the experience mod
DESCRIPTION
An understanding of the Experience Modification Factor which is greatly misunderstood by brokers and business owners alike.TRANSCRIPT
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Company ABC
Presented by | Your Name(s)presented by | John Link, CPCU
April 19, 2011
Cottingham & Butler Benefits Consulting Webinar Series
The MOD Factor!Understanding the Experience Modification Factor
Workers’ Compensation Risk Management
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The information, examples and suggestions presented in this material have been developed from sources believed to be reliable, but they should not be construed as legal or other professional advice
Cottingham & Butler accepts no responsibility for the accuracy or completeness of this material and recommends the consultation with competent legal counsel and/or other professional advisors before applying this material in any particular factual situations
Please remember that only the relevant insurance policy can provide the actual terms, coverage, amounts, conditions, and exclusions for an insured
Disclaimer:
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What is this thing called a “MOD”?
How does it effect me?
How do the numbers work?
How can I predict where the MOD is going?
What can we do to minimize the MOD going up?
Today’s Objectives:
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Who We Are
• National provider of employee benefits and risk management solutions
• Established in 1887
• Headquarters in Dubuque, IA (population 60,000)
• Over 3,500 customers
• $350 million in Commercial Insurance premium placements
• Over $473 million in Benefits Claims Administered
• 38th largest Insurance Broker in USBusiness Insurance Top 100 Brokers
• 95% retention rate across entire book of business
• Posted $63 Million in revenue in 2010
• “2007 Agency of the Year” National Underwriter
• “Agency of the Year” Rough Notes Magazine
John ButlerChairman and Chief Executive Officer
David BeckerPresident and Chief Operating Officer
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Who I am
John M. LinkVice President
Risk Management Practice
• Vice President of Risk Management and Tribal Insurance Consulting Practices
•13 years with Cottingham & Butler
•Graduate of the University of Iowa
•43 Clients in 6 states managing $30 million dollars in premiums
•Native Dubuquer
•Father of 4 and husband of 1
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What Is This Thing Called The “MOD”?
The “MOD” is short for Experience Modification Rating factor.
It’s actually a system where by frequency of losses is given a higher “weight” and thus penalized verses severe losses.
In the most simple of terms, the MOD is calculated based on expected claims versus actual claims, total payroll and classes of eligible employees. When the actual primary losses are greater than expected primary losses, the MOD is above 1.0 and when the actual primary losses are less than expected, primary losses the MOD is less than 1.0
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What is this thing called the “MOD”?
MYTH or MISUNDERSTANDING• A 1.0 experience Modification factor by many is considered “good”
• 1.0 MOD is equivalent to a “C” grade which shouldn’t be acceptable to any of
us!
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The Experience MOD Formula
Actual Primary Losses
+ Ballast Value + Weighting Value x Actual Excess Losses
+ (1-Weighting Value x Expected Excess Losses
ExpectedPrimary Losses
+ Ballast Value + Weighting Value x Expected Losses
+ (1-Weighting Value) x Expected Excess Losses
• Primary Losses = first $5000 in losses
• Excess Losses = amount of loss greater than $5000
• Ballast Value = state specific value which increases with the size of the company as measure in expected losses. Creates stability to the formula
• Weighting Value = state specific with range between 0.04 to 0.80. The value increases as expected losses increase and determines the percentage of actual excess losses utilized in the calculation
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Years MOD is Based Upon
2007 2008 2009 2010 2011
J F M J F M J F M J F M J F M
A M J A M J A M J A M J A M J
J A S J A S J A S J A S J A S
O N D O N D O N D O N D O N D
Experience Rating Period Excluded MOD is effective for the 2011 policy year
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How Does The MOD Affect You?
Ultimately, the MOD is applied to your insurance premium.
The premium you pay will equal the basic premium times your MOD.
So, a MOD below a 1.0 lowers your premium costs and a MOD above a 1.0 increases your premium costs against your peers and competitors.
Example: Company A has basic premium of $100,000 and their experience MOD was 1.20, their final workers’ compensation premium is $120,000.
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Why Is This Important 2.0?
Take our previous example:
Company A in 2010 had a MOD of 1.0 and a basic premium of $100,000 so final premium in 2010 was $100,000.
In 2011, their MOD is increasing to a 1.20 with no overall growth to the company so basic premium remains at $100,000 but final premium is now $120,000.
At a 5% profit margin, Company A needs to increase top lines sales by $400,000 in order to make up that cost increase.
Is controlling the MOD and loss frequency worth it?
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The MOD Worksheet
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The MOD Worksheet Headers
1. Name of the Risk – name of the company for which the MOD is calculated
2. Risk Identity No. – this is the number NCCI or other rating bureau assigns to your company
3. State – if your company operates in only one state, the state will be displayed. If your company operates in multiple states, the word “Interstate” will be displayed
4. Effective Date – the date on which the MOD becomes effective.
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The MOD Worksheet Columns
1. Column 1 - Class Code – lists the payroll classification codes for each state used in the calculation.
2. Column 2 - Expected Loss Rate (ELR) – amount of loss per $100 of payroll.
3. Column 3 - Discount Ratio (D-Ratio) – the percent of expected losses that are classified as expected primary losses.
4. Column 4 – Audited Payroll – amount of payroll for the given class code, state and policy period shown.
5. Column 5 – Expected Losses – (Payroll divided by 100) x ELR
6. Column 6 – Expected Primary Losses – expected Losses x D-Ratio
7. Column 7 – Claim Data – shows the claim number which is a number or series of numbers assigned by the insurance company.
