Experience modifications are a complicated topic, but it’s important to know enough to make sure that your insurance agent does his or her job to make sure you’re not getting cheated by the system.
Your Experience Modification is a safety factor that can have a significant bearing on the competitiveness of your Workers’ Compensation rates. It can result in either a debit or credit being applied to your policy.
Your Experience Modification is assigned to you by a rating body such as the National Council On Compensation Insurance, otherwise know as NCCI, your state Workers’ Compensation commission, or by your self insurance fund. The factor is mathmatically derived from a comparison of your actual losses to your predicted losses. The comparison period does not count the preceding policy year but looks at the three years prior to the preceding year.
In order to qualify for an experience modification, you must have had a single year of premium that exceeded $9,000 or an average premium for two years in a row that exceeded $4500.
Once you qualify, about three months prior to your next renewal, you’ll receive an experience modification worksheet in the mail from the rating body that will indicate your factor as well as all of the information and math that was used in the computation. You should immediately forward a copy of the worksheet to your insurance agent.
The experience modification factor is an indication of whether you have had more claims or less claims than expected based on state averages for the types of classification codes you’ve been using. An experience modification of 1.00 is neutral and that’s what you start out with. When the factor goes above 1.00, it is called a debit modification and is an indication that your claims experience has been worse than average. When the factor goes below 1.00, it is called a credit modification and is an indication that your claims experience has been better than average.
When you have a debit modification over 1.00, you are hit with a surcharge penalty. For example, if your experience modification is 1.2, you get a 20% surcharge penalty that’s applied to your policy. On the other hand, if your experience modification is .90, you get a 10% credit discount that is applied to your policy. I’ve seen builders have experience modifications that range from .80 to over 1.75.
Verifying your experience modification on an annual basis is a must because they’re wrong over 50% of the time. Most of the errors are in favor of the insurance carrier and result in your paying incorrect premiums that are too high. I recommend that you take an active role in the verification process and manage the performance of your insurance agent.
The most common mistake is that your payrolls can be understated on the worksheet if your insurance carrier didn’t report them to the rating body after your final audit for each of the three policy years that are taken into account. Its relatively easy to compare the class codes and payrolls that appear on your final audit bills to the class codes and payrolls that appear on your experience modification worksheet.
Another common mistake is that the claim payments will show up as overstated or will not reflect recent reserve take downs. Your insurance agent will need to order loss runs from your insurance carrier for each of the three policy years that are taken into account. You and your agent need to compare the incurred claims to make sure that they’re consistent between the loss runs and your experience modification worksheet. When I use the term “incurred” claims, that means that you are charged for not only the claims that have actually been paid, but also for the claim reserves that are set up in anticipation of future payouts. Any discrepancies in either the payrolls or claims should be reported to your insurance carrier so that they can get the accurate information to the rating body so that your experience modification can be corrected.
This leads us to the issue of checking for reserve takedowns prior to the deadline for making a change. You should set a suspense for six months prior to your policy renewal to contact your insurance agent to request hard copy loss runs to see if they’re any open claims with reserves that should be reviewed. If so, your insurance agent should contact the claims adjuster to find out if the claim has been recently closed for a lower amount or if he or she is getting ready to reduce the reserve to a lower amount. If this is the case, the carrier must report the reserve take down to the rating body four months prior to the policy renewal for it to be taken into account on your soon to be issued experience modification factor. If you miss this deadline, you’re probably going to be out of luck unless the mistake causes an experience modfication increase of over 5% which is called an “aggravated inequity” and then steps may be taken for resolution if your state allows this.