EX-MODS: THE KEY TO WORKERS' COMP COSTS

Workers' compensation may seem complicated, but only two factors affect your costs: your employees' job classifications and your experience modification factor.

You can't change 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.

An ex-mod is simply a multiplier that reflects your claims experience. By multiplying the base rate for your job classifications by your ex-mod, an insurer can reward or penalize you for past claims experience. In most states, 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."

The state's rating bureau calculates ex-mods based on your 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, 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, not all losses are weighted equally. 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" = the first $5,000 of any loss; "excess losses" = all loss amounts over $5,000. Losses up to $5,000 are included in full. Losses over $5,000 are included on a discounted basis. This means smaller losses have a bigger relative impact on your ex-mod than larger ones.
• The "ballast value" and "weighting value" correct for the size of the risk. In statistics, the larger the pool sampled, the more accurate the sample is. With ex-mods, the larger the payroll base, the more accurately you will be able to predict your losses.

The resulting experience modification factor generally ranges from .75 to 1.75. An experience modification of 1.00 indicates your losses reached the expected dollar amount. A higher number indicates that your risk of loss is greater than average, while an ex-mod lower than 1.00 indicates your risk is better than average.

Keeping Ex-Mods Low

Focus on controlling the smaller, more frequent losses—they will impact your ex-mods more than less frequent, larger losses. You'll also want to review your payroll and claims information for accuracy. Make sure your payroll data are accurate and your ex-mod calculations include data from the proper years. And keep tabs on loss reserves—unused loss reserves affect your experience modification.

We can develop strategies to help control your ex-mod and workers' compensation costs. For more information, please contact the PCOC Insurance Program department of Jenkins Insurance Services at (877) 860-7378 or, email us @ ProPest@Leavitt.com.