Understanding the calculation change
In the majority of states in the U.S., workers’ compensation insurance is a mandatory coverage that employers must have in place. As such, it is important to understand what the Experience Modification Factor (E-MOD) is, and how it affects your company’s workers’ compensation policy. The National Council on Compensation Insurance (NCCI) collects data and calculates the E-MOD for most states. The NCCI made significant calculation changes to the E-MOD that began January 1, 2013.
Workers’ compensation premium is developed by looking at payroll by an established class code, the rate for that class code, the E-MOD, and any additional discretionary pricing factors. The E-MOD factor is based on the frequency and severity of workers’ compensation claims. It is the method of adjusting the rate charged to companies to reflect the actual loss experience of the employer, as compared to expected losses. The E-MOD factor is multiplied against your base workers’ compensation premium. Not only does the E-MOD factor significantly impact workers’ compensation premiums, but it is also viewed as an indicator of industrial safety. It is supposed to reflect whether a company has more, or fewer, workers’ compensations claims as compared to other companies of similar size and in similar industries. The E-MOD factor provides incentives to reduce losses because employers who have fewer losses than expected have a lower E-MOD.
The baseline E-MOD is 1.00. This means there has been no debit, credit applied to your workers’ compensation premium. Low frequency and severity will generate a sub E-MOD of 1.00, such as a 0.75 meaning the company has received a 25-percent discount to the workers’ compensation premiums. Alternatively, claims frequency and severity may generate an E-MOD in excess of 1.00 in the construction industry. Many GC’s will not allow a contractor to bid a particular job if they have an E-MOD in excess of 1.00. This is because the E-MOD is used as a safety benchmark, an indicator of sorts used to evaluate the contractor. As such, companies need to do everything they can to manage their E-MOD.
As previously stated, the E-MOD factor is based on two components: the frequency and severity of workers’ compensation claims. In the past, a company with one $10,000 claim would have a lower E-MOD than a similar situated company with ten $1,000 claims. The new E-MOD calculation seeks to change this frequency component because of the way it punished companies in the past; however, depending on your company, it may in fact hurt your E-MOD. The following shows how claims are split and rated under the current E-MOD ratio. A workers’ compensation claim that is paid up to the “split point” is considered primary, and this is where the frequency component is established. Any losses paid out higher than the “split point” are considered excess, and factor into the severity component.
Effect to Primary (Frequency): The first $5,000 of each claim would be punished at a higher rate of 3:1. This means your company would pay an additional $3 in premium over a 3-year period for each $1 in claims that show up on the company’s E-MOD worksheet.
Effect to Excess (Severity): If the claim is over $5,000, each dollar over $5,000 would be punished at a lower rate of 1:1. This means that your company would pay an additional $1 in premium over a 3-year period for each $1 in claims that show up on the company’s E-MOD worksheet.
For the past 20 years, this split point has remained the same, while the average cost of claims has increased by 300 percent. The NCCI hopes the change in the E-MOD calculation will shift more claims and weight from severity to frequency. On January 1, 2013, the NCCI increased the “split point” calculation from $5,000 to $10,000. In 2014, it will be increased to $13,500, and again to $15,000 in 2015. This change will put a greater emphasis on losses over $5,000, which will force many companies’ E-MODs to be higher than they would have been in the past.
Over the next 3 years, the 3:1 punishment factor will apply to the first $10,000, then $13,500, then $15,000+, whereas in the past it only affected the first $5,000 of each claim. This means that an increasing number of your larger claims will be impacted at the 3:1 ratio. As an example, if your company had a $30,000 claim in 2010, only the first $5,000 of the claim was punished at 3:1 on your 2012 E-MOD. However, starting in 2013, the first $10,000 would be punished at 3:1, increasing to the first $13,500 punished at 3:1 in 2014. As you can see, any claims over $5,000 are going to hurt your company’s E-MOD in an ever-increasing manner. Bottom line—if your company has a lot of claims over $5,000, those claims are going to negatively impact your E-MOD in a huge way. ■
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Article courtesy of NBIS. NBIS delivers premier construction and transport risk management products and services. For more information, visit www.nbis.com.
Modern Contractor Solutions, May 2013
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