Insurers create class groups for policyholders to assign risk. In workers compensation, they go one step further and calculate a client’s risk based on their experience.
Your clients’ experience modification rate, or Ex Mod, is one of many factors that determines their policy premiums. The good news is that your clients are in control of their experience, which can translate into savings year-on-year.
As insurance pros, you can help your clients save by letting them know how their Ex Mod works and what strategies are available to improve their rate. To help you out, we wrote a quick Ex Mod refresher along with tips to help manage your clients’ Ex Mods, suitable for high-risk clients, like construction and manufacturing.
What is the Experience Modification Rate (Ex Mod)?
The experience modification rate, or Ex Mod, is used by insurers to describe both past injuries and future risk.
In short, it can be described using this formula: Experience Modification = Actual Losses / Expected Losses.
In all states but California, an Ex Mod of 1.0 is the industry average. An Ex Mod above 1.0 represents a higher cost and risk and thus a higher premium. An Ex Mod below 1.0 garners clients a discount on their premiums.
The NCCI sees Ex Mods and experience ratings as a chance for clients to manage their premiums by using cost-saving programs to lower their Actual Losses.
How long does a client’s Ex Mod stay the same? The figure sticks with clients for three years, or what’s known as the experience rating period. So, if a client has one bad year (multiple injury claims), the number follows them until they have three good years in a row. The experience rating period is an incentive for preventing lapses in safety programs. A lapse now means you’ll pay for years, even if you refocus on safety down the line.
What’s the Experience Rating Period?
The data used to calculate an Ex Mod comes from the company’s rating effective date, which is the start date of a policy. However, this is complicated if the client switches policies or if they have multiple policies with different start dates.
The experience period begins four years and nine months before the rating effective date and terminates one year and nine months before the rating effective date.
If a rating effective date is January 1, 2021, then the experience period is April 15, 2016, to April 1, 2019.
Why Isn’t the Manual Rating Enough to Calculate Premiums?
All clients have a manual rating or a group that represents their operation or classification. The estimated losses of the group come together, and insurers generate an average cost. Manual ratings are a straightforward way of calculating premiums for a group, but the Ex Mod goes further.
Even though every client in the group or class has similarities, they are all different in terms of loss potential.
If insurers used only the manual rating, then they could discriminate against high-cost groups. The experience rating prevents discrimination by refining the manual rating based on the individual client’s payroll and loss data over the experience period.
In other words, the Ex Mod allows insurers to calculate premiums based not only on industry average experience but on each client’s unique operations. For example, if construction has a higher cost than mining, then it will see higher premiums. However, suppose a construction company has minimal losses relative to their payroll during their experience period. In that case, they have an opportunity to save on their premiums thanks to their Ex Mod.
Does Everyone Have an Ex Mod?
Ex Mods are generated by either the NCCI or the state’s independent rating bureau. Not every business has an Ex Mod, even if they’ve had workers compensation coverage for several years.
Organizations need to qualify for an Ex Mod before the ratings bureau can assign them one. Whether they’re eligible may depend on:
- Amount spent on payroll
- Industry classification codes
- Expected losses (the “expected loss rate” per $100 for each class code
These factors are combined with the experience period.
Once each class is totaled, they create an eligibility value. The minimum value to qualify for an Ex Mod is $10,000.
How is a Client’s Ex Mod Calculated?
Thirty-nine states use the National Council on Compensation Insurance (NCCI) for data collection and Ex Mod calculations.
In Texas, the experience rating formula differs from the one used by the NCCI, but only slightly. The NCCI typically allows for 30% of the total cost of medical-only injuries in the formula. Texas includes 100% of the cost in the formula. Therefore, Texas companies have financial incentives to implement loss prevention and safety programs.
However, if you’re a California-based broker, you and your clients deal with California’s independent rating bureau, the WCRIB.
Other states with independent rating bureaus include:
- New Jersey
- New York
- North Carolina
What’s the Formula Behind Ex Mods?
The NCCI uses a highly complex formula to calculate an industry’s Ex Mod and a company’s individual modification. The formula includes factors like:
- Company size
- Unexpected large losses
- Incidence of loss frequency
- Loss severity
The formula isn’t just cold hard data. Insurers and underwriters weight it in an attempt to hold organizations accountable for the success of the safety programs while also acknowledging that no organization can ever promise that they’ll be 100% accident and injury-free. It’s about fairness rather than punishment.
