Control Costs by
Understanding
Experience Rating
Prepared by:
Copyright © 2003 by Timothy L. Coomer
All rights reserved. This book, or parts thereof, may not
Preface ...iii
1. Introduction to Experience Rating ...1
2. The Experience Rating Process and Formula ...6
3. Analyzing Your Mod ...20
4. Controlling Your Mod...23
5. Using QuickMod.com to Perform a Mod Analysis ...26
Appendices ...35
Glossary of Terms ...35
States Using NCCI or Similar Methodology ...37
States That Have Approved ERA ...38
1.1 The experience modification formula...2
1.2 The experience modification worksheet ...3
2.1 Experience included for the mod computed for policy year 1/1/2001 ...6
2.2 Computation of expected losses for several payroll class codes. Example computation shown for code 6003 Pile Driving ...7
2.3 Computation of expected primary losses and expected excess losses for several payroll class codes. Example computation continued for code 6003 Pile Driving...8
2.4 Simplified mod formula...8
2.5 Impact of ballast value on mod ...10
2.6 Primary vs. excess losses ...11
2.7 Sample weighting values ...12
2.8 Example of ERA ...13
2.9 Sample Worksheet ...15
2.10 IJ Codes...16
5.1 QuickMod.com home page ...26
5.2 QuickMod.com input screen with values entered from sample worksheet shown in Figure 2.8 ...28
5.3 Display of mod formula with sample values ...30
5.4 Your minimum mod & controllable mod ...31
5.5 Analysis of your primary and excess losses ...32
5.6 Your specific loss sensitivity ...33
5.7 Your aggregate loss sensitivity...34 Figures
Master Your Workers’ Comp Modifier
W
elcome! As a business owner or financial manager, it is important to identify and understand every cost associated with doing business. The workers’ compensation modification factor for your business has a significant impact on the cost of workers’ compensation insurance. This alone is reason enough to better understand the underlying theory, formula, and data that determines your company’s modification factor. However, the experience rating worksheet, which is used to communicate the modification factor, can also provide valuable insight into your company’s operation.This book explains, with minimal industry jargon, the experience rating formula and the computation of the modification factor. For convenience, the workers’ compensation modification factor will be referred to as the “mod” throughout this publication. After a thorough discussion of the experience rating process and formula, a mod analysis will be demonstrated using a case study.
As part of the benefit of purchasing this book, you also have access to QuickMod.com, the only online mod analysis tool. By simply logging onto QuickMod.com and entering a few summary values from your company’s experience rating worksheet, you will be able to generate a valuable mod analysis.
Chapter 1 Introduction to Experience Rating
Introduction to
Experience Rating
The Purpose and Theory
of Experience Rating
The experience rating process is complex, but the underlying theory and purpose of experience rating is simple. Most states utilize an organization called the National Council on Compensation Insurance, referred to as “NCCI” (www.ncci.com) to gather the data necessary to manage the experience rating system and publish the mods. This book addresses those states using the NCCI formula or similar formulas. For a complete list of states utilizing this type of methodology see the Appendix.
Experience rating is designed to measure whether your company’s workers’ compensation losses (also known as “experience”) are better or worse than expected. If the experience is worse than expected, you are “punished” with a high mod (greater than 1.0, also known as a debit mod) and you pay more for your workers’ compensation insurance. If the experience is better than expected, you are “rewarded” with a low mod (less than 1.0, also known as a credit mod) and you pay less for your workers’ compensation insurance.
Many companies have the misunderstanding that a mod of 1.0 is good. This is like saying a “C” on your grade school report card is good. A mod of 1.0 is average and a company should strive to decrease their losses in order to beat the average and lower their workers’ compensation insurance costs. An understanding of the mod formula provides you with the information necessary to determine how to best lower your mod. Whether your mod is driven by loss frequency, severity, or misallocation of payroll, this book along with QuickMod.com, will show you how to identify the problem.
The workers’ compensation insurance rates that are published in your state represent the average company. If the cost of everyone’s workers’ compensation insurance were simply based on average rates, there would be no incentive for individual employers to lower their workers’ compensation losses and thus improve the safety of their work environment. On the other hand, making every company bear the full burden of their workers’ compensation claims could potentially be very damaging to some organizations. The experience rating process does
The formula used to compute your mod is shown in Figure 1.1. A detailed explanation of the components of this formula is provided in the next chapter.
Figure 1.1: The experience modification formula
Actual
Ballast Weighting Value (1 - Weighting Value)
Primary + + x + x
Losses Value Actual Excess Losses Expected Excess Losses
Expected
Ballast Weighting Value (1 - Weighting Value)
Primary + + x + x
Losses Value Expected Excess Losses Expected Excess Losses
The formula shown above results in a number, your company’s mod, which is provided to your insurance agent and to you on an experience rating worksheet. This worksheet shows all the numbers used in the calculation and the final mod for your company. A sample worksheet is shown on the following page.
The mod determines your final workers’ compensation cost. The premium you pay will equal the basic premium (or the premium based on the average rates) times your mod. So, if the basic premium for your company was computed to be $10,000 and your company’s mod was 1.20, then you would pay a final workers’ compensation premium of $12,000.
Figure 1.2: The experience modification worksheet
Reasons for Understanding Your Mod
As you can tell from the previous section, the experience rating system is complex. But, through an understanding of the mod formula and the data that goes into the mod, you can better control your mod, reduce costs, and gain insight into your company’s operations. 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 (example: going from a mod of 1.20 to 0.90 would be a thirty point reduction), the cost savings are substantial. The first step to achieving a lower mod is to understand your company’s mod, how it is calculated, and what is necessary to lower the mod.
In addition to controlling and lowering your mod, it is possible to better understand your company’s operations through mod analysis. Changes in loss frequency or severity over time may indicate problems in your operation that have not been identified. Your experience worksheet may be the easiest way to “benchmark” your company against other companies with similar operations. There are certain numbers on the worksheet that can help you identify if your company is experiencing more workers’ compensation claims or more severe losses than average. The experience worksheet will actually tell you whether or not you’re beating the competition in this important cost area.
There are several types of mod analysis. At QuickMod.com you can perform several analyses simply with the data available from your experience worksheet. More advanced analysis can be performed with a mod analysis software package like ModMaster software (visit
www.specificsoftware.com for more information). The insights that can be gained from a mod analysis are numerous. A full discussion of QuickMod.com and the analysis it performs will be provided in Chapter 3 and Chapter 5. By utilizing QuickMod.com, you can generate all of the analyses shown in less than one minute.
Insights from a QuickMod.com Mod
Analysis
A mod analysis performed by QuickMod.com can help you identify: • the minimum mod for your company;
• the contribution of loss frequency (number of accidents) to your mod; • the contribution of loss severity (cost of accidents) to your mod;
• whether your company’s loss frequency is better or worse than the competition; • whether your company’s loss severity is better or worse than the competition; • the impact of a specific loss on your mod and how much that loss costs you in
terms of increased premium;
• how your mod would change with aggregate changes in losses.
