Restoration Insurance News: Understanding Your Workers Compensation Experience Mod
The experience modification factor is critical to your worker's compensation premium. Understanding where this number comes from and how it is calculated is a powerful tool to help restoration contractors minimize their worker's compensation premiums.
Most states work with the NCCI (National Council on Compensation Insurance) to determine the calculation of experience mods. Every year they adjust you mod factor either up or down, and your worker's compensation premiums are adjusted accordingly.
How is a mod calculated?
While we won’t go through the entire complicated formula for calculating the experience, we still feel it's essential to provide the underlying theory and purpose of the experience mod.
The purpose of an experience mod is to take your company’s actual losses and compare them to similar-sized companies from the same industry. Additionally, the formula considers loss frequency and severity to provide an accurate and fair comparison. Companies that experience losses worse than their industry peers and penalized and companies that don’t have losses are rewarded.
How does my mod affect my premiums?
Your experience mod will start at 1.0, meaning your losses are the same as other companies within your industry. Then depending upon your failures, your mod will be adjusted, and a credit or debit will be applied to your worker's compensation premiums.
An experience mod greater than 1.0 is a debit mod, and a surcharge will be added to your premiums. For example, a restoration contractor with multiple claims over the past few years could have a mod of 1.5. That means insurance companies will automatically surcharge the company’s workers' compensation premiums by 50%. There is no negotiating this surcharge down.
An experience mod of less than 1.0 is a credit mod, and a discount will be applied to your premiums. Using a similar example from the last one, let’s say that a restoration contractor doesn’t have any claims over the past few years and they have an experience mod of .75. With that experience mod; insurance companies will automatically apply a 25% discount to the company's premiums.
In the two examples above, it is easy to see how controlling your experience mod can dramatically affect how much your restoration company pays in premiums.
Next week’s post will dive into the importance of understanding the period over which your experience mod is calculated, how NCCI evaluates your prior losses, and tips for keeping your experience mod low.
