If you have been in business for even a short period of time, you’ve figured out that your MOD Score (Experience Modification Factor) drives your workers compensation premium. But understanding where the number comes from and what you can do about it can be confusing. Let me try and at least clear up a few basics about MOD and how it affects your bottom line.
What is MOD?
MOD, or Experience Modification Factor, is a score used in American workers’ compensation insurance to adjust premiums based on a business’s risk. Your number represents either a credit or a debit. In plain English – it’s a score of how big a risk your business is based on your industry, size, and personal history of claims. And it can help or hurt your premium cost.
So, how in the heck is a MOD calculated?
Your company’s actual losses are compared to your industries expected losses. So simply put, your company is being compared to the losses of those businesses just like you across the nation. The calculation includes factors that account for unexpectedly large losses, company size, and incident severity and frequency. The goal is to strike a balance between fairness and accountability – if you’re business is better than average, your premiums deserve to be, too.
Where does my MOD and my premium intersect?
Your workers’ comp premium is a direct result of your MOD factor. Your score adds up to either a credit or a debit. A score of less than 1.0 is a credit mod, which means your losses are better than your industry average. The net result… a discounted premium. Great job!
On the flip side, a mod score greater than 1.0 is a debit mod, which means your losses are worse than your industry average and a surcharge will be added to your premium. Bummer.
What’s magic about the number “3”?
I mentioned above, one of the factors in your MOD score is your own business history of workers’ comp incidents. Thankfully, the NCCI doesn’t use just one year of history, but 3. By using three years of data, you get a more accurate picture of your average losses, hopefully smoothing out the impact of a bad year.
The experience rating period includes data for three policy years, but excludes the most recently completed year. So, let’s say your rating anniversary date is January 1, 2018. The experience period used for your score would be 2014 through 2016. 2017 won’t be included until next year.
So, which is worse… loss frequency or loss severity?
Believe it or not, loss frequency will have a greater negative affect on your MOD score, resulting in a higher premium. Gulp! But let’s think about it. If your organization has a track record of consistent losses, even if they’re small, your insurance company might wonder where your proactive loss control programs are. Do you really care about safety?
Your final mod calculation takes your actual primary and excess loss figures, and compares them to your industry and a company of the same size. Both actual and expected losses are divided into a primary and excess portion by what’s called a split rating method.
It can help to think of primary losses by thinking of the frequency of losses. Primary losses are weighted higher (more important) in the formula. When you think of excess losses, think of the severity or the dollar amount of the loss. Excess losses are weighted lower (less important) in the formula.
Who are the brains behind the MOD calculation?
For most states, the National Council on Compensation Insurance (NCCI) provides the calculations and scores to determine your MOD. NCCI is a private corporation funded by member insurance companies from across the nation, which operates with a not-for-profit philosophy. Their goal is to collect and analyze trends, claim data, and regulatory decisions from across the nation.
(Note: Those states that fall outside the NCCI either operate on independent workers’ compensation bureau or have set aside a state fund for workers’ compensation. These states may or may not use the NCCI’s classification system to govern experience modification.)
What’s this “split” rating method?
The NCCI announced in July 2011 a proposal to raise the split point from $5,000 to $15,000 over a three-year period to better correlate with claims inflation. In 2015, the split point included an added increase because of claims inflation, and the NCCI now makes yearly adjustments to the split point based on inflation.
In 2017, the NCCI’s rating system used a split point of $16,500. Simply put, this means the first $16,500 of a claim equals a primary loss and any amount over this point is an excess loss.
For example, let’s say you have three separate $8,000 losses. These losses would all be primary losses, as each falls below the current split point of $16,500. That’s three strikes against you.
But let’s say you have one $28,000 loss; here you would have $16,500 in primary losses and $11,500 calculated as excess loss. That’s just 1 primary strike, and an excess loss, which dings you at a lower weighting.
Just like we talked about above, fewer claims, even if a higher dollar amount, have less impact on your MOD score, and therefore, your premium.
The GREAT NEWS!
By taking proactive loss control measures within your company, you have the ability lower your MOD score and save your organization a lot of money!