If you’re doing business in California, you know the workers compensation Insurance Rating Bureau switched its formula on January 1, 2017.
In the past, the WCIRB placed a heavy emphasis on the cost of claims in its formula. Recognizing that employers have little-to-no control over the cost of things like medical care, the WCIRB now emphasizes the number of claims. Its aim: to hold accountable the businesses that produce a significant number of claims, both large and small.
Additionally, the WCIRB allows you to lower each claim by knocking off the first $250. The move aims to encourage more companies to report minor first aid claims without impacting their premiums.
How Does a Client’s Ex Mod Impact Premiums?
A client’s Ex Mod impacts their premiums because the underwriter can apply your client’s Ex Mod as either a credit or debit on the premium.
In states using the NCCI system, clients with an Ex Mod greater than 1.0 (the industry average) will see a surcharge added to their premium. Clients with an Ex Mod below 1.0 receive discounted premiums because they get a credit.
The credit or debit depends on the decimal point associated with your client’s Ex Mod. You can see an example here:
|Premium||Ex Mod||Modified Premium|
|$100,000||1.0 (industry average)||$100,000|
In California, the same principle applies, but the number industry average is 100.
For reference, the national average spend per hour worked is:
- $0.46 per hour worked or 1.2% of total compensation for civilian workers
- $0.45 per hour worked or 1.3% of total compensation for private industry workers
- $0.56 per hour worked or 1.1% of total compensation for state and local government workers
How Can Clients Improve Their Ex Mod?
Let’s get down to the part your clients care most about: improving their Ex Mod and saving on premiums.
Response can keep Ex Mods from increasing as much as it would without proper management. Careful management doesn’t just save on premiums: reducing their Ex Mod gives companies edge over competition when bidding work: low Ex Mod numbers often prequalify companies before even looking at bids.
After all, both clients and general contractors want to partner with contractors and subcontractors with strong safety records. Organizations that emphasize safety are less expensive to work with, less likely to cause delays, and keep the teams they work with safe.
Learn What Impacts Ex Mods
First, it’s important to remember that an Ex Mod is more likely to be impacted by many small or mid-size claims than by one catastrophic claim.
For example, California employers’ Ex Mods can’t go up by more than 25 points from the loss-free rating in one experience period. The rule falls away if clients don’t comply with the end of year audit and don’t report payroll for a policy period.
Additionally, keep in mind that medical-only claims enjoy a 70% discount. Emphasizing return to work programs, with a focus on light duties and recovery, can help clients keep their Ex Mod down even when claims are inevitable.
Check for Errors on Client’s Experience Rating Worksheets
As agents and brokers, you can help clients lower or maintain their ex-mod by assisting them to review their Ex Mod worksheet each year for errors.
Employers get one free copy per year, and you can help look for potential issues that caused an increased Ex Mod, such as a failure to report payroll or a figure written in error.
If you aren’t familiar with worksheets, the NCCI provides a helpful 16-minute webinar that you can pass onto your clients. It’s often beneficial to re-watch it yourself, too.
Identify Areas for Improvement
Finally, you can work with clients to identify areas for improvement within their organization and operations.
In some cases, improvement is a matter of developing safety programs with prevention procedures to control loss. However, clients with safety programs in place may need a more advanced touch to help them hone their safety programs instead.
Often, your clients’ understanding of safety vs. compliance can make the most significant difference in their ability to lower their Ex Mod. Compliance is the bare minimum need to avoid fines from state and federal regulators. But safety goes much further and uses data and leading indicators to track hazards and prevent claimable incidents from happening in the first place.
Ex Mods Are in Your Client’s Control
Insurers use the experience modification rate to provide a policy premium based on your client’s industry and experience. The Ex Mod provides insureds more control than the manual rate — and that’s a good thing. Every client has a chance to save on their annual workers compensation premiums just by implementing measures that prevent accidents and keep employees safe.
As a broker, you can do more than sell policies and explain benefits. It’s your job to help clients better understand their Ex Mods and work to an above-average score.