It's a mod, mod, mod, mod world: split plan creates chance to reduce premiums
By Nancy Grover
The experience modification factor, or ex-mod, represents a company's payroll and losses and is used in most states to determine workers' comp premiums. A higher mod results in higher premiums. Companies that understand how their ex-mods are calculated stand a better chance of lowering their workers' comp premiums, especially with the upcoming changes to the so-called split plan.
"Something employers often do not understand is that the experience mod causes workers' comp policies to behave more like a line of credit than a typical insurance policy," said Kory Wells, product director of broker analytics for Zywave Inc. "Almost always, the employer, not the insurance company, ultimately pays for claims because of the effect they have on the mod over three years. Every injury an employer experiences impacts the mod and thus insurance premiums for three years."
Split point. Actual incurred losses in the mod are divided at the "split point" into a primary and an excess portion. The primary losses are given full weight in the experience rating formula while actual excess losses only receive partial weight.
The split point for the last two decades has been $5,000, meaning the first $5,000 of a loss goes to the primary with the remainder going to the excess.
"The purpose of dividing it up is that primary losses -- the way they are represented in the formula -- are a measure of frequency," Wells says. "The excess is meant to be a measure of severity of losses. The way the formula works [is that] a relatively low number of severe, or high dollar losses, won't impact the mod as much as a lot of smaller losses."
NCCI has proposed increasing the split point to be more in line with current claims costs. As the rate-making organization explains, because of the increase in the average cost of claims, the portion of each claim that is included in the experience rating formula at full value is much smaller than what it was originally.
"It was tending to make most risks have more excess losses over time," Wells says. "In moving the split point, it allows the rating plan to become more sensitive and operate the way it is supposed to."
The impact to employers will vary, depending on the number of claims they have that exceed the new split point values in 2013 and beyond. In general, employers who have credit mods -- under 1.0 -- will tend to become more favorable, and debit mods -- over 1.0 -- will tend to increase.
The effect on individual employers may be to drive their premiums up or down, depending on their payroll classifications and loss experience that applies to their 2013 mod, typically the 2009-11 policy years.
"The best short-term action is to simply be prepared for the change; an insurance professional can help estimate the vulnerability to an increase," Wells says. "Evaluation of open claims, since reserves affect the mod, is also recommended. Over the long term, employers can take action to lower their mod."
Actions to drive down mods and premiums. Looking at a mod worksheet tells a story of a company's past "and its path to a best possible future," Wells said. "A mod of 1.0, although often a requirement for a company to win contracts and do business, is by no means a perfect score. In fact, it is only average, like a C on a report card."
Using the minimum, or loss free mod, can help identify the potential savings in workers' comp premiums. The loss free mod is the value of the mod if the employer were to experience no losses at all. "It is a real and attainable value, and [it] changes from year to year," Wells said. "The premium associated with this mod value is what the employer could be paying in workers' comp premiums. ... The difference between the current mod and the loss free mod -- called the controllable mod -- represents the money an employer could be saving in premiums."
Wells says companies that closely examine their mod numbers can determine what is driving them and work to reduce them. For example, to test for a severity issue, divide actual excess losses by expected excess losses -- 1.0 or higher needs attention.
"If their primary is what is driving their mod, it means they probably have safety or training issues that are causing losses to occur," she said. "Severity will point toward return to work being an issue they need to look at or possibly injury management."
Wells recommends the following actions to monitor and improve the mod:
- Training supervisors on communicating with injured workers.
- Familiarizing employees on RTW as a benefit of employment.
- Improving hiring practices.
- Implementing safety programs.
- Preparing for a premium audit and monitoring open claims.
- Forming relationships with medical providers.
Read more at the WorkersComp Forum homepage.
April 16, 2012
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