
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.
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