Although workers’ compensation may seem complicated, only two factors affect your workers’ compensation costs: your employees’ job classifications and your experience modification factor.

Rating bureaus publish rates for hundreds of different job classifications, shown as rate per $100 of payroll. These rates are based on the relative hazards of each occupation. For example, it costs more per $100 of payroll to insure roofers than computer programmers, since roofers are more likely to experience severe on-the-job injuries. To avoid overpaying, you will want to review your company’s occupational categories to make sure your employees haven’t been misclassified.

You can’t change your employees’ job classifications: if an employee performs the duties of a roofer, then your insurer will classify him/her as a roofer. But you do have control over the other variable that affects your workers’ compensation costs: your experience modification factor, often referred to as an ex-mod or mod.

Stated simply, an ex-mod is a multiplier that relates to your claims experience. By multiplying the base rate for the applicable occupational class times your ex-mod, an insurer can reward or penalize you for your claims experience.

In most states, your premiums must exceed a certain minimum amount for the ex-mod to apply. If you do not pay enough in premiums, your organization will have a “minimum premium policy,” in which ex-mods do not apply.

Insurance companies send information on employers’ premiums and losses to the state’s rating bureau. The rating bureau then calculates ex-mods based on the employer’s paid claims and incurred losses for the “experience period,” generally the three years prior to the last policy renewal date.

To calculate your ex-mod, expressed as a percentage, take your total actual losses for this period and divide by the total expected losses, or average losses by $100 of payroll per job classification. An employer with actual losses of $253,563 and expected losses of $352,051 would calculate the experience modification as follows:

253,563 / 352,051 = 72%

However, it’s not as simple as all that. Not all losses are weighted equally. And rating bureaus use “weighting values” and “ballast values” to arrive at ex-mods that more accurately predict your company’s losses.

Following is the actual formula for calculating an experience modification factor:

What do these terms mean?

  • “Primary losses” are the first $5,000 of any loss; “excess losses” are all loss amounts over $5,000. Losses up to $5,000 are included in full. Losses in excess of $5,000 are included on a discounted basis. In practical terms, this means that smaller losses have a bigger relative impact on your ex-mod than larger ones do.
  • The “ballast value” and “weighting value” attempt to correct for the size of the risk. In statistics, the larger the pool sampled, the more accurate the sample is. Calculating ex-mods works in the same way — the larger the payroll base, the more accurately you will be able to predict your losses.

The resulting experience modification factor is expressed in a number that generally ranges from .75 to 1.75. An experience modification of 1.00 indicates your losses reached the expected dollar amount. A number higher than 1.00 indicates that your risk of loss is greater than average, while an ex-mod of less than 1.00 indicates your risk is better than average. If you meet the minimum premium levels, you can control your workers’ compensation costs by keeping your ex-mod low.

Keeping Ex-Mods Low

Keeping ex-mods low requires controlling workers’ compensation claims. Focus on controlling the smaller, more frequent losses —they will impact your ex-mods more than less frequent, larger losses. Insurers view this from the standpoint that companies with frequent small losses aren’t as concerned about safety, and are eventually going to have a very expensive catastrophic loss.  As counter intuitive as it may sound, they actually “favor” severity over frequency in their rating formulas.

Next, you’ll want to periodically review your payroll and claims information for accuracy. Make sure your payroll data is accurate and your experience mod calculations include data from the proper years. And keep tabs on loss reserves — unused loss reserves affect your experience modification.

We can help you understand your experience modification factor and help you develop loss mitigation strategies to lower your ex-mod, provide safety training in areas where losses are occurring, and help get injured workers navigate the workers’ comp system in Connecticut so they can get back on the job ASAP.