Workers Comp Experience Modification Rate: Everything You Need To Know

workers comp insurance experience modification rate

Your worker’s compensation experience modification rate is the very long and official name for what is commonly known as:

  • Comp Mod,
  • Experience Mod, or
  • X-Mod.

For the purpose of this article, we’ll refer to it as the “Experience Mod,” as this is in our experience the most commonly used terminology (and seems to most accurately depict what worker’s compensation experience modification rate actually is).

What is an Experience Mod?

Your Experience Mod is a premium rating factor (or multiplier) developed by measuring the difference between your actual past worker’s compensation experience (claims) and the expected or actual claims experience to other employers of similar size operating in the same type of business.

Your Experience Mod may be either a debit or credit to your worker’s comp premiums and, therefore, will increase or decrease the amount you pay for your insurance in response to past loss experience.

In a nutshell, your Experience Mod is a method for tailoring the cost of worker’s compensation insurance to the specific experience and characteristics of your business.

And while this still might sound confusing (and possibly unfair), the good news is the fact an Experience Mod is applied uniquely to your business creates an opportunity for you to manage and sculpt the cost over time through strategic cost-saving programs and processes (this is our specialty at Rogue Risk).

How to Qualify for an Experience Modification Rate?

A business will not have an Experience Mod for the first 1-3 years after it purchases it’s first workers’ compensation policy.

Some very small businesses may never qualify for an experience modifier in some states. Qualifying for an Experience MOd rating will vary by state, but the overall concept is the same.

There are two triggers for qualification:

  • Total policy premium exceeds dollar threshold for one policy period
  • Total policy premium exceeds lower threshold for more than two policy periods

As an example, the state of Missouri has a one-year threshold of $7,000 in premium before a business will be assigned and X-mod and a Rating Effective Date (RED). Otherwise, the business will need a premium to exceed $3,500 for more than two policy periods before it can qualify for an Experience Mod rating. Each state sets its own dollar value for x-mod qualification.

How to Calculate Your Workers Comp Experience Mod

The process of calculating your exact Experience Mod is complex, but the purpose of the rating is pretty straightforward.

Your Experience Mod is calculated for your business annually using claims data, (taking into account frequency, severity, and type of claim), from the three most recently completed years, excluding the current term.

In most cases, the frequency of claims carries more weight in Experience Mod adjustments than the severity of claims. For example, an employer with one claim totaling $75,000 will see less impact on their Experience Mod calculation than an employer with three $25,000 claims.

Think of it this way, insurance companies know claims are bound to happen. You might refer to these as accidents. However, high volume or repetitive claims shows the possibility of systemic concerns in how a business operates (yielding the need for higher premiums).

Then your company’s actual losses are compared to its expected losses by industry type. Taking all this data into account, your Experience Mod is then calculated by a rating bureau, which in most states is National Council on Compensation Insurance or NCCI, but a few states have their own rating bureau.

If you’re looking to nerd out on the basics and history of Experience Mod rating then watch this video from NCCI.

How Does Experience Mod Impact Worker’s Comp Premiums?

Workers’ comp insurance premiums are calculated according to how employees are classified (with regards to the specific type of work they perform) and the rate assigned to each employee classification.  The premium rate itself is expressed as dollars and cents per $100 dollars of payroll for each class code.

Your Experience Mod represents either a credit or debit that’s applied to your workers’ compensation premium.

An Experience Mod of 1.0 is considered to be the industry average. While an Experience Mod factor of more than 1.0 is a Debit Mod, which means your losses are worse than expected and a surcharge will be added to your premium. An Experience Mod under 1.0 is a Credit Mod, which means losses are better than expected, resulting in a premium discount.

Here is an example of the impact an Experience Mod can have on your final workers’ comp premium:

As you can see, properly tracking and managing your Experience Mod can have a drastic effect on your overall cost of insurance.

What is a Good Experience Mod Rate?

The lower the Experience Mod of your business, the lower your worker compensation insurance premiums will be.

An Experience Mod rate of 1.0 is considered the industry average for your business class.

This means a “Good” experience mod rate is anything below a 1.0 rating. However, simply falling below 1.0 doesn’t mean that is your BEST experience mod rate possible.

Only through Experience Mod Rate Audit can you determine your best possible mod rate.