8. Column 8 – Injury Code and Open/Final designation – shows what type of claim occurred and whether the claim is open or final.
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Injury Codes
Injury Code (IJ) Medical Claim
IJ Code 1 Death
IJ Code 2 Permanent Total Disability
IJ Code 5 Temporary Total or Temporary Partial Disability
IJ Code 6 Medical Only
IJ Code 7 Contract Medical or Hospital Allowance
IJ Code 9 Permanent Partial Disability
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IJ Code 6: Medical Only
In 1998, the ERA became part of the mod calculation!
No, Not that ERA…
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IJ Code 6: Medical Only
In 1998, the Experience Rating Adjustment (ERA) was introduced to the MOD calculation
• Change in primary/excess split point – state specific as in
California
• Change in weighting value table – raises maximum value
from .63 to .80
• Reduction in Medical-only claim amounts-Medical-only claims are calculated at 30% of primary and excess of loss value
-Incentive for employers to report ALL claims without being penalized
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Experience Rating Adjustment State Summary
Approved: Alabama, Arkansas, Arizona, Connecticut, Colorado, District of Columbia, Florida, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia and Wisconsin
If your State is not on this list, approval is pending (essentially Disapproved) or formally Disapproved
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The MOD Worksheet Columns
1. Column 1 - Class Code – Lists the payroll classification codes for each state used in the calculation.
2. Column 2 - Expected Loss Rate (ELR) – amount of loss per $100 of payroll.
3. Column 3 - Discount Ratio (D-Ratio) – the percent of expected losses that are classified as expected primary losses.
4. Column 4 – Audited Payroll – amount of payroll for the given class code, state and policy period shown.
5. Column 5 – Expected Losses – (Payroll divided by 100) x ELR
6. Column 6 – Expected Primary Losses – Expected Losses x D-Ratio
7. Column 7 – Claim Data – shows the claim number which is a number or series of numbers assigned by the insurance company.
8. Column 8 – Injury Code and Open/Final designation - shows what type of claim occurred and whether the claim is open or final.
9. Column 9 – Actual Incurred Losses – the actual loss amount for the claim.
10. Column 10 – Actual Primary Losses – the actual primary loss for the claim.
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The MOD Worksheet Worksheet Summary
WORKERS COMPENSATION EXPERIENCE RATING
1. Code 2. ELR 3. D-Ratio 4. Payroll 5. Expected
Losses 6. Exp Prim
Losses 7. Claim
Data 8. OIJF
9. Act Inc. Losses
10. Act Prim Losses
Expected Excess Losses
Actual Excess Losses
A. 010 B. C. (D-E) 48178
D. 68049 E. 19871 F. (H-I) 9663
G. 19600 H. 44187 I. 34524
11. Primary
Losses 12. Stabilizing
Value 13. Ratable Excess Losses 14. Totals
Actual 34524 (I) 62960 966 (A x F) 98450
Expected 19871 (E) 62960 4818 (A x C) 87649
Experience Mod Factor = 1.12
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How to Analyze Your MOD
Expected vs. Actual: Compare Box D to Box H. If H > D, then your competition is outperforming you.
Expected Primary vs. Actual Primary: Compare Box E to Box I. Primary losses are a measure of loss frequency and have a greater impact on the MOD.
• Training issues
• Poor Procedures
• Hazardous Work Environment
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How to Analyze Your MOD
Expected Excess vs. Actual Excess: Compare Box C to Box F. If F>C, the average claim is larger than expected.
•Are claims being handled properly internally and
externally?
•Loss reduction techniques-Transitional duty-Pre- and Post-Injury management training
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How to Analyze Your MOD
Determine your Minimum MOD.
Determine your Controllable MOD
Ratio of Actual to Expected Losses
Specific Loss Sensitivity – by loss type
Aggregate Loss Sensitivity – losses overall
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Ways to Control Your MOD
Implement and Manage a Sound Loss-Control Program
•Lower frequency
•Reduces severity
•e.g. Safety committees, training, safety bonuses/incentives,
communication
Verify Accuracy of Payroll and Loss Data
•Data is often incorrect
•Claim review approximately 5 months into policy year
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In Summary
The MOD is a complex formula
The MOD Worksheet is a valuable tool to identify the issues within your overall safety program
The MOD is controllable
The MOD needs to be reviewed and audited for accuracy (codes, payroll, loss totals, etc)
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THANK YOU & BE SAFE TODAY!If you have any further questions please contact me at:
John M. Link, CPCU Risk Management Group, Vice President
ph: 563.587.5288 800.793.5235 ext: 5288 [email protected]