How your experience modifier affects your bottom line
By Paul Praxmarer
The cost of workers’ compensation insurance would rank as one of the top five highest costs on a typical profit/loss statement for a company in the material handling industry. Your workers compensation insurance premium is determined by payroll, manual rate, insurer credits and debits, and your experience modifier. Controlling your experience modifier through claims management and safety programs are the only ways you can control your workers compensation costs.
How Does the Experience Modifier Work?
Payroll and losses are the main components in the calculation of the experience modifier. The experience modifier compares your actual loss experience with the expected experience of the industry average, which is valued at 1.00. If your losses are higher than the industry average, your cost of insurance will be higher than average. If your losses are lower than the industry average, your cost of insurance will be lower than average.
An experience modifier of 1.25 would indicate that you would pay 25 percent more in premium than that of the average firm in the industry. A company with a more favorable experience modifier of .85 would be paying 15 percent less than the average firm in the industry.
Understanding Your Experience Modifier
Having a clear understanding of your experience modifier and how it is calculated is vital to keeping your workers compensation insurance costs as low as possible.
In most states the experience modifier is calculated by the National Council on Compensation Insurance (NCCI). Other states such as California, Texas, Minnesota, Wisconsin, Indiana, Michigan, New York, Massachusetts, Pennsylvania, New Jersey, Delaware and North Carolina use different rating bureaus. These rating bureaus use a similar formula as the NCCI. There are four monopolistic states, Washington, Wyoming, North Dakota, and Ohio. In these states, the workers compensation coverage is handled through the state. A similar formula is used in the monopolistic states.
Each year, insurance carriers report workers compensation class codes, payroll by class, and loss information by class to the calculating bureau, exactly six months prior to the policy’s expiration date. Three historical years of loss experience information and payroll data are used when calculating an experience modifier. Three years of data are used to prevent against skewed results that would occur if only one year was used. The current year of data is omitted from the calculation since it is reported prior to the expiration of the policy. Also, the payroll audit has not been completed.
A high experience modifier can not only increase operating costs, but decrease sales. Many large customers will not allow a vendor on their premises if their experience modifier is over 1.05. Risk managers at large facilities will require a prequalification form which will request your experience modifier.
Small medical only claims are considered at 70 percent value in the calculation of the experience modifier. The first $5,000 of lost time injury claims are considered at full value. Claims over $5,000 are not considered at full value. Catastrophic claims are subject to a cap, so that the experience modifier is not distorted. In 2011, catastrophic claims were capped at $370,500.
Frequency vs. Severity
Even though smaller claims are not valued at 100 percent, the frequency of these claims has a much larger impact on your experience modifier than a single severe claim. For example, a company with ten $5,000 claims would have an experience modifier of 1.25. If that same company had only a single $50,000 claim, their experience modifier would be substantially lower at .95.
Reducing your Experience Modifier
Minimizing frequency is fundamental to reducing your experience modifier. Safety programs should be in place to help promote a safe work environment. Proper training will help to reduce the number of employee injuries.
A medical only deductible could also be considered. This would allow you to absorb the cost of smaller claims by paying for the claims that would be valued below the deductible. A typical medical deductible is $1,000.
Report your claims to the insurance carrier as soon as possible. The insurance carrier can help to mitigate the claim and keep resulting costs low. According to Hartford Financial Service Group’s study, claims reported 7-14 days after the incident were 18 percent more expensive than claims filed in 1-6 days. Claims reported 15-28 days after the incident were 30 percent more expensive. Claims reported 29 days or more after the incident were 45 percent more expensive. The impact of late reporting is illustrated below.
It is also possible to arrange a FYI reporting program with your insurance carrier. Your carrier will be placed on notice, but these small claims will be paid by your company at your own expense. As a benefit, these claims would not be reflected in your experience modifier.
Encouraging employees to return to work as quickly as possible will also help keep your experience modifier low. A return to work program will help to reduce medical, legal, and disability claim costs. The program also shows concern for employees’ well being and will improve employee morale. When employees return to work, your productivity will also increase.
Audit Your Own Experience Modifier
It is also important to verify that your experience modifier is based off of correct information. Mistakes can be made when carriers submit the statistical information to the rating bureaus. Be sure that accurate payroll figures are allocated to the correct class. You can verify the information by comparing three years of loss history and payroll records to you experience modifier worksheet.
A more common error can be found in the value of open reserves. The open reserves represent the projected amount that will be paid on the claim. This reserve is set by the claims adjuster at the insurance carrier and is based on the medical condition of the injured worker. It is imperative to get your broker involved in the claim and work with the adjuster to ensure that the reserves are set appropriately and are accurate.
Failure to remove the reserves for closed claims from the rating data will also make a negative impact on your experience modifier. Be sure that closed claim amounts are reflected appropriately.
It is also very important to check if a claim has been subrogated against another. For example, if your driver was rear-ended and is severely injured by another vehicle, with adequate insurance, the claim would be subrogated against the at fault party. The amount of subrogation should be removed from the loss portion of your experience modifier calculation.
Remember, statistics are submitted to the rating bureau exactly six months prior to the expiration date of the policy. After the statistics are submitted, you will not be able to lower the reserves that are used in the calculation of your experience modifier unless it is a simple typographical error. An adjuster lowering a reserve as the claim progresses is not a typographical error.
With some effort and understanding, you can keep your experience modifier below the industry average, resulting in safer employees and greater revenue.
Paul Praxmarer is executive vice president of Corkill Insurance Agency, Inc. For more information call 847-758-1000, or visit www.corkillinsurance.com.