The Impact of Experience Rating on Your Workers Compensation Premium

Understanding Your Workers Compensation Premium

 READ PART A HERE

PART B:

Experience Mod Factor

 

A quick review:
We now know that class codes are used across the insurance industry to categorize different jobs by the risk of the work performed by employees. Class codes are factored into your premium calculation to account for the likelihood of injury for that category of work.

We continue our review of the key cost-driving factors by delving into the second factor in premium formulation – the Workers Compensation Experience Modification (Mod).

The Basics:
The workers compensation “experience modification number” is a rating prepared by the National Council on Compensation Insurance (NCCI). A handful of states use their own system, but we’ll concentrate on NH where NCCI prepares it.

Based on a 3 year period, companies that have paid at least a certain amount in work comp premium, receive mandatory experience rating.

The Purpose
What is the purpose of the experience rating? Insurance companies are able to take on your individual risk at a reasonable cost by spreading or sharing your risk with other customers within your industry. This is a basic
mechanism of insurance.

In a sense, you are not paying premiums just to cover your potential annual losses. Your premium will help to
pay losses accrued by everyone. Let’s say you were loss-free in 2016. Then in 2017 you have a loss that is almost twice your annual premium. Carriers will be able to cover your 2017 loss because of the other companies who, similar to your 2016 year, have contributed more premium than the cost of their losses. That surplus is what carriers use to pay for that big loss of yours in 2017.

In our review of class codes, we discussed that different occupations present different levels of risk. In a similar fashion, each employer presents a different level of risk compared to others in their industry. Two different general contractors can have very different approaches to safety and training. Those two contractors still fall into the same class code, so class codes alone clearly fail to capture the whole story. That’s where your mod factor comes in; to illustrate your operation’s unique level of risk based on your recent history.

 

Your premium 

Your Mod compares your actual claims history to your expected claims history based on your size and industry.

If your claims are higher than expected, you will be given a debit Mod (greater than 1.0); if your claims are lower than expected, you will be given a credit Mod (below 1.0); and if your actual claims match your expected claims, your Mod is neutral at 1.0

As you may expect, it’s a lot more complicated than that quick overview but this explanation is intended for the purpose of understanding the basics.

 

In Practice

 

To Illustrate how your Mod affects your premium, let’s take a look at a few scenarios:

 

Now you have a broad-brush understanding the purpose of experience modification numbers, but the question remains; Why does knowing this help you? 

Your Mod has a direct impact on your premium. The fact that you actually have some degree of control over it, makes it notably important. If you pay attention and employ loss management strategies, your Mod will probably stay low.

Here are some things you can do to keep your experience modification number low:

 

Keep tabs on it:

Review your NCCI report with your agent/broker at least annually to stay on top of how your Mod is trending and make sure the data is accurate.

File claims quickly:

Have an efficient procedure for filing claims. The sooner the provider is notified, the sooner a claims professional can begin to validate the claim, determine and approve benefits, verify and monitor medical expenses, and do what they can to help your employee get back to work. Which brings us to..

Get employees back to work quickly:

Adopt a return to work and/or temporary alternate duty (TAD) program in place to encourage employees to get back to work as soon as possible. The longer an employee is out of work, the harder it is to get them back. So get them back to work as soon as possible, even if it is only for a few hours a week or doing something that is outside of their normal duties.

Implement and monitor a safety program:

Make workplace safety a priority in your business. Not only will this help you maintain a healthy Mod but it may have the added benefit of creating a culture where your employees feel they are being cared for.

Incentivize time without incidents:

Small but more frequent claims will have more of an impact on your Mod than one large claim. One method to encourage safety in the workplace is by giving employees a special treat or a small bonus for reaching defined periods of time without and injury.

Get buy in from the top down:

In many organizations, the employees will not take these steps seriously unless their direct supervisor is taking it seriously. As the owner, partner, executive, or GM safety begins with you. Your managers and supervisors have to understand how important it is to the organization so they will, in turn, relay its importance to your lower level employees.

 

Understanding NH Workers Compensation Premium: What’s your class code?

Written By:

Jeff Reardon, AAI

Commercial Account Executive

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Have you ever looked at your worker’s compensation bill and wondered, “How did they come up with this price!?”  Well to answer your question, it’s basically calculated using a three-part formula. Still unclear? Understandable. That’s why I’m going to explain each part in a series of quick-read, posts. By the end, you’ll understand the numbers used to calculate your premium and the formula for doing so.

This is part A of the formula.

Part 1: Your Workers’ Compensation Class Codes

The first component we’ll look at is the workers’ compensation class code. The codes are established by The National Council of Compensation Insurance (NCCI); an independent organization that analyzes industry data.
Using data on the severity and frequency of claims within a specific industry, NCCI categorizes different jobs into class codes that represent the level of risk* associated with the industry/occupation it is assigned to.

*When we are taking about workers compensation “risk”, we are referring to the likelihood of an employee being hurt while on the job.

Keep in mind; your workers compensation policy is a contract between you and the carrier. It says that they agree to pay for an employee’s work-related injuries, in exchange for your annual premium (more or less). It makes sense that premiums would generally increase as the chance of injury increases.

Class codes help carriers account for the variation in risk from one job to another, so they can calculate an appropriate premium.

To highlight this concept, let’s compare two very different occupations:

New Hampshire Workers’ Compensation Voluntary Market Rates for 2018:

Carpenter (5403): $9.01

Accountant (8803): $0.08

As you can see, the accountant will pay much less than the carpenter because the accountant is much less likely to suffer  from an on the job injury (according to NCCI).

How does this apply to YOUR industry?

There are usually a variety of class codes that apply to the work performed in a given industry. You can find them all listed on the NH Insurance Department Website, where you can compare the qualifiers for different class codes, and the rate assigned to them. To get an idea of how this applies to you, search for any job that you pay an employee to do. Look at the definition and the “related” class codes. Do you think any of them apply to the scope of work done in your operation? Is the variation in rates between two class codes, what you would expect based on the variation in risk?

The Takeaway

The formation of your worker’s compensation premium begins with determining which class code(s) is the best fit for your business. Therefore, it is important for you to know a little about how they work and more importantly, what class code accurately classifies the work your employees do. I’m a big fan of “trust but verify” and chances are you have been assigned the right code; however, it cannot hurt to have a conversation with your advisor to make sure this is true.

Keep an eye out for Part 2: Your Workers Compensation Modification Factor.

Written by:

Jeff Reardon, AAI

Commercial Account Executive

Don’t be shy! Email me your insurance questions & requests.