Now that you have an overview of experience rating and an appreciation of the value of understanding your mod, Chapter 2 will explain the experience rating process and formula in detail.
The Experience Rating
Process and Formula
Basic Concepts Pertaining to
Experience Rating
Before we begin a simplified explanation of the experience rating formula, it is important to understand some underlying concepts and computations. Experience rating is a process by which a company is compared to other companies. This comparison results in a value that represents whether your company’s losses were greater or less than expected. This value is called the workers’ compensation experience rating modification factor or “mod” for short. The mod is computed using data for an experience rating period. The experience used in the calculation generally covers three years. The most recently completed year is excluded. For example, the mod for 1/1/2001 would contain experience from policies that were effective 1/1/97, 1/1/98, and 1/1/99. This is better demonstrated with the calendars shown below:
Figure 2.1: Experience included for the mod computed for policy year 1/1/2001
In the example shown in Figure 2.1, data for 2000 is excluded in the mod calculation for 2001. This is because the mod for 2001 is calculated before the end of 2000. The three years of data prior to that are readily available (1997, 1998, 1999). Three years are used, rather than one, to provide for a more accurate estimate. By utilizing three years in the calculation, the effect of any one “bad” year is dissipated. Obviously, this works the other way, too. A really “good” year does not have the same impact when analyzed along with years where losses were higher.
The experience rating process compares your company’s actual losses to what would be expected for a company with similar operations. This comparison is achieved by using the job classification system for the states in which your company operates. For a given payroll classification code (class code), the rating bureau for your state publishes what is called an expected loss rate (ELR) and discount-ratio (D-ratio). These values are based on data that is reported by insurance companies to the rating bureau. The ELR is the expected losses per $100 of payroll. If you know the payroll for a given class code, then you can compute the expected losses for that class code. Let’s look at an example.
Figure 2.2: Computation of expected losses for several payroll class codes. Example computation shown for code 6003 Pile Driving
Code Job Description Payroll ELR* Expected Losses
8810 Clerical $100,000 0.14 $140
8742 Salespersons $100,000 0.22 $220
5606 Contractor- $100,000 1.47 $1,470
Superintendent
6003 Pile Driving $100,000 10.73 $10,730
*All rates are for ILeffective 1/1/2000 Expected losses = (ELR ÷ 100) x Payroll
Expected losses = 10.73 *($100,000 ÷ 100) = $10,730
After the expected losses are computed, a second computation occurs to split the losses into primary and excess losses. This is called “split rating.” The importance of split rating and the difference between primary and excess losses are discussed later in this chapter. A simple explanation is that primary losses measure frequency and are the first $5,000 of each loss, while excess losses measure severity and are those loss amounts in excess of $5,000.
As mentioned previously, an ELR and D-ratio are published for each payroll classification code in each state. The D-ratio determines the percentage of the expected losses that will be classified as primary in the calculation. The table shown in Figure 2.2 is revised to show the D-ratios and the primary and excess loss computations. This revised table is shown in Figure 2.3.
Figure 2.3: Computation of expected primary losses and expected excess losses for several payroll class codes. Example computation continued for code 6003 Pile Driving.
Code Job Payroll ELR* D-Ratio Expected Expected Expected
Description Losses Primary Excess
8810 Clerical $100,000 0.14 0.25 $140 $35.00 $105.00 8742 Salespersons $100,000 0.22 0.24 $220 $52.80 $167.20 5606 Contractor- $100,000 1.47 0.18 $1,470 $264.60 $1205.40
Superintendent
6003 Pile Driving $100,000 10.73 0.17 $10,730 $1824.10 $8905.90
*All rates are for ILeffective 1/1/2000
Expected primary losses = Expected losses x D-ratio
Expected excess losses = Expected losses - expected primary losses
Expected primary losses = $10,730 x 0.17 = $1,824.10 Expected excess losses = $10,730 - $1,824.10 = $8,905.90
Detailed Explanation of the
Experience Rating Formula
In a simplified form, experience rating would be the ratio of your company’s losses to the average company with similar operations:
Fig. 2.4: Simplified mod formula
However, as you can see, this type of simplified comparison between your company and the average company could result in a wide range of mods. If you were fortunate enough to enjoy no losses for a period of time, your mod would equal zero. As a result, you would pay nothing for workers’ compensation insurance. But obviously, if you are operating a business, there is some possibility of incurring a workers’ compensation loss. Therefore, it is reasonable that you should pay for workers’ compensation insurance even if you have not incurred any losses during the past several years.
At the other extreme, if you were unfortunate and incurred a severe loss, which made your company’s losses many times more than the average company, your mod could be extremely
high. For example, if you were using this theoretical formula, a mod equal to 20.0 could result from an unfortunate large loss. Without any limitation on this type of loss, a company could be forced out of business due to excessive workers’ compensation insurance costs. Actuaries, who analyze loss data and establish experience rating formulas and rules, have invented some creative ways to modify the simple mod formula shown in Figure 2.4 to make it more “fair.” This is accomplished through six specific modifications that are discussed below.
Individual loss limits
Each state sets a single loss limit. For example, in Florida for the year 2000, the single loss limit is $124,500. This means that any loss greater than $124,500 would be limited (reduced) to $124,500 before computing the mod. This prevents a huge loss from having a dramatic impact on the mod. For example, if your company incurred an $800,000 workers’ compensation loss, the loss amount would be reduced to $124,500 for purposes of
computing your company’s mod.
Mod limits
Each state also has a limit on how high the mod can be for a specific-sized company. As the size of the company increases, the limit increases. This protects all size businesses from having a mod that is unreasonably high, but provides the most significant protection to smaller companies. In the state of Illinois, for mods with an effective date in the year 2000, the maximum mod ranges from 1.14 for a small company (expected losses equal to $5,000), to 1.71 for a medium-sized company (expected losses equal to $25,000), and 3.83 for a large company (expected losses equal to $100,000).
Ballast value
The dictionary defines ballast as “material carried in a vessel to provide stability.” That same principle applies to the ballast value used in the experience rating formula. The ballast value is placed in the top and bottom part of the formula to move all mods closer to 1.0. In other words, it stabilizes the values.
As a result, if you have a low mod, the ballast takes away some of that good news by moving the mod higher and closer to 1.0. However, if your have a high mod, the ballast will move your mod lower and closer to 1.0. The ballast value increases as the size of the company (as measured by expected losses) increases. However, the impact of the ballast is still greatest for small companies. A table is shown (figure 2.5) which demonstrates the mod for several scenarios with and without the ballast value in the formula.
