Understanding Your workers’ Compensation Experience Modification Factor
An important aspect key to realizing your workers’ comp 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 reduce your workers’ compensation costs.
Who calculates the mod factor?
Most states use the National Council on Compensation Insurance to collect data and calculate the experience modification factor. The NCCI is a private corporation funded by member insurance companies. However, some states either operate an independent workers’ compensation bureau or have set aside a state fund for workers’ compensation. These territories may or may not use the NCCI’s classification system to determine experience modification factors.
How is your mod calculated?
The formula of calculating the experience modification factor is multifaceted, but the fundamental theory and purpose of the formula rather simple. Your company’s actual losses are compared to its expected losses by industry type.
The formula includes factors that account for company size, unexpectedly large losses, and the occurrence 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 anticipated 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 anticipated, resulting in a reduced 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 generally includes data for three policy years, excluding the most recently completed year. For example, if your anniversary rating date is Jan. 1, 2019, the experience period is 2015 to 2018. 2019 would be excluded.
Three years of data is used to provide a more precise reflection of the losses, flattening out the impact of an extraordinarily 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 indication of loss frequency (the number of losses) and are used at their complete 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 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.
An important aspect key to realizing your workers’ comp 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 reduce your workers’ compensation costs.
Who calculates the mod factor?
Most states use the National Council on Compensation Insurance to collect data and calculate the experience modification factor. The NCCI is a private corporation funded by member insurance companies. However, some states either operate an independent workers’ compensation bureau or have set aside a state fund for workers’ compensation. These territories may or may not use the NCCI’s classification system to determine experience modification factors.
How is your mod calculated?
The formula of calculating the experience modification factor is multifaceted, but the fundamental theory and purpose of the formula rather simple. Your company’s actual losses are compared to its expected losses by industry type.
The formula includes factors that account for company size, unexpectedly large losses, and the occurrence 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 anticipated 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 anticipated, resulting in a reduced 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 generally includes data for three policy years, excluding the most recently completed year. For example, if your anniversary rating date is Jan. 1, 2019, the experience period is 2015 to 2018. 2019 would be excluded.
Three years of data is used to provide a more precise reflection of the losses, flattening out the impact of an extraordinarily 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 indication of loss frequency (the number of losses) and are used at their complete 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 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.