Savvy business managers have always kept a close eye on the experience modification factor that is calculated for their company each year by the Workers’ Compensation insurance industry, because the experience modifier direct impacts the cost of their Workers’ Comp insurance. But for those in construction-related industries, there is an additional reason to check over experience mods: more and more, their clients and potential clients are using experience modifiers as a benchmark to choose among bidders.
The experience modification factor is normally calculated each year by a rating bureau, based on past reported claims and payrolls for a particular employer. The resulting modifier is used to calculate Workers’ Compensation insurance premiums. An experience modifier of 1.25 means that the company will have a 25% surcharge on their premiums, while a .75 modifier would produce a 25% discount on premiums. Each year, updated claim and payroll information is used, so the particular modifier for a given company will vary from one year to the next.
But many clients use the experience modifier as a rough benchmark of how safely a company operates, and may disqualify a company whose modifier goes over 1.00. Other clients may compare the experience modifier of one company to another, and give preference to the company with the lower experience mod.
The problem with this is that the experience modification factor was never designed for this purpose, and thus can give misleading results when used in this way. A lower experience modification factor does not always mean that a given company is operating more safely than a competitor with a higher mod. Also, experience modifiers are calculated based on data reported by past insurers, with no real quality control efforts in place. It is not uncommon for errors to occur in the data used to compute experience modifiers, and the rating bureaus that calculate experience mods do not review this data before computing a company’s mod.
Even though many insurance agents and brokers promise to review these experience modifiers, the typical review done is less than thorough, allowing many errors to remain uncaught and uncorrected. With the experience modifier calculation now being widely used as a safety benchmark, it is more important than ever to have it reviewed carefully by someone experienced in experience mod calculations.
Because an experience modification factor is based on reported past losses and reported past payroll information, it is important to obtain a copy of the mod worksheet every year and to review it carefully for inaccurate or incomplete information. Not only will inaccurate loss information distort the mod calculation, but inaccurate payroll or classification codes can also make a modifier inaccurate. The payroll and classification information on the experience modifier calculation should be checked against past years’ audit billing statements from the insurance companies, to make sure accurate data has been used to compute the mod.
With the use of experience modifiers by clients, an inaccurate mod can cost a company more than just higher Workers’ Comp premiums–it can cost them clients.