Figure 2.5: Impact of ballast value on mod
Expected Actual Mod Impact Ballast Mod w/o of Losses Losses ballast ballast $ 208,378 $ 183,000 34450 0.88 0.86 0.02 $ 208,378 $ 460,000 34450 1.56 1.65 -0.09 $ 14,540 $ 3,180 13250 0.9 0.8 0.10 $ 14,540 $ 26,000 13250 1.27 1.52 -0.25
As is evident from the table shown above, for a large company, the ballast moves the mod a couple of points closer to 1.0. However, for a smaller company, the ballast has a more dramatic impact. The mod for our example small company was lowered twenty-five points by including the ballast value in the calculation. Also, the low mod for the small company was raised by ten points by including the ballast value. One area where the ballast value can have a surprise impact is in mergers and acquisitions. Since the ballast value changes with the size of the company, the merger of two companies may result in an unexpected change in the mod due to the change in the ballast value.
Primary vs. excess losses
If you were an insurance underwriter analyzing a company that had $100,000 in workers’ compensation losses, which scenario would cause you more concern? Company A has twenty $5,000 losses and Company B has two $50,000 losses. The underwriters and the actuaries are more worried about loss frequency. Each time a loss occurs it is like rolling the dice – the severity of the loss could be significant. The company with the twenty losses is considered more “risky” than the company with only two losses. Theoretically, loss severity is more difficult to control than loss frequency. But, if you can reduce the frequency of losses, then you reduce the possibility of having a severe loss. An organization with numerous losses (loss frequency) increases its chance of incurring severe losses.
The manner in which this is measured in the experience rating formula is fairly ingenious. The losses for a company are divided into two categories: primary losses and excess losses. For most states, the first $5,000 of each loss is called primary. If a loss is greater than $5,000, then the first $5,000 is primary and the balance is excess (example: a $7,500 loss would be divided into $5,000 primary and $2,500 excess). In the state of California, the primary portion of a loss is determined by a formula (primary loss = (loss amount x 9,000) ÷ (loss amount + 7,000)).
Primary losses are a measure of loss frequency because some portion (the first $5,000) of each loss is allocated to primary losses. Excess losses are a measure of loss severity since only those loss dollars over $5,000 are allocated to excess losses. To demonstrate the effectiveness of this method, let’s look at our simple case for Company A vs. Company B.
Figure 2.6: Primary vs. excess losses
Total Total* Total** Company Losses Primary Excess
Losses Losses
Company A $ 100,000 $ 100,000 $ — Company B $ 100,000 $ 10,000 $ 90,000
*Primary losses are the first $5,000 of each loss. **Excess losses are the loss dollars over $5,000.
All of Company A’s losses are primary, which leads the underwriter to conclude that Company A had many small losses ($5,000 or less). Company B’s losses are mostly excess. This leads the underwriter to conclude that Company B had only a few large losses (>$5,000) and less loss frequency than Company A. The underwriter may want an explanation for the severity of the losses incurred by Company B, but would probably view the high level of loss frequency at Company A as the greater of the two risks.
If you were to only look at total losses, it would not be as informative as an analysis of primary and excess losses. By splitting the losses into primary and excess, and then placing more emphasis on primary losses, the experience rating formula successfully discriminates against loss frequency.
The experience rating formula uses all of the actual primary losses in the calculation of the mod. However, only a certain percentage of the actual excess losses is utilized. The percentage of excess losses utilized in the calculation is determined by the weighting value.
Weighting value
The weighting value is utilized in the experience rating formula to determine the percent of the actual excess losses to use in the calculation. This recognizes that excess losses, especially for smaller companies, are less “credible” (meaning directly related to the operations of the business and not just a random occurrence). Therefore, the weighting value is small for small companies and increases for larger companies. The weighting value is obtained form a table that is published for each state. Figure 2.7 provides an abbreviated sample weighting table.
Figure 2.7: Sample weighting values
Sample State Effective January 1, 2000
Table of Weighting Value
Expected LossesWeighting from to Values $ — $ 877 0.04 $ 878 $ 3,550 0.05 $ 3,551 $ 6,219 0.06 $ 6,220 $ 9,079 0.07 $ 9,080 $ 11,925 0.08 $ 4,248,928 $ 4,975,568 0.73 $ 4,975,569 $ 5,966,443 0.74 $ 5,966,444 $ 7,397,700 0.75 $ 7,397,701 $ 9,646,820 0.76 $ 9,646,821 $ 13,695,231 0.77 $ 13,695,232 $ 23,141,519 0.78 $ 23,141,520 $ 70,372,942 0.79 $ 70,372,943 $ Over 0.80
The lookup value for the weighting table is expected losses. Expected losses can be thought of as a measure of the size of the organization. As you can see, the weighting values cover a broad range from 0.04 to 0.80.
In the numerator (the numerator is the top part of the ratio) of the experience rating formula, there are two terms that involve the weighting value. The first term is the weight times the actual excess losses (w X actual excess losses). The next term is the complement to the weighting value (1 - w) times the expected excess losses ((1- w) X expected excess losses). As a result, the total excess losses used in the numerator are a combined number representing a percentage of what actually happened and a percentage of what was expected. If your company is small, the weighting value will be very small and your company’s mod will be computed with a number very close to the expected excess losses. Conversely, if your company is large, your weighting value will be large and the mod will be computed with a number very close to the actual excess losses. The weighting value is based on the theory that as a company increases in size, its loss experience, specifically loss severity, becomes more statistically valid.
Experience Rating Adjustment (ERA)
The most recent change in the experience rating formula came in 1998 with the introduction of the experience rating adjustment (ERA). ERA included three changes to the formula. These changes are listed and explained below:
Change in the primary/excess split point: Presently, losses are split into excess losses
at $5,000 as we discussed earlier. Under ERA, this split point may change in the future. As of publication of this book, no state has changed the split point to a value other than $5,000 (excluding California, which uses a formula to split losses).
Change in the weighting value table: The table of weighting values, previous to ERA,
had a maximum value of 0.63. Under ERA, these values now have a maximum value of 0.80. This increases the emphasis on the actual excess loss experience of larger companies.
Reduction in medical-only claim amounts: Medical-only claims, injury code 6 claims,
are reduced by 70% in states where ERA is approved. This is the most significant change. Historically, some companies would not report small medical-only claims in an attempt to keep their mod low. This practice, while legal in many states, concerned many of the insurance companies and actuaries. By not reporting these claims, the database of loss experience was not complete and could lead to poor statistical analysis. In an attempt to discourage the practice of not reporting these claims, ERA reduces the claim by 70% before it is utilized in the experience rating process. Also, the expected loss rate and discount ratio used to compute expected losses and expected primary losses, have also been changed to reflect the fact that medical-only claims will be reduced by 70%. Therefore, the incentive to not report medical-only claims has been eliminated in states where ERA is approved.
Figure 2.8 Example of ERA
Medical-Only Claim of $8,000 Before ERA After ERA
Primary Loss = $5,000 Primary Loss = $1,500 (30% x $5,000) Excess Loss = $3,000 Excess Loss = $900
(30% x $3,000)
Dissecting a Workers’ Compensation
Experience Rating Worksheet
Worksheet header items
First, there are a few header items on each worksheet. These are explained below. The appropriate example from the worksheet enclosed in your kit is provided in parentheses.
