Experience rating is the main pricing component of your workers’ compensation policy that you can directly impact. It’s essentially a method for determining whether your business’ losses are better or worse than expected.

The state rating bureau or the National Council on Compensation Insurance (NCCI), an organization that administers workers’ compensation on behalf of most states, evaluates your business’ loss and payroll history and compares your loss experience with the average loss experience in your industry. From that data, an experience modification (ex-mod or mod) is created. Your experience mod is unique to your business. This factor will either increase or decrease your overall workers’ compensation premium. If your mod is over 1.00, your business compares unfavorably to other businesses in your industry. If your mod is below 1.00, your business compares favorably to other businesses in your industry.

Reducing your losses by taking an active role in employee safety will help improve your mod and save your business money! When you have no actual losses in your experience period, you are utilizing the best mod available to your business.

How am I doing compared to my peers?

Now let’s compare your company’s losses to the industry average, also known as your industry benchmark total loss ratio. On your mod worksheet (available from NCCI), find your total actual losses (box H) and total expected losses (box D). If your actual losses are lower than your expected losses, you’re doing better than average.

Divide the actual by the expected to obtain your industry benchmark total loss ratio. Let’s say your total actual losses were $50,000 and your expected losses were $70,000. Your total loss ratio would be .71 and this means your losses are 29% better than your competitors!

You can use this same calculation with the primary and excess portions of your losses. This would give you your primary loss ratio and your excess loss ratio. The primary portion of losses measures the frequency of claims, while the excess portion measures the severity of claims. By calculating your primary and excess loss ratios, you’ll be able to assess whether your business is doing better or worse than the industry average in frequency and severity.

The frequency of losses tends to impact your mod more than the severity of a single loss. Frequency is a better predictor of future claims and can indicate training or safety issues that should be addressed.

Understanding medical only (or med only) losses

In most states, the claim cost is reduced by 70% when a claim is medical only (no lost time from work). You can identify a med only loss on your experience rating worksheet by looking at the injury (IJ) code next to each claim. An injury code of six (6) indicates the claim is med only and did not involve an indemnity component, usually incurred when an employee does not return to work in a specified number of days. Getting employees back to work as soon as possible can save you mod points, which in turn saves you money!

IMPORTANT FACTORS TO KEEP IN MIND

1. Not every business will qualify for experience rating. A business’ eligibility is based on premium size and this varies by state.
2. The experience rating period typically consists of the prior three policy years, not including the most recent expiring policy. So your 2014 mod will include policy data from your 2012, 2011 and 2010 policies.
3. Each loss will typically impact your mod for a three-year period.
4. The claim values on your experience rating worksheet are a snapshot of the claim activity as of the worksheet valuation date. The valuation date is always the 18th month from your policy effective date. If your policy is effective in June 2014, the data reported on your future 2016 experience rating worksheet will be valued as of Dec. 31, 2015. And while claim activity could change after that date, the adjustment will not take place until the next valuation date in December 2016.
5. Changes in ownership can affect experience rating. Any entity that experiences ownership changes, such as a merger, acquisition, or sale, transfer or conveyance of all or a portion of their ownership interest/physical assets, is required to notify their insurance carrier within 90 days of the change.
6. Reducing losses will reduce your mod and your premium, but it’s an effort that takes time.

Here are some questions you should be asking yourself:

• Do I need to improve my hiring practices?
• Have I implemented a return-to-work program?
• Am I providing adequate safety training?

Protective Insurance has many resources available to help you implement the proper loss prevention measures for your business. Visit protectiveinsurance.com/mod to learn how to implement a program to improve your loss experience and your mod.

For additional guidance, email lossprevention@protectiveinsurance.com or call (800) 644-5501 and ask for our Loss Prevention & Safety Services Department.