Why Assuming Your Workers Comp Experience Mod is Correct Could be a Dangerous Calculation
This article illustrates the importance and complexity involved in making sure a company's workers compensation experience mod is calculated correctly.
Quick Mr/Mrs/Ms Businessowner! What does the following formula mean to you?
M = AC+E(LC)+E(1.00-C) / E
No. It has nothing to do with Einstein's famous equation. However, it could mean the difference between a fat bottom line or permanently hanging up the "closed" sign. Give up yet? It's the calculation that determines your workers compensation experience modifier (mod). You know, the number that can save you or cost you thousands on your workers comp premium.
Just in case you've forgotten, most businesses are assigned a number based on their workers compensation claims history. In Pennsylvania, this number is calculated and placed on your workers compensation policy by the Pennsylvania Compensation Rating Bureau (PCRB). The PCRB calculates the expected losses for each class of business in the Commonwealth. The number 1.000 means that your organization's workers compensation losses are average for your line of business. A number over 1.000 (such as 1.100) means that your company's losses are higher than expected. A number under 1.000 (such as 0.900) means that your losses are lower than expected. But what it really means is that you are either surcharged or credited based on your loss history.
For instance, let's say you run a construction company. Assume that your workers compensation premium is $100,000 for your carpenters, salespeople, and clerical staff. If your claims are in line with what is determined to be average for a construction company, your premium will remain $100,000. However, if you've experienced more claims than usual, your mod might be 1.105. Therefore, your premium would be $110,500 or 10,500 more than average. On the other hand, if you had fewer claims, your mod might be 0.850. Your premium would be $85,000. Thus the difference between a 1.105 mod and a 0.850 mod is $25,500 for this hypothetical company. Do you think the company with a lower mod could gain a competitive advantage? Do you think the company with the higher mod could have its long term viability threatened?
So now that we understand why calculating your mod is important. Let's review just how it's calculated. Here are the steps necessary in the equation above.
1. (A) Actual losses are multiplied by (C) Credibility;
2. (E) Expected losses are multiplied by the (L) limitation charge times the C) Credibility.
3. (C) Credibility is subtracted from 1, the result of which is multiplied by (E) Expected losses
4. The results of steps 1 through 3 are added together and divided by (E) Expected losses
Actual losses are determined by your insurance company. The Credibility, Expected losses, and Limitation charge are listed in the PCRB rating manual.
So that was easy wasn't it? I forgot to mention that there are several other rules that will factor into your ultimate assigned mod despite completion of the mod equation. For instance, despite what the number comes out to be, it cannot be more or less than 25% of your prior year's mod.
Now let's talk about why you need to keep an eye on this. Obviously, an incorrectly calculated mod could have a serious impact on your bottom line. And the shear complexity of the calculation and all the rules and sub-rules it's subject to lend itself to error. The PCRB gets your claims history from your insurance company. All it takes it one comma or decimal point to be misplaced somewhere in the exchange of data (throughout a rather complex calculation) for you to be financially impacted. The figures used in the calculation are readily available from the PCRB and your insurance carrier. Therefore you may want to sharpen your pencil and breakout your calculator once a year and double check the "official numbers". Doing so could pay big dividends.
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ABOUT THE AUTHOR
Eric D. Patrick is an attorney and Chief Operating Officer of Consumers Insurance Agency Inc. http://www.consumers-insurance.com . He also engages in insurance consulting and legal work through The RiskAssure Consulting Group. Please contact him for further information.