Understading the Calculation and Impact of The Experience Modifier

Understanding the nature of the Experience Modifier and how it works is very important. The Experience modifier or experience modification is a term used in the insurance business and more specifically in workers' compensation insurance. It is the adjustment of manual premium based on previous loss experience. Usually three years of loss experience are used to determine the experience modifier for a workers' compensation policy. The three years typically include not the immediate past year, but the three prior. 

 

Two misconceptions about the Experience Modifier are that it is set by state agencies and that it is factored using data specific to each business. 

The Mod Factor is not calculated by the state. In nearly every state, Experience Mods are calculated by rating bureaus. The NCCI is the approved bureau in most states, but basic approval is the extent of any official capacity.

Many people believe the Experience Modifier to be factored by comparing a company's past premiums with past losses. That seems to make sense, however, the experience modification forumula compares actual reported loss information for that particular employer with average loss data for all employers in that state who are also in the same classification codes.

 

The experience modifier adjusts workers compensation insurance premiums for a particular employer based on a comparison of past losses of that employer to what is calculated to be "average" losses of other employers in that state in the same business, adjusted for size. To do this, experience modifier calculations use loss information reported in by an employer's past insurers. This is compared to a calculation of expected losses for a company in that line of work, in that particular state, and adjusted for the size of the employer. The calculation of expected losses utilizes past audited payroll information for a particular employer, by classification code and state. These payrolls are multiplied by Expected Loss Rates, which are calculated by rating bureaus based on past reported claims costs per classification. 

 

Experience modifiers are normally recalculated for an employer annually. Each year, a newer year's data is added to the three year window of experience used in the calculation, and the oldest year from the prior calculation is dropped off. The other two years worth of data in the rating window are also updated on an annual basis 

Since the mod is calculated based on data reported to the rating bureau by an employers' past insurers, incorrect or incomplete data can cause incorrect experience mods. It can be worthwhile for employers to review these mod calculations, to make sure the calculation is complete and accurate.

 

Errors in experience modifiers can occur if inaccurate information is reported to a rating bureau by a past insurer of an employer. Most states allow increases in experience modifiers if done relatively early in the term of the workers compensation insurance policy, and most states prohibit increases in experience modifier late in the term of the policy.

 

The detailed rules governing calculation of experience modifiers are developed by the various rating bureaus. Although all states use similar methodology, there can be differences in details in the formulas used by independent rating bureaus and the NCCI.

 

In many NCCI states, the Experience Rating Adjustment plan is in place, allowing for the 70% reduction in the reportable amount of medical-only claims. That is, for claims where there has been no payment to the worker for lost time, but only for medical expenses. This gives employers an incentive to report all claims to their insurers, rather than trying to pay for medical-only claims out of pocket.

 

 

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