The Importance of Understanding your Worker's Compensation Premium

A key to understanding your workers’ compensation premium is the experience modification factor, also known as your mod. Understanding your company’s mod and the data used to obtain it helps you identify ways to minimize your workers’ compensation premium.

Who calculates the mod factor?
Most states use the National Council on Compensation Insurance (NCCI) to collect data and calculate the experience modification factor. The NCCI is a private corporation funded by member insurance companies. The remaining states either operate an independent workers’ compensation bureau or have set aside a state fund for workers’ compensation. These states may or may not use the NCCI’s classification system to determine experience modification factors.

How is a mod calculated?
The process of calculating the experience modification factor is complex, but the underlying theory and purpose of the formula is straightforward. Your company’s actual losses are compared to its expected losses by industry type. The formula incorporates factors that account for company size, unexpectedly large losses, and the incidence of loss frequency and loss severity to achieve a balance between fairness and accountability.

How does my mod affect my premiums?
The mod factor represents either a credit or debit that is applied to your workers’ compensation premium. A mod factor greater than 1.0 is a debit mod, which means that your losses are worse than expected and a surcharge will be added to your premium. A mod factor less than 1.0 is a credit mod, which means losses are better than expected, resulting in a discounted premium.

What is the experience rating period?
The mod is calculated using loss and payroll data for an experience rating period. The experience rating period typically includes data for three policy years, excluding the most recently completed year. For example, if your anniversary rating date is Jan. 1, 2017, the experience period is 2012 to 2015. Three years of data is used to provide a more accurate reflection of the losses, smoothing out the impact of an exceptionally bad or good year for losses.

Both actual and expected losses are divided into a primary and an excess portion in what is called a split rating method. Primary losses are designed to be an indicator of loss frequency (the number of losses) and are used at their full value in the mod formula. Excess losses are an indicator of loss severity (the amount of each loss) and are weighted in the formula so that they are less important. The emphasis of loss frequency over loss severity in the formula reflects the fact that loss frequency is a more significant indicator of risk and can be improved through proactive loss control programs.

How do your losses compare?
The final mod calculation compares your actual primary and excess loss figures to those expected for a company of the same size and industry type.