If you are a business owner with employees, then you are familiar with workers’ compensation insurance. Even if you are a sole proprietor, you may carry a policy to protect yourself.

Workers’ compensation helps employees cover the cost of medical expenses, lost wages, and rehabilitation in the event of an accident, illness, or injury on the job, or even death benefits in unfortunate cases.

Most states require businesses with even one employee to carry worker’s compensation coverage. Like most commercial insurance coverage, it is the cost of doing business and protects your company and employees.

However, by implementing safety protocols and procedures, you can not only maintain a safe workplace, but also help lower your workers’ compensation premiums.

How Are Premiums Determined?

Several rating factors go into the final calculation of premiums for workers’ compensation insurance. These include: employee job classifications, annual payroll amounts, officer/owner classifications, location of employees, prior losses (record of accidents, injuries, illnesses, or deaths), and something known as the experience modification factor (mod factor).

But first, some background information. Workers’ compensation is a class-rated insurance program. That is, within a state, an insurance company applies the same rate to all employers who fall into a given class.

For example, all clerical employees are subject to the clerical rate, all janitors are subject to the janitorial rate, etc. The rate applied in each class is an average rate and does not recognize any individual characteristics of the employer.

Because of this, there is a need for a statistically supported means of differentiating one business in a given class from another, for the purpose of determining policy premiums. This is where experience rating comes in—the great equalizer.

Because workers’ compensation insurance is mandatory in most states, it is an industry rich with statistical information. Each state subscribes to an independent statistical organization or bureau to gather and analyze data and trends in the industry. Although some states have their own bureaus, for most states, this organization is the National Council on Compensation Insurance (NCCI).

Every year, insurance companies are required to submit to the NCCI or state bureaus information for each employer they insure. These reports, known as unit statistical reports, include classification codes, audited payrolls by class, and premium and claim information. The statistical organization then collects the data, which allows it to predict expected losses for each payroll classification based on the historical performance of that business class.

What Role Does the Mod Factor Play?

The experience modification factor (mod factor) is a premium multiplication factor calculated for each employer who qualifies (typically a premium more than $10,000 or a three-year average premium of $5,000, depending on the state).

The mod factor compares the claim profile of the employer to the expected claim profile of an employer of similar size (based on payroll) in the same industry, or class codes. A value of 1.00 is average, meaning the frequency and severity of actual losses equaled the expected losses.

A mod factor greater than 1.00 means the employer experienced worse than expected losses during the rating period, and a mod of less than 1.00 indicates the employer’s losses were better than expected for the rating period.

An individual employer’s mod factor is calculated using claims data from the three most recently completed years, excluding the current term. Contributing factors include size of each loss and frequency of losses.

Finally, these adjusted claims are compared to expected losses for the class and size of the organization, which ultimately determines the mod factor assigned to the individual employer.

Credit mods (less than 1.00) reduce premium, while debit mods (greater than 1.00) result in a premium surcharge. For example, if your business has a mod factor of 1.24 you will be assessed a 24 percent surcharge (increase) on your base workers’ compensation rates.

Lower Mod Factor=Lower Premium

So the million-dollar question becomes: How do I get my mod factor below 1.00?

• First and foremost, create an environment of safety. Frequent losses are heavily weighted in the calculation. What’s more, frequent losses often result in the occurrence of a severe loss. An employer that invests in eliminating work-related losses will save in the long run.
• It is also important to check the calculations on the experience modification worksheet each year. Most calculations are correct, but mistakes can occur. Common mistakes include inaccurate, outdated, or incomplete data provided to the statistical rating bureau.

Creating a safe workplace is a combination of site maintenance, employee awareness and training, and appropriate protective equipment and procedures. Specific risk mitigation strategies will vary from industry to industry.

For instance, many automotive aftermarket, garage, or carwashes must deal with chemical exposure and airborne toxins which require proper labeling, personal protective equipment, and hazard and accident protocols. Other businesses may have mechanical risk exposure that may include rotating parts, use of hand tools, or operation of forklifts, cranes, or vehicles.

Whatever your business may be, employee training from inclement weather protocols to proper use of a ladder are a necessary part of any safety program. By increasing employee safety awareness and training you will provide a safer workplace environment for both employees and customers. This will not only help control and lower your mod factor, it will also increase productivity and employee morale.

If you have questions about starting a safety awareness program for your business, contact your workers’ compensation or business insurance carrier and they should be able to assist or direct you to available resources or a competent provider.

Dan Tharp is licensed in all states (except Alaska & Hawaii) and is the Vice President of Business Insurance Lines for Pearl Insurance. Dan has been assisting business owners in protecting their operations, customers, and employees for over 30 years. For questions regarding this blog post or any other insurance matter, he can be reached via phone at 800.447.4982 or email at [email protected].