Solving the Mystery of the Mod
Are you aware that the largest driver in your Workers Compensation premium is something that you can actually control? Let’s debunk the Mystery of the Mod (Experience Modification Factor) and the data used behind to help identify ways to minimize your workers’ compensation premium.
- MYSTERY #1 - Do all companies have a mod, and why does it matter?
The mod factor is a number that represents whether a company’s workers’ compensation losses are better or worse than average in their respective industry. The mod works as a credit or debit that is applied to your workers’ compensation manual premium. A mod factor greater than 1.0 is a debit mod, meaning losses are worse than expected and a surcharge is added to your premium. A mod factor less than 1.0 is a credit mod, meaning losses are better than expected, resulting in a discounted premium.
Many factors affect whether a company is experience rated. In general, very small companies may not be eligible. The determination is based on the sum of a company’s payroll by classification code multiplied by the pure premium rate for that code. If this total exceeds $6,000 (changes yearly) then the company is experience rated.
- MYSTERY #2 - Who calculates the mod?
In New Jersey, the New Jersey Compensation Rating & Inspection Bureau (NJCRIB) calculates employers’ experience modification factors. The NJ is a private, nonprofit association comprised of the companies licensed to transact workers' compensation insurance in the state.
Outside of New Jersey, most other states use the National Council on Compensation Insurance (NCCI) to perform a similar function. However, the following states also have their own rating bureaus similar to NJCRIB: Delaware, Indiana, Massachusetts, Michigan, Minnesota, New York, North Carolina, Pennsylvania, Texas and Wisconsin.
- MYSTERY #3 - How is a mod calculated?
The process of calculating the mod is complex, but the underlying theory and purpose of the formula is straightforward. Your company’s actual losses are compared to its expected losses by industry type. The formula incorporates factors that account for company size, unexpected large losses and the difference between loss frequency and loss severity to achieve a balance between fairness and accountability.
- MYSTERY #4 - What is the experience rating period?
The mod is calculated using loss and payroll data for an experience rating period. The experience rating period typically includes data for three policy years, excluding the most recently completed year. Three years of data is used to provide a more accurate reflection of the losses, smoothing out the impact of any exceptionally bad or good year for losses.
For example, for a mod factor calculated on 1/1/19, data would be used for the 1/1/15-16, 1/1/16-17 and 1/1/17-18 policy periods. The data for the 1/1/18-19 policy period would be excluded because the losses for the recent policy period have not fully developed yet.
- MYSTERY #5 - How are the losses rated?
The actual loss data is split rated into normal and excess pools. In New Jersey, normal losses, which are the first $7,500 of every loss, measure frequency (# of losses). Excess losses—or amounts more than $7,500—measure severity ($$$ of each loss).
Normal losses are an indicator of loss frequency and the formula penalizes frequency by including all loss amounts in the calculation. The reason for this is that these types of claims can be controlled through proactive loss control programs. Large losses are capped at levels that can vary each year. This minimizes the impact that any single claim can have on your premium.
Expected losses are then calculated using your payroll data by class code and applying the Expected Loss Ratio (ELR). ELRs are provided by NJCRIB, broken into normal and excess and are updated on an annual basis. Credibility factors, also supplied by the bureau and determined based on expected losses, are applied in a final step of the calculation.
- MYSTERY # 6 - How do the losses compare?
The final mod calculation compares your actual normal and excess loss figures to those expected for a company of the same size and industry type based on payroll codes. To understand how workers’ compensation losses to your business compare to state industry averages, contact your Account Executive at Borden Perlman to review your experience modification worksheet.
- MYSTERY #7 - How can you control your mod?
Your mod factor has a direct impact on your workers’ compensation premium. The loss-free rating value shows you how low your mod could be if you had no losses. The key to achieving the lowest possible mod and thus controlling your insurance costs is accident prevention. Creating a safe work environment for employees will have a direct impact on your mod and ultimately your Workers' Compensation premiums.
Hopefully the Mod is no longer shrouded in mystery but rather a comfortable term, empowering you with information to control and minimize your Workers Compensation costs to free up capital to grow your business.