If your business has a mod rate greater than 1.0 the reasons are simple. There have been a worker compensation claims that your insurance provider has paid that exceed the expecting loss amounts/ratio for your industry class.

To mitigate the insurance company’s risk, they raise your worker compensation premiums. The bad news is this increased mod rate can stick with you for 3 years if you’re not working with an insurance professional who knows how to help you lower your mod rate.

How to Improve Your Experience Mod

Of course, this is the question every savvy business owner wants to know. So here is a list of things you can do to be more proactive when it comes to lowering your Experience Mod:

Quick-Fix Improvements in Experience Mod

1) Verify Accuracy of Experience Mod

You might be paying more (or less) than you should due to incorrect or incomplete data reported on your Experience Mod worksheet.

2) Verify Accuracy of Payroll and Class Codes

Examine your current Experience Mod worksheet and verify that your payroll and class codes have been calculated accurately. Over 65 % of workers’ compensation audits have errors that could be solved from a thorough review.

Long-term Improvements in Experience Mod

1) Track Incidents Not Just Claims

“Frequency breeds severity” is a common saying inside insurance circles. Many claims could be avoided if you are meticulous about tracking all of your incidents (or near misses) that created hazardous situations that did not result in a claim. Typically, employees are taking short cuts long before the ultimate injury occurs.

Developing a culture and process for employees to report and track these incidents will help prevent injuries over the long term.

2) Create a Safety Program with Goals

Maybe this goes without saying, but not having injuries in the first place is a great way to reduce your Experience Mod.

While in reality injuries at work are almost inevitable, well-thought and diligently implemented safety programs can drastically reduce the frequency and ultimately the severity of injuries.

Develop a written safety program, and train employees in their responsibilities for safety. Incorporate a disciplinary policy into the program that holds employees accountable for breaking rules or rewards them for correctly following safety procedures.

Set safety performance goals and hold managers’ responsibility for hitting these goals. Success in achieving safety goals should be used as one measure during performance appraisals.

It is the responsibility of senior leadership to frequently communicate with employees, both formally and informally, regarding the importance of safety.

3) Return to Work Program

Create or improve a return to work program. Getting your employees back to work is good for morale, company culture and significantly helps in lowering your Experience Mod.

Train front-line supervisors and managers on how to manage injured employees. Supervisors play a key role in managing the injury and recovery process. When there’s a good relationship between the injured employee and the supervisor, chances are you’ll get better results.

Take an aggressive approach to provide light duty to all injured employees upon their release from treatment. Supervise light duty employees to ensure their conformance with restrictions.  

Return To Work programs are extremely powerful tools for lowering your Experience Mod and the cost of a workers’ compensation claim as they give leverage back to you, the employer.

4) Prompt Injury Reporting Program

Have a process and program to report injuries promptly. Studies reveal that prompt injury reporting reduces the cost of claims.

Report all incidents to your insurance professional immediately. Studies show the longer it takes to report a claim, the more expensive it will be.

In a study done by Hartford Insurance, examining over 2 million claims, a 4-week delay in reporting an injury drives the cost of that same injury up by 48 percent.

5) Thorough Claims Management Program

Implement an active claims management program to manage outstanding reserves and improve the efficiency in resolving open claims.

Develop an action plan for closing out every reported claim to your insurance carrier regardless of the line of insurance, (but especially worker’s compensation claims).

This is a big mistake made by most businesses.

They report a claim and then forget about it until their worker’s comp policy comes up for renewal. At that point, they are shocked at the increase in the workers’ comp premium which has been driven up open-ended claims experience.

The Rub

The best way to take control of your workers comp premiums is through an Experience Mod Rate Audit.

Remember that the Experience Mod is influenced more by small, frequent losses than by large, infrequent ones. So the fewer losses you have, the better.

Frequency breeds severity.

Reducing the frequency of claims starts at the top. Senior leadership and management must make safety a priority if you’re ever going to take control of your Experience Mod.

And while the goal is to never have an accident, over a long enough period of time, employee injuries are inevitable which makes a return to work and claims management programs essential to limiting the long-term impact of injuries to your Experience Mod and ultimately your worker’s compensation premiums.

If all this sounds overwhelming, confusing or if your current insurance agent has never addressed these issues with you before, then I’d encourage you to reach out to us at Rogue Risk, today.

I hope this article helped you better understand your Experience Mod.

Thank you,

Ryan Hanley

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