When explaining a Workers’ Comp insurance program and how the premium is determined, once an insurance agent begins reviewing the experience modification factor (ex-mod), often you’ll recognize a familiar gaze that comes over a client’s face. This is especially true if you get too deep into the weeds of explaining how the ex-mod impacts premiums. Yet, it’s important for clients to have a general understanding of the ex-mod and how to improve it for a better outcome.
Determining Workers’ Compensation Insurance Program Premium
The premium for Workers’ Compensation is basically based on this formula: Payroll x Class Code x Ex-Mod. In order to predict the risk of future claims, the ex-mod is calculated by comparing a company's Workers’ Compensation claims history to industry averages. The most common e-mod starting point is 1.0. It’s important for the client to understand that the comparison is very specific. The company’s claims history is compared to employers of the same size in the same state and in the same classification code. The National Council on Compensation Insurance (NCCI) computes the ex-mods for most states; in California, the Workers’ Compensation Insurance Rating Bureau (WCIRB) determines the ex-mods.
If the company, for example, has an ex-mod of .85, its claims history is better than the average 1.0, which is a good thing. If the ex-mod is 1.25, on the other hand, the company has had more claims than others in the same industry and will likely be paying more for Workers’ Compensation insurance. The ex-mod is applicable for the prior three policy years, not including the most recent expiring policy. Each loss typically impacts the ex-mod for a three-year period.
There are additional benchmarks and factors that go into determining the ex-mod, such as the impact of claims frequency and severity, but for our purposes, we will keep it simple and look at ways to improve a company’s ex-mod.
Improving the Ex-Mod
A Culture of Safety
To mitigate on-the-job injuries and accidents, an organization should foster a culture of safety with strong management buy-in. In doing so, it’s critical to pinpoint workplace hazards and develop a strong risk management program that includes safety best practices, loss control protocols, an onboarding plan for new employees, and regularly scheduled company-wide employee safety training. This will help in ultimately improving an organization’s ex-mod.
Prompt Claims Reporting
Claims should be reported immediately. The longer a claim goes unreported, the more likely the costs involved (medical expenses, lost-time benefits) will increase. Organizations should have a process that identifies the point of contact for claims notification to get the information to the insurance company without delay.
Employers should also have an accident investigation process in place to determine how an accident occurred and what remedies can be implemented to prevent similar incidents from occurring in the future.
Implementing an early return-to-work program in which injured employees get the green light from a physician to perform temporary, transitional, or modified work duties will help promote quicker recoveries, lower claims costs, and improve a company’s ex-mod and future premiums. The ultimate goal is to return employees to work while reducing claim payments for lost time (indemnity losses). This is because Workers’ Compensation claim payments are divided into two categories based on the ex-mod: medical-only claims and lost-time claims. Medical-only claims involve only medical expenses, whereas lost-time claims involve indemnity payouts when employees are unable to work due to injuries. The impact of a medical-only claim on the ex-mod is reduced by 70% of the claim amount. However, if a claim includes lost-time payments, the entire claim amount is applied to the ex-mod.
Good hiring practices at the outset will help organizations reduce the likelihood of claims. A company should have in place well-written and effective job descriptions that include the job functions, required skills and qualifications, work experience, and educational level. Physical requirements, such as lifting and carrying weight limits, should also be specified. A thorough explanation of the job duties will provide prospective employees with additional information to help them decide if the role is right for them.
Pre-screening candidates after an offer is made can also help minimize accidents. This may include background checks, MVR checks, and drug tests. These must be done in accordance with state and federal requirements, including HIPAA, ADA, and privacy concerns. All hiring and interviewing practices, including pre-screening procedures, should be reviewed by legal counsel.
There are a number of steps organizations can take to improve their ex-mod and work toward lowering their costs. As an insurance agent you can assist them in doing so.