Name of Risk: (XYZ Company) This is the name of the company for which the mod
is calculated.
Risk Ident. No.: (123456) This is the identification number NCCI or other rating
bureaus have assigned to your company.
State: (Oklahoma): If your company operates in only one state, the state will be displayed.
If your company operates in multiple states, the word “Interstate” will be displayed.
Effective Date: (7/1/2000): This states the date on which the mod becomes effective.
This date is also used to determine which tables of rating values are the appropriate ones to utilize (most rates change on an annual basis).
Worksheet column items
Next, look at each column found on an experience rating worksheet. Refer to the sample worksheet, shown in Figure 2.9, for example data for each column. Note that data is grouped by state and policy year. The state name is written across the columns along with the policy period and policy number.
Column 1 – Class Code: This column lists the payroll classification codes for each state
utilized in the calculation. As discussed earlier, all jobs in a given state are categorized into more than 600 class codes. This allows for data, by class code, to be analyzed and for the computation of statistics by class code.
Column 2 – ELR (Expected Loss Ratio): The ELR for the given class code is displayed.
The ELR is the expected amount of losses per $100 of payroll.
Column 3 – D-Ratio (Discount-Ratio): The D-ratio for the given class code is
displayed. The D-ratio is the percent of expected losses that are classified as expected primary losses.
Column 4 – Audited Payroll: The amount of payroll for the given class code, state, and
policy period is shown in this column.
Column 5 – Expected Losses: The expected losses are computed and displayed in this
column. Expected losses are computed as follows: Expected Losses = (Payroll ÷ 100) x ELR
Figure 2.9: Sample worksheet
Chapter 2 The Experience Rating Process and Formula
WORKERS’ COMPENSATION EXPERIENCE RATING
XYZ COMPANY 00000 7/1/2000
OK
Experience 11 12 13 14
Modification PRIMARY STABILIZING RATABLE ADJUSTED Calculation LOSSES VALUE EXCESS TOTALS
(I) (C) x (1-W) + (G) (A) x (F)
15
ACTUAL 36,972 48,913 2,757 88,642 EXP. MOD. (E) (C) x (1-W) + (G) (A) x (C) (J) / (K)
EXPECTED 9,296 48,913 3,802 62,011 1.43 16
AR AP
1.36
*RATING REFLECTS A DECREASE OF 70% MEDICAL ONLY PRIMARY AND EXCESS LOSS DOLLARS WHERE ERA IS APPLIED, REFLECTED ONLY IN TOTALS (F), (H) & (I).
1 2 3 4 5 6 7 8 9 10
CLASS ELR D - AUDITED EXPECTED EXP PRIM CLAIM O ACT INC ACT PRIM CODE RATIO PAYROLL LOSSES LOSSES DATA IJ F LOSSES LOSSES
(2)X(4)/100 (3)X(5)
POLICY PERIOD: 7/1/1996 TO 7/1/1997 POLICY NO.
7,960 5,000 3724 5.170 0.22 110,000 5,687 1,251 SMALL LOSS(ES) 5 250 250 5190 3.850 0.21 162,000 6,237 1,310 SMALL LOSS(ES) 6 * 200 200 5606 1.430 0.19 117,250 1,677 319 8,566 5,000 8810 0.330 0.25 22,500 7 4 1 9 12,589 5,000 POLICY-TOTALS 411,750 13,675 2,899 29,565 15,450
POLICY PERIOD: 7/1/1997 TO 7/1/1998 POLICY NO.
3724 5.170 0.22 115,000 5,946 1,308 SMALL LOSS(ES) 5 514 514 5190 3.850 0.21 185,000 7,123 1,496 SMALL LOSS(ES) 6 * 723 723 5606 1.430 0.19 128,500 1,838 349 9,450 5,000 8810 0.330 0.25 27,500 9 1 2 3 8,655 5,000
POLICY-TOTALS 456,000 14,998 3,176 19,342 11,237
POLICY PERIOD: 7/1/1998 TO 7/1/1999 POLICY NO.
3724 5.170 0.22 125,000 6,463 1,422 SMALL LOSS(ES) 5 526 526 5190 3.850 0.21 175,000 6,738 1,415 SMALL LOSS(ES) 6 * 1,350 1,350 5606 1.430 0.19 132,000 1,888 359 5,663 5,000 8810 0.330 0.25 30,000 9 9 2 5 7,180 5,000 POLICY-TOTALS 462,000 15,188 3,221 14,719 11,876 A B C D E F G H I (D)-(E) (H)-(I)
"W" EXPECTED TOTAL TOTAL ACTUAL "B" TOTAL TOTAL
VALUE EXCESS EXPECTED EXP. PRIM EXCESS VALUE ACTUAL ACT. PRIM
0.11 34,565 43,861 9,296 25,063 18,150 62,035 36,972
NAME OF RISK RISK IDENT. NO: EFFECTIVE DATE
STA
Column 6 – Expected Primary Losses: The expected primary losses are computed and
displayed in this column. Expected primary losses are computed as follows: Expected Losses x D - ratio = Expected Primary Losses.
Using the first line of example worksheet, the calculation is as follows: 5,687 x .22 = 1,251
Column 7 – Claim Data: This column shows the claim number. The claim number is a
number or series of numbers and letters that your insurance carrier has assigned to the claim. This claim number will assist you in identifying the claim if additional data or research is required into the cause or loss reserve for the claim.
Column 8 – IJ Code and O/F Indicator: This column indicates two key values. The
IJ Code is the injury code. A list of IJ Codes is shown below:
Figure 2.10: IJ codes
IJ Code Medical Claim
IJ Code 1 Death
IJ Code 2 Permanent Total Disability IJ Code 5 Temporary Total or Temporary Partial Disability
IJ Code 6 Medical Only
IJ Code 7 Contract Medical or Hospital Allowance IJ Code 9 Permanent Partial Disability
The important IJ code to note for experience rating purposes is IJ Code 6. This is a medical-only claim and, as discussed earlier, is reduced by 70% in states where ERA has been approved. The O/F indicator tells you whether a claim is open or is final. An open claim (indicated by an “O”) simply means that payments may still be made that are related to this claim. Therefore, the loss amount you see for this claim represents payments made to date plus a loss reserve (an estimate of additional payments that will be made). A final claim (indicated by an “F”) indicates that the claim is closed and no more payments will be made that are associated with this claim.
Column 9 – Actual Incurred Losses: The actual loss amount for the given claim is
displayed in this column. As discussed earlier, the amount will be the total paid amount for a final claim. For an open claim, the amount will be the loss reserve plus all payments to date.
Column 10 – Actual Primary Losses: The actual primary loss amount for the given
claim is displayed in this column. The primary loss amount equals the first $5,000 of the claim or, if the claim is less than $5,000, it equals the claim amount. (NOTE: In California, the primary loss amount is computed using a formula. This formula was discussed earlier in this Chapter).
