Workers Compensation is a mandatory coverage and there’s no way a legitimate business can get around purchasing a policy.
Since the coverage is mandatory, business owners should monitor their exposures to ensure they are not paying more for their Workers Compensation policy than is necessary. One way to save on Workers Comp premiums is to keep close track of the policy’s experience modification.
What is a Workers Comp Experience Modifier (Exp. Mod)?
An experience modification is a factor that is applied to the workers comp premium. The modification number is based upon loss experience. A company with good loss experience is rewarded with a credit mod. Conversely, a company with poor loss experience is penalized with a debit mod.
How Experience Modifications Work
A brand new business starts out with a neutral experience mod of 1.0. It takes four years of a company being in business in order to benefit or be penalized by an experience mod. Mods are calculated based on three years’ worth of loss experience excluding the most recent policy year’s losses.
The National Council on Compensation Insurance (NCCI) promulgates experience mods by gathering loss information on businesses of similar size and similar type. NCCI crunches numbers to develop an industry average on which the experience modification is based. A credit mod means a business has losses lower than industry average losses and a credit mod means the opposite.
Although a business owner cannot control how NCCI derives the industry average losses, the owner can control her own company’s Workers Compensation losses in an attempt to earn a favorable experience mod.
Monitoring Workers Comp Claims
It is important for the business owner or her insurance agent to keep track of the incurred losses. Incurred losses are the amount the insurance company actually paid in claims plus the amount in reserve for future claims that have yet to be settled. The amount paid is a definite figure, but reserves can serve to inflate the actual loss numbers.
Reserves are not numbers that are etched in stone. They vary depending on the type of injury, seriousness and duration of the claim. Wise insurance professionals learn to review loss information and challenge outstanding reserves to see if they are appropriately set. Negotiating the reserves to a lower amount benefits the business owner as it reduces the incurred losses, thus improving the business loss experience. Doing so has a favorable impact on the experience modification. Understand, however, resetting the reserves is an ongoing process as claims mature.
Workers Compensation Safety Programs
Instituting safety procedures and programs is another way to lower workers comp premiums. Successful safety programs reduce the number and severity of claims. While there may be an initial investment upfront to institute the safety procedures, it can potentially pay for itself several times over through lower losses and favorable experience mods. Larger companies especially benefit from safety programs.
In the long run, keeping a close eye on the existing losses to see how they trend in addition to implementing safety procedures can go a long way to lowering experience modification factors and in turn lowering the Workers Compensation premium.