In computing workers compensation insurance premiums several inputs are used, including an Experience Modification Factor (MOD). The MOD is used to measure how your company has performed against other similar companies over the past three full years in terms of accident frequency and severity. The MOD will either increase or decrease your premiums. Understanding your MOD is key in monitoring your workers compensation costs. It is also a measure of how you compare to others in your industry.
A MOD factor of less than 1.000 will reduce your premiums and a factor greater than 1.000 will increase your premiums. A MOD factor greater than 1.000 indicates that your accident rate is above the industry norm and less than 1.000 indicates that you have a good safety record. For example a factor of .90 results in a 10% savings to the risk and a 10% increase for a factor of 1.10. Since the MOD typically includes three years of information, a bad year will impact your premiums for at least the next three years.
The MOD factor rewards companies that practice effective safety and claims management techniques. You should receive an Experience Modification Rating Sheet each year prior to your policy renewal date. You should assign someone to monitor the MOD factor on a regular basis as it has a direct correlation to your insurance premiums.
The comparison to other employers is primarily driven by payroll information and historical losses. Payroll is classified into categories such as carpentry and masonry. Properly classifying payroll will directly impact the MOD factor calculation. Improperly classifying will have thr reverse effect and may significantly impact your MOD factor. What you pay for workers compensation insurance depends upon total payroll and payroll per classification and you will pay a higher rate for higher risk jobs. Therefore in monitoring the MOD factor it is important to understand you payroll classification process if you use multiple classification codes.
In addition to monitoring payroll you should also be reviewing your loss history and reserves maintained by your insurance carriers. The MOD factor is calculated based on data reported to your states rating bureau by your insurers. Why is this important? It’s important to note because the data is not coming from you, but the insurance carrier. There is a potential that your loss history maintained by the insurance carrier contains inaccurate data or has not been revised to reflect the current status of claims. Therefore, a critical component of your monitoring process should be understanding the data provided by your insurance carrier. If data appears odd, ask questions of your carrier to make sure that your data is accurate.
Most states use the National Council on Compensation insurance, Inc. (NCCI) for calculating MOD factors. NCCI is a private corporation which was created and funded by member insurance companies. However, a limited number of states, including
Several small claims will likely have a more significant impact on your MOD factor than one large claim. Therefore, monitoring should not be limited to claims that are considered significant. Companies should pay particular attention to open claims with outstanding reserves. Working with your claims administrator to close open claims may reduce your reserves and ultimately have a positive impact on you MOD factor.
A MOD factor is something that all companies that pay workers compensation premiums should understand. For companies that pay significant workers compensation premiums it is equally important that a monitoring process be implemented to review the MOD factor on a routine basis. It is important that the monitoring process include a person that is knowledgeable of the inputs in the MOD factor calculation so that errors will be identified and corrected in a timely manner. In addition to driving workers compensation premiums, MOD factors may be considered by potential clients and customers as it is a direct reflection of your company’s safety management.
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