Worksheet summary information
Now let’s look at the summary information displayed at the end of the experience rating worksheet. These values can be divided into summary values and calculation values. Summary values are totals based on expected and actual loss information. These values are utilized in the final mod calculation. The summary values are the values you will utilize when you access QuickMod.com.
Box A - W Value (011): A table of weighting values, keyed on expected losses, is
published for each state. For multiple state calculations, the weighting value is looked up for each state based on the total expected losses. Then, a weighted average weighting value is calculated based on the expected losses for each state.
Box C - Expected Excess Losses (34,565): This number is obtained by subtracting
the Expected Primary Losses (Column E) from the total expected losses (Column D). In our example:
43,861 - 9,296 = 34,565
Box D - Total Expected (43,861): This number is the sum of the three years of Policy
Period Totals from the Expected Losses (Column 5). In our example: 13,675 + 14,998 + 15,188 = 43,861
Box E - Total Expected Primary (9,296): This box is the sum of the three years of Policy
Period Totals from the Expected Primary Losses (Column 6). In our example: 2,899 + 3,176 + 3,221 = 9,296
Box F - Actual Excess (25,063): This box displays the actual excess losses. It is the result
of subtracting the Total Actual Primary Losses (Column I) from the Total Actual Losses (Column H). In our example:
62,035 - 36,972 = 25,063
Box G - B Value, “Ballast Value” (18,150): This box displays the computed ballast value
for the company. A table of ballast values, keyed on expected losses, is published for each state. For multiple state calculations, the ballast value is determined for each state based on the total expected losses. Then, a weighted average ballast value is calculated based on the expected losses for each state.
Box H - Total Actual (62,035): This box displays total actual losses. It is the result of
summing the three years of Policy Period Totals for Actual Incurred Losses (Column 9). In our example:
29,565 + 19,342 + 14,719 = 63,626
Box I - Total Actual Primary (36,972): This box displays total actual primary losses.
The amount shown in this box will reflect the impact of the experience rating adjustment (reduction of medical-only claims by 70%).
The total is taken from the sum of Actual Primary Losses (Column 10) for each of the three years. Using the numbers provided in the worksheet:
15,450 + 11,237 + 11,876 = 38,563
This total does not match the number of 36,972 provided in the box because the ERA reduction is only reflected in the total boxes (F, H, and I).
Experience modification calculation section of the worksheet
The calculation section of the worksheet actually displays the calculation of the mod and shows how each summary value plugs into the mod formula. This section displays the numerator (the top part of the equation labeled “actual”) and the denominator (the bottom part of the equation labeled “expected”).Box 11 - Primary Losses: The value in the numerator is total actual primary losses
(Box I) and the value in the denominator is total expected primary losses (Box E).
Box 12 - The Stabilizing Value: This value is the same in the numerator and
denominator. It is expected excess losses (Box C) multiplied by (1 - weighting value) plus the ballast value. In our example, this calculation was derived as follows:
34,565 x (1 - .11) + 18,150 = 48,913
Box 13 - Ratable Excess: This value is the weighting value (Box A) times the actual
excess losses (Box F) in the numerator. In the denominator, the value is the weighting value (Box A) times expected excess losses (Box C). In our example, this calculation was derived as follows:
.11 x 25,063 = 2,757 (numerator) .11 x 34,565 = 3,802 (demoninator)
Box 14 - Adjusted Totals: This box displays the result of the numerator (Box J: 88,642)
and the result of the denominator (Box K: 62,011). It is derived by adding Boxes 11, 12, and 13 for both the actual and the expected losses. In our example, this calculation was derived as follows:
36,972 + 48,913 + 2,757 = 88,642 (numerator) 9,296 + 48,913 + 3,802 = 62,011 (denominator)
Box 15 - Experience Mod (1.43): Finally, the mod is shown for the company as the
numerator (Box J) divided by the denominator (Box K). In our example: 88,642 ÷ 62,011 = 1.43
Box 16 - ARAP (1.36): This box would only apply to your company, if you are in an
assigned risk program. Sometimes called “The Pool,” it is a mechanism established by individual states to make sure that employers can obtain workers’ compensation insurance even if insurance companies are not willing to write such insurance on a voluntary basis, due to high risk or other factors. ARAP is the Assigned Risk Adjustment Program. It is an additional adjustment to the mod, used in some states, that surcharges assigned risk employers with a record of losses greater than expected.
Special Rules
Master Your Workers’ Comp Modifier explains the mod formula and the rules that apply to loss limitations and mod limitations. However, there are a limited number of special rules that may effect a mod calculation. Explanation of these rules is outside the scope of this book.
If you believe there are special rules or circumstances affecting your mod, please discuss this with your insurance advisor.
Analyzing Your Mod
A mod analysis can provide valuable insight into your business operations and workers’ compensation losses. This chapter will discuss two types of mod analysis: basic and intermediate. Advanced mod analysis requires a software package like ModMaster software (for more information please visit www.specificsoftware.com). A basic mod analysis can be performed simply with the numbers found on your experience rating worksheet. An intermediate mod analysis can be performed using information from your experience rating worksheet and mathematics. An intermediate mod analysis has been designed for your convenience and is available at www.QuickMod.com. Access and usage of this web site will be discussed in Chapter 5.
Basic Mod Analysis
A basic mod analysis can be performed using the summary values contained on your experience rating worksheet and without any difficult mathematics. In the previous chapter, we defined the columns and summary values found on the worksheet. Here, we will put that knowledge to good use. Below is a list of several specific analyses you can perform quickly and easily.
Expected vs. actual
First, compare Box D “Total Expected” with Box H “Total Actual.” This comparison will quickly tell you if you are experiencing more or less losses than expected. Your goal should be to reduce actual losses in order to be well below expected (or average) losses. Expected losses are based upon actuarial models of how others in your industry are performing; therefore, if your losses are higher than this number, it is an indicator that the competition is
outperforming you in this key area of cost reduction and can offer their products or services at more attractive prices or simply increase their own profitability. In our example, Box D is 43,861, while Box H is 62,035, which indicates that the company’s actual losses are too high, which resulted in a debit (higher than 1.0) mod.
Expected primary vs. actual primary
Next, for a more specific loss comparison, compare Box E “Total Expected Primary” to Box I “Total Actual Primary.” Remember that primary losses are a measure of loss frequency (number of accidents) and that these losses have the greatest impact on your mod. Actual primary losses greater than expected indicate a loss-frequency problem and should be addressed immediately. Loss frequency can be an indication of more serious problems such as lack of training, poor procedures, or a hazardous work environment. These problems may lead to other business issues such as poor quality, missed production goals, etc.
In our example, Box E is 9,296 and Box I is 36,972. Since Box I is almost four times Box E, this company is experiencing too many accidents.
