Understanding the workers’ compensation experience modification factor

In order to fully understand your workers’ compensation premium, you need to understand the experience modification factor, typically referred to as your “mod.”

Understanding your mod and the data used to calculate it helps identify ways to minimize your workers’ compensation premium.

Who calculates the mod factor?

The Virginia Risk Sharing Association (VRSA) calculates the mod based on factors and data from the National Council on Compensation Insurance (NCCI). The NCCI is a private corporation funded by member insurance companies. The Commonwealth of Virginia accepts use of the NCCI classification system, and the Bureau of Insurance annually approves the factors used in the mod calculation.

How is a mod calculated?

The process of calculating the mod factors is complex, but the underlying theory and purpose of the formula is straightforward. Your actual losses are compared to expected losses by payroll classification type.

The formula incorporates factors that account for the payroll size, unexpectedly large losses, and the incidence of loss frequency and loss severity to achieve a balance between fairness and accountability.

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 typically a more significant indicator of risk and can be improved through proactive risk control programs.

The NCCI’s rating system uses a split point of $17,000. This means that the first $16,500 of every loss is considered a primary loss, and any amount over this point is considered an excess loss. For example, a $9,000 loss would have no excess losses, as it falls below the current split point of $17,000. However, a loss of $25,000 would have $17,000 in primary losses and $8,000 in excess losses. Additionally, medical only claims losses are reduced by 70 percent.

Expected losses are calculated using your payroll data by class code and applying the expected loss rate (ELR). The ELR is provided by the Virginia Bureau of Insurance. These figures are also broken down into expected primary losses and expected excess losses.

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 experience rating period includes data for three policy years, excluding the most recently completed year. For example, if the renewal date is 07/01/2020, the experience period includes data for policy years 2016, 2017 and 2018. Policy year 2019 is excluded.

Three years of data is used to provide a more accurate reflection of losses and smooths the impact of an exceptionally bad or good year for losses.

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. To understand how workers’ compensation losses at your entity compare to other like entities, contact your member service representative or underwriter.

How can you control your mod?

Your mod factor has a direct impact on your workers’ compensation premium.

The key to controlling your insurance costs is good risk management.
  • Report claims immediately.
  • Do not pay more than you legally owe. The law is designed to make employees whole. Paying full wages often leads to tax problems, and to making the employee financially better off for being out of work which can be both a moral and morale hazard.
  • Light duty should be provided to all employees receiving a light duty release.
  • The experience modification factor is influenced more by small, frequent losses than by large, infrequent ones. Review your small claims, even though they may look minor dollar-wise. It’s possible there are patterns that can be addressed by simple risk control measures.
  • Safety programs, return to work programs, and appropriate prevention procedures can help to reduce loss frequency.
  • An effective self-inspection and accident investigation program are critical to managing claim frequency.
  • Supervisory roles should have set safety performance goals. Success in achieving safety goals should be used as one measure during performance appraisals.
  • Employees should be trained on their responsibilities for safety, and violations should be enforced.
  • Frequently communicate with employees on both a formal and informal basis regarding the importance of safety.

If you would like VRSA to review your loss patterns or assist with any of the controls mentioned above, please contact your member service representative or safety consultant.