Workers’ compensation insurance can be a complicated topic for business owners. With terms like “experience modification factor” (Experience Mod ) and “expected losses,” it’s no wonder that many people feel confused when trying to figure out what it all means.
In this article, we’ll take a closer look at the experience modification factor, how it’s calculated, and what it means for your workers’ compensation insurance premiums. Whether you’re a small business owner or a larger corporation, understanding the Experience Mod is key to managing your insurance costs and keeping your employees safe.
What is an Experience Modification Factor?
At its core, the experience modification factor is a number that reflects your company’s workers’ compensation claims history compared to other companies in your specific industry. It’s a way for insurance companies to adjust your workers’ compensation insurance premiums based on the likelihood that you’ll have future claims.
Here’s how it works: every year, your state’s workers’ compensation rating bureau or your insurance company’s underwriters will look at your company’s payroll and workers’ compensation claims history over a period of three years, excluding the current policy year. They’ll then use a complex formula to calculate your experience modification factor based on your actual losses compared to your expected losses.
The formula takes into account both the frequency and severity of your claims, as well as your company’s size and payroll. A company with an Experience Mod of 1.0 has average claims experience for its industry. If your company has fewer and less severe claims than the industry average, your Experience Mod will be lower than 1.0. And in contrast, if your company has more or more severe claims, your Experience Mod will be higher than 1.0.
How is an Experience Modification Factor Calculated?
To understand how the experience modification factor is calculated, let’s take a closer look at the formula:
Actual losses / Expected losses = Experience Modification Factor
Actual losses are the total amount of money that your insurance company paid out for workers’ compensation claims in a given year. Expected losses are calculated based on the average claims experience for businesses in your industry. The exact formula used to calculate expected losses varies by state but generally considers your payroll and the type of work your employees do.
Once your actual and expected losses are calculated, they’re divided to give you your experience modification factor. If your Experience Mod is below 1.0, you’re typically paying less for workers’ compensation insurance than a similar company with a higher Experience Mod. If your Experience Mod is above 1.0, you’re likely paying more than your competitors.
It’s worth noting that experience mods are generally assigned to employers whose annual workers’ compensation premiums are above a certain threshold set by the state they operate in. If you have operations in multiple states, your experience mod will be calculated by the National Council on Compensation Insurance (NCCI).
How Does the Experience Modification Factor Affect Your Workers’ Compensation Insurance Premiums?
The experience modification factor can significantly impact your workers’ compensation insurance premiums. To recap, if your Experience Mod is higher than 1.0, you’ll pay more for insurance than a company with a lower Experience Mod. On the other hand, if you can keep your claims experience low and your Experience Mod below 1.0, you’ll save money on insurance costs.
For example, let’s say your company has an annual workers’ compensation premium of $50,000. If your Experience Mod is average or 1.0, your insurance company will charge you the full $50,000. But if your Experience Mod is 0.75, your insurance company will reduce your premium to $37,500. That’s a savings of $12,500 per year!
In addition to impacting your insurance premiums, your experience modification factor can also affect your ability to bid on certain jobs or contracts. Many construction companies, for example, require contractors to have a minimum experience modification factor in order to be considered for a project. If your Experience Mod is too high, you may be disqualified from bidding on certain jobs, which could impact your bottom line.
How to Keep Your Experience Modification Factor Low
The good news is that you can take steps to keep your experience modification factor low and your workers’ compensation insurance premiums under control. Here are a few tips:
- Focus on safety: The best way to keep your Experience Mod low is to prevent workplace accidents and injuries from happening in the first place. Make sure that your employees are properly trained, that safety protocols are in place, and that everyone is following the rules.
- Report claims promptly: If an employee gets injured on the job, report the claim to your insurance company as soon as possible. Delayed reporting can lead to higher claim costs and a higher Experience Mod.
- Manage claims effectively: Work closely with your insurance company and the injured employee to manage the claim effectively once a claim is reported. This includes providing medical treatment and rehabilitation services and staying in touch with injured employee to ensure they get the care they need.
- Work with an experienced insurance broker: An experienced insurance broker can help you navigate the complex world of workers’ compensation insurance and keep your premiums under control. They can also help you identify areas where you can improve your claims experience and lower your Experience Mod.
Understanding your experience modification factor is key to managing your workers’ compensation insurance costs and keeping your employees safe. By focusing on safety, reporting claims promptly, managing claims effectively, and working with an experienced insurance broker, you can keep your Experience Mod low and your insurance premiums under control.
If you’re unsure about your company’s Experience Mod or how it’s impacting your insurance premiums, reach out to our team of Risk Management Experts for more information. Mention this blog, and we’ll provide you with a detailed breakdown of your claims history and help you identify areas where you can improve free of charge. With a little effort and attention, we can help control your workers’ compensation insurance costs and protect your bottom line.