Expected excess vs. actual excess
Excess losses are a measure of loss severity. Compare Box C, “Expected Excess” to Box F, “Actual Excess.” Actual excess losses greater than expected excess losses indicate that the average claim is larger than expected. Loss severity is more difficult to control than loss occurrence (loss frequency). However, if your severity is greater than expected, you should investigate whether or not your claims are being handled appropriately. Also, you may want to learn more about loss-reduction techniques that could be utilized to decrease the severity of the losses. Your insurance consultant should be able to assist you.
Intermediate Mod Analysis
With the help of mathematics, several other key observations can be made. It is not necessary to develop a spreadsheet to make all of these calculations, however. All of the analyses in this section are available to you at www.QuickMod.com. Chapter 5 explains how to access and use this web site. Chapter 5 also provides an example of each of these calculations using a sample worksheet and QuickMod.com.
Determination of the minimum mod
The minimum mod is the lowest mod possible for your company. This value can be determined by plugging in zero actual primary and excess losses into the mod formula while maintaining the values for expected losses, ballast, and weighting value. This gives the lowest mod value theoretically achievable by your company. The minimum mod is not the same for all companies. For small companies (as measured by expected losses), the minimum mod can be as high as 0.90. As the size of the company increases, the minimum mod decreases. For very large companies, the minimum mod can go as low as 0.25. Knowing your minimum mod is important for large and small companies. A large company with a mod of 0.95 may still be able to achieve significant savings through loss control and loss-prevention activities. The company may perceive the 0.95 mod as “good.” However, if the minimum mod is 0.50, there is significant room for improvement. For a small company, the minimum mod can be used for setting realistic expectations; for example, a small company that sets a goal of having a 0.80 mod will not be able to achieve it under any circumstance if the minimum mod is 0.85.
Determining the controllable mod
The controllable mod is the difference between your current mod and your minimum mod. This is the variable piece of your mod that fluctuates with losses. The controllable mod can be broken into the contribution made by primary losses and by excess losses. This helps
Ratio of actual to expected losses
By computing a simple ratio of actual to expected losses (both primary and excess), you can measure the degree to which your company’s losses differ from the expected loss values. This is a statistic that can be tracked over time to identify trends, improvements, or problems relating to loss experience.
Specific loss sensitivity
This analysis identifies the specific impact that a single loss has on your mod and on the premium you pay during the three years that the loss is in the calculation. This can be an extremely helpful analysis to quantify the cost vs. benefit of loss-prevention programs you are considering. For example, if your company has had an increase in carpal tunnel syndrome claims and you are trying to justify the purchase of keyboard holders to make workstations ergonomically correct, you can look at how much your mod and therefore your premium increased as a result of these claims. The results can be striking; for example, a single $4,000 claim may increase a small company’s premium by $10,000 to $12,000 over a three-year period. Imagine how much more powerful your funding request for safety programs will be if you can back them up with these types of numbers. For instance, you might say to senior management, “It will cost us $20,000 to install keyboards at every workstation, but we could have already saved $65,000 if we had made this change four years ago, and our claims are continuing to rise by 15% a year.”
To perform this calculation, you must subtract the primary and excess (if any) portions of the loss from the totals used in the mod calculation. The resulting mod will be the mod without the loss. The difference between this mod and the actual mod will be the mod impact of the loss. This difference multiplied by the estimated premium yields the cost of the loss in terms of increased premium dollars. Multiplying this value by 3 (the number of years that the loss is in the calculation) will provide an estimate of the ultimate three-year cost of the loss. QuickMod.com does all of this for you!
Aggregate loss sensitivity
Calculating the sensitivity of the mod to aggregate (total) changes in losses highlights the relationship between losses and your company’s mod. The aggregate loss-sensitivity analysis yields a table showing how the mod would vary with increases and decreases in total losses. This analysis is generated by varying both the actual primary and excess losses and then computing the resulting mod. It will help you set a goal for a specific percentage decrease in losses and achieving the corresponding mod.
Controlling Your Mod
Understanding your mod is only valuable if you use this information to control your mod. Controlling your mod means the ability to lower a high mod or to maintain a current low mod. With the information provided so far, you should have a good understanding of the
components that drive a mod.
First, let’s look at the motivation for lowering your workers’ compensation mod. Obviously, a low mod helps to lower your workers’ compensation premium. However, a low level of workers’ compensation claims has a broader impact on your company. The savings you generate by controlling your mod allow you to invest more in your company’s operations than competing firms. By doing so, you can improve efficiencies and quality - or reduce your price or win a bid based on coming in with the lowest number. Also, with lower workers’ compensation losses come healthy, happy, and more productive employees. This increases productivity and further lowers overall costs. Safety, therefore, can become its own profit center with significant payback. Now, lets focus on a few of the ways you can impact the components that control your mod.
Implement a Loss-Control Program
A loss-control program can be very effective at decreasing your loss frequency. You may remember from the earlier explanation of the experience rating formula that loss frequency is the main driver of your mod. Investing in a loss-control program may have benefits that far outweigh the cost of the program. A secondary benefit of a loss-control program, in addition to preventing losses, is the reduction in the severity of losses. Loss severity is the second most important driver of your mod. Also, a loss-control expert may be able to identify processes or behaviors exhibited by your employees that create unnecessary risk. This expertise is often available from your insurer at no cost to you.
Other loss-prevention programs you can implement:
• institute a workers’ safety committee that meets regularly to discuss safety problems. Many states offer workers’ compensation discounts for companies with active safety committees; • provide employee safety training;
• offer safety bonuses to employees for maintaining an accident-free workplace; • communicate your company’s commitment to reporting and prosecuting workers’
Verify the Accuracy of the
Payroll and Loss Data
There are two types of data in your mod calculation: loss data and payroll data. The majority of incorrect mods that are issued are incorrect due to erroneous data. There are several things you can do to ensure accurate data is utilized in your mod calculation.
First, actually look at your mod worksheet! Compare the loss and payroll data used in the calculation to another source document. A payroll audit or a third party, such as an
accountant or payroll service provider, should be used to verify payroll data. Information on losses should be obtained from your insurance company.
Occasionally, a claim that has been settled for less than originally anticipated, may not have been updated to the lower amount on your mod worksheet. Also, if the insurer has received subrogation on a particular claim, the lower net claim cost may not be reflected on your mod worksheet. Subrogation is when the insurer makes a claim against a third party who is liable for a loss that has been paid by the insurer. For example, an injury results from a forklift accident. In investigating the accident, it is discovered that a defect with the forklift actually caused the accident. If the insurer then made a claim against the forklift manufacturer, the amount paid to the insurer should be deducted from the employer’s loss record when calculating the mod.
Take a few moments to ask your insurance advisor questions concerning the losses used in the calculation. Verify that he or she has given thought or investigation to the accuracy of the loss data.
Do these classifications seem to make sense to you? You are in a position to know, better than your insurance advisor or insurer, what your employees are doing and whether or not the classification is appropriate. In this case, changing incorrect job classifications may have significant impact on both your mod and your basic workers’ compensation premium. When judgement is involved in determining the correct payroll classification, a careful analysis should be made of the impact of changes in the codes on the premium and mod. Also, if it is determined that a job has been misclassified, investigate the possibility of having historical mods recalculated to reflect this change.
Anticipate and Calculate
By utilizing a software tool like ModMaster software, see www.specificsoftware.com, you can calculate your experience mod. Prior to the actual issuance of your mod, it is a worthwhile endeavor for you or your insurance advisor to calculate an estimate of your company’s mod. If the actual mod is different from your preliminary calculations, then you can investigate the differences.
Also, prior to any ownership changes, merges, or divestitures, you should anticipate the impact on your mod by calculating the mod for the new entity. Some companies are surprised when they purchase a smaller organization, with bad loss experience, and find that the cost of that acquisition is higher than anticipated because of the impact on the new company’s mod. This frequently overlooked expense can be anticipated and quantified by calculating the new mod.
Understand the True Cost of a Loss
Finally, by using QuickMod.com, you can better understand the true cost of a loss. This can be the greatest incentive to implementing some of the techniques discussed in this chapter. Although the insurer may pay the loss, the impact that the loss has on your mod may result in a real and significant cost to your organization.
Using QuickMod.com to
Perform a Mod Analysis
The QuickMod.com site is designed to produce the intermediate level mod analysis described in Chapter 3. This can be accomplished quickly and simply with a few summary values from your company’s worksheet. This chapter will tell you how to:
• Log onto QuickMod.com
• Enter the data from your worksheet • View and print the mod analyses
To perform the mod analysis, you will need your latest worksheet and access to the Internet. If you do not have a copy of your mod worksheet, please contact your insurance advisor to obtain a copy. The worksheet used throughout this book will be used for the example QuickMod.com analysis.
1. Log onto QuickMod.com by pointing your browser to:
http://www.QuickMod.com
Once you have loaded the web site, you will see the following page:
The home page for QuickMod.com has several buttons. The function of each button is explained below.
Online Tools: This button will take you into the Mod Analysis Tool. This is where you
will perform the mod analysis discussed during the next sections of this chapter.
About this Site: This button will take you to a page that explains the purpose and
functionality of QuickMod.com.
Contact Us: This button will take you to a form where you can submit comments to
Specific Software Solutions, LLC concerning QuickMod.com.
Sign Up Now!:This button will take you to an order form where you can purchase a
subscription to QuickMod.com
ModMaster: Information on ModMaster, a full-featured,
PC-based mod analysis tool, is available by pressing this button.
Specific Software Solutions: To immediately access Specific Software’s Web site, press
this button.
2. To start a mod analysis, press the Online Tools button.
You will immediately be prompted for a username and password. If you do not have a username and password, please send email to [email protected] and request a username and password for QuickMod.com.
After successfully entering your username and password, you will see a screen that prompts you to select your state. If your mod calculation involves more than one state, select Multi-state as your state selection. After you have made your selection, press Continue. You will then see the input screen for the QuickMod.com mod analysis tool.
This form is designed to correspond to the lettered boxes on your worksheet. Locate each value on your worksheet and enter it in the form. Use the tab key to move to each consecutive data entry box. Do not press Enter on your keyboard in an attempt to move to the next data field.
Figure 5.2: QuickMod.com input screen with values entered from sample worksheet shown in Figure 2.9
Notice the values entered into this data entry form come directly from the XYZ Company worksheet provided with your kit. The estimated workers’ comp premium is the only value that was provided by XYZ Company that did not come from the worksheet.
Data fields A through I have been explained previously in this book and are easily located on your worksheet. However, please note that the “W” value is displayed on most worksheets without the decimal point. When you enter the “W” value in the QuickMod.com data form, please use the decimal point. In our example case, the “W” value is typically displayed as “011”. This value is entered as 0.11 or .11 in the data form.
After entering items A through I, you can enter up to five losses to determine the mod impact of each loss.
NOTE: If you are in an ERA-approved state (these states are listed in the appendix) and you are entering a medical-only claim (IJ code 6), enter 70% of the loss amount shown on the worksheet.
For all other losses, enter the full-loss amount. Enter only itemized losses. Do not enter the group small-loss amounts that are identifiable by the “*” in the O/F column (Column 8). Finally, enter an estimate of your workers’ comp premium prior to application of your mod. This is called the unmodified or subject premium. If you are not aware of this value, contact your insurance advisor or accountant. Alternatively, you can use the subject premium for the most recent policy period on your worksheet as an estimate. This value is displayed next to the policy totals in parenthesis.
Press Continue to view the results of your QuickMod.com mod analysis.
There are five different screens that display the results of your analysis. They are shown below for the sample XYZ Company worksheet (see Figure 2.9). If you prefer to print the analysis, press your browser’s print button to automatically print all five pages.
Navigating from report to report can be done by pressing the next button, clicking on the link to the next report, or by scrolling down the page to the next report. In the following sections, clicking on the link to the next report is referenced. However, choose the navigation technique that best suits you.
The first screen shows the numbers you entered as they are utilized in the experience rating formula. The mod is also displayed. This mod will match the mod on your worksheet unless there is some state mod limitation that has reduced your mod. Note that each analysis can be printed by selecting the File Menu in the upper left hand corner of your browser and selecting Print from the menu list.
Figure 5.3: Display of mod formula with sample values
Next, click on the link that says “Your Minimum Mod & Controllable Mod.” This will take you to the next analysis.
Figure 5.4: Your Minimum Mod & Controllable Mod
Previously, we discussed the importance of understanding the minimum mod and controllable mod. The unique numbers from your mod worksheet are utilized by QuickMod.com, and the estimate you provided for your basic workers’ comp premium, to perform this analysis.
For XYZ Company, we can see that the minimum mod is 0.79, which would yield a premium of $21,296.98. The average company with similar operations has a mod of 1.0 and a premium of $27,000. XYZ Company has a current mod of 1.43 and a premium of $38,595.22. Obviously, XYZ Company has room for improvement.
This analysis also identifies that primary losses are contributing 0.60 to the mod of 1.43. Primary losses are a measure of loss frequency. Loss frequency can be effectively reduced by loss-control services. With the “Your Minimum Mod & Controllable Mod” analysis in
Figure 5.5: Analysis of Your Primary and Excess Losses
This analysis is a ratio of actual to expected losses (primary and excess). As you may recall from Chapter 2, primary losses are a measure of loss frequency and excess losses are a measure of loss severity. This analysis indicates the degree to which actual losses are greater than or less than expected. For XYZ Company, actual primary losses are 397.72% of expected (nearly four times the expected value!). Excess losses are actually less than expected at only 72.51%. This analysis provides a brief text description and analysis that is based on the percentages calculated. For XYZ Company, this analysis clearly illustrates the extent to which their primary losses are exceeding the industry average.
Next, click on the link, “Your Specific Loss Sensitivity.” This will take you to the next analysis.
Figure 5.6: Your Specific Loss Sensitivity
For the five losses entered for XYZ Company, QuickMod.com has computed the impact that each loss had on the mod, what the mod would have been without that loss, and an estimate of the cumulative one-, two-, and three-year premium costs of the loss. This is one of the most effective ways to highlight the true cost of a loss in terms of increased premiums. XYZ Company can use this analysis to quickly compute the savings, thus preventing similar losses in the future. With this information, a more informed decision can be made concerning changes in operations or loss prevention services necessary to prevent and reduce losses. Next, click on the link, “Your Aggregate Loss Sensitivity.” This will take you to the next analysis.
Figure 5.7: Your Aggregate Loss Sensitivity
This analysis demonstrates the sensitivity of the mod to changes in the aggregate loss level. For XYZ Company, a decrease in losses of over 50% would be required to reach an average mod of 1.00. If XYZ Company continues to see a rise in losses, and losses increase by 50%, the mod would increase to 1.75. This analysis will help you quickly gauge the impact of aggregate changes in losses and will assist you in setting reasonable mod goals for your company.
Summary
The analysis produced by QuickMod.com will be unique for every company. The
calculations are driven by the unique characteristics of your company. This includes the job classifications, payroll levels, states of operation, and loss history. Each analysis will be interpreted differently depending on the unique results for your company. You may want to share the results of your analysis with your insurance advisor and discuss the appropriate steps necessary to Master Your Workers’ Comp Modifier!
Appendix 1: Glossary of Terms
Actual Excess Losses - the amount of losses that exceed $5,000. This is a measure of loss
severity. For example, an $8,000 loss is divided into $5,000 primary and $3,000 excess.
Actual Primary Losses - The first $5,000 of each loss. This is a measure of loss frequency.
For example, an $8,000 loss is divided into $5,000 primary and $3,000 excess.
ARAP - Assigned Risk Adjustment Program. Used in some states, this multiplier is designed
to surcharge assigned risk participants who have mods greater than 1.0.
Ballast Value - A table of these values is published for each state. The value increases with the
size of the company as measured in expected losses. The Ballast is found in both the numerator and denominator of the experience rating formula. The purpose of the value is to move all mods closer to 1.0 thus providing stability to the mod formula.
Controllable Mod - The portion of the mod that is a direct result of the company’s losses. Discount-ratio (D-ratio) - A value published for a given state and payroll code that
indicates the percentage of expected losses that are considered primary losses.
Effective Date - The date for which the mod is effective.
Expected Excess Losses - This value is computed based on the payroll, and the payroll code
for the company. The value is the expected losses minus the expected primary losses. This value represents the expected level of loss severity given the payroll and payroll code for a given state.
Expected Loss Rate (ELR) - A rate that represents average losses per $100 of payroll. This
value is published for each payroll code for each state.
Expected Losses - The product of the expected loss rate (ELR) and the payroll. This value
represents the average losses for the given job classification and payroll level.
Expected Primary Losses - The portion of the expected losses that are considered primary
losses. This value represents the expected level of loss frequency given the payroll and the payroll code for a given state.
Experience Rating Adjustment (ERA) - A change in the modification formula that
occurred in 1998. The most significant impact of this change is the reduction of medical only (IJ Code 6) losses by 70% in the modification formula.
Experience Rating Worksheet - The document that is used to communicate the mod
calculation to the company for whom it is calculated.
Injury Code - The code used to identify the type of loss. Most important to note is that IJ
Code 6 is the medical-only code. Medical-only (IJ Code 6) losses are reduced by 70% in Appendices
Minimum Mod - The lowest possible mod for a company. The mod when losses are set
equal to zero.
Mod Limit - A value that represents the maximum mod for a given level of expected losses. Payroll Code (also known as “class code”) - The four-digit identifier for a given job. This
value is used to identify a specific job and the corresponding ELR and Discount Ratio values.
Policy Period - A period of time that is covered by a specific insurance policy. Generally,
three policy periods are utilized in an experience rating calculation.
Small Loss - Loss amounts less than $2,000 that can be grouped together and utilized as a
lump sum value in the experience rating process.
Weighting Value - A table of these values (ranging from 0.04 to 0.80) is published for each
state. The value increases as expected losses increase. The value determines the percentage of actual excess losses utilized in the experience rating calculation.
Appendix 2: States Using NCCI
or Similar Methodology
The following states use the NCCI rating methodology or a similar formula to compute the workers’ compensation modifier (NOTE: California utilizes a different loss splitting formula, but this is accommodated for by QuickMod.com). You can use QuickMod.com to perform an analysis for these states.
AK AL AR AZ CA CO CT DC FL GA HI IA ID IL IN KS KY LA MA MD ME MI MN MO MS NC NE NH NM NV NY OK OR RI SC SD TN TX UT VA VT WI Appendices
Appendix 3: States That Have
Approved ERA
The following states have approved ERA. See Chapter 2 for an explanation of ERA.
AL AR AZ CT DC FL HI
ID IL IN KS KY MD ME
MI MN MS MT NC NE NH
NV OK RI SC SD TN UT
About the Author
Timothy L. Coomer, A.R.M., President, Specific Software Solutions, LLC
Tim founded Specific Software Solutions, a company that develops software solutions for insurance and risk management professionals, in 1990. Their products include the ModMaster, which is used by agencies, large insurance companies, and other risk professionals in a variety of industries to calculate and analyze workers’ compensation modification factors.
Loss Forecaster II is used to forecast losses and estimate required reserves for property and casualty losses. The company’s newest product, NPVision offers risk-management professionals a valuable tool with which to calculate and analyze the net present value of various alternative loss financing programs.
Prior to founding Specific Software Solutions, Tim worked as a risk-management consultant and product developer for Corroon & Black (now Willis) Advanced Risk Management Services. While at Corroon & Black, he designed several software products including a program to compute the workers’ compensation modification factor. He holds a Bachelor of Engineering with a double major in mechanical engineering and mathematics from Vanderbilt University as well as an M.B.A. from the Owen Graduate School of Management at Vanderbilt. He has been employed by Teledyne Brown Engineering where he was an engineer and systems analyst and contributed to Strategic Defense Initiative Programs. Although he was primarily responsible for the development of early versions of ModMaster, he now focuses on the company’s relationships with individual customers, professional associations, and corporate subscribers.
He is the involved father of four children, is active in his church, and maintains his pilot’s license.
T
his guidebook can save you thousands of dollars in workers’ compensation premiums by teaching you how to understand and improve the company-specific rating that determines your final cost – the Experience Rating Modification Factor (“Mod”). Combined with a one-year subscription to the “QuickMod” web site, this easy-to-understand set provides all the tools you need to analyze and control factors that influence your premiums. You’ll learn:•
How your Mod is calculated•
How to interpret your company’s Mod worksheet•
How to ensure that your rating is accurate•
How losses impact the premiums you pay•
How to generate a Mod analysis for your company online using your actual worksheet“Finally, a scientific way to gain control over worker’s compensation premiums!”— Caroline Taylor, Director – Human Resources “By calculating the premium savings we could derive from various safety programs, we were able to target
