'Ex-mods' Can Be Problematic for Some Employers

Sarasota, FL (WorkersCompensation.com) - Experience modification rating — on paper, a fairly straightforward way of translating a business’s past experience in workplace injury claims into a workers’ compensation insurance rate at policy renewal — can, in actual practice, introduce some inequities into the calculation of what some businesses should be paying. 

Known variously as EMRs, e-mods, mod rates or experience ratings, experience modification rating became part of premium calculations as a result of insurance industry research showing that the best predictor of future claims is the past frequency of injury claims in a given workplace.

Briefly, an employer with average claims experience has a modifier of 1.0 and would pay the manual premium, a premium based solely on the payroll for various job classification codes within the business. An employer with more significant loss experience would have a higher modifier — such as 1.2 — and would pay more than the manual premium. Conversely, an employer with less than expected loss experience would have a modifier below 1.0 and would pay less than the manual premium.

Each of the 50 states calculate their experience modifications independently, although most states rely on the work of the National Council on Compensation Insurance (NCCI), a not-for-profit organization owned by its member insurers that provides data and other services to insurance industry stakeholders, to calculate those rates. 

Using data reported to NCCI, agencies that calculate experience modifications use claims data from three years, ending one year prior to the year for which premiums are being calculated. As a result, it will take a business three years to work completely through an adverse experience modification rating.

Each state does, though, set its own “accident limitation,” a dollar limit for any individual claim that is not figured into an employer’s experience modification rating. Those caps range from somewhat above $100,000 to somewhat above $300,000.

NCCI periodically reviews its approach to calculating experience modification ratings, which are designed to reflect both the frequency and severity of claims. 

In 2012, for the first time since the 1990s, NCCI revised its process by increasing the “split point” — the dollar amount at which a claim moves from the “primary loss” category, intended as a measure of the frequency of workers’ comp claims, into the “excess loss” category, intended as a measure of the severity of claims filed by workers at a given business.

That shift reflected a recognition of the fact that medical treatment costs had risen since the 1990s, but it has created some issues for smaller employers, according to one expert.

Jon Coppelman, the senior workers’ compensation consultant at Renaissance Insurance Group, a workers’ comp consulting firm, noted in an interview this week with WorkersCompensation.com that a small business which experiences a single claim of just $20,000 — $3,500 above the new, higher $16,500 “split point” — would have an experience modification rating of 1.2, subjecting it to higher premiums not on the basis of claims frequency, but on the basis of a single claim that, in dollar terms, isn’t particularly severe.

Experience ratings are “a report card that can be misread,” Coppelman said.

Amplifying his point, Coppelman explained that an unfavorable experience rating can be unfairly detrimental to a business, a phenomenon particularly evident in the construction industry.

In many instances, Coppelman explained, general contractors for construction projects won’t hire subcontractors with poor experience ratings, and likely won’t look beyond that number to determine whether a potential subcontractor has fallen victim to a statistical anomaly.

Another expert, Ed Priz, president of Advanced Insurance Management, a Chicago-based workers’ comp insurance consultancy, identified some other problems with current experience rating.

According to Priz, larger employers can be shielded from statistical anomalies or other circumstances producing an adverse experience rating, at least in part because insurers are interested in retaining their business, where premiums are higher than premiums paid by smaller businesses. 

With those larger employers, insurers sometimes will take steps that can mitigate the impact of an adverse experience rating, Priz said.

“They [larger employers] get treated to a lot more discretionary discounts” than smaller accounts, Priz said.

And, he added, larger employers also have the option of opting for higher-deductible workers’ comp policies to overcome a problematic experience rating.

But an overarching issue, Priz said, is the calculation of experience modification ratings. Those calculations rely on reports from insurers, and when that reporting is inaccurate, the subsequently determined rates won’t necessarily reflect an accurate accounting of claims.

“When it goes wrong, it’s a classic case of ‘garbage in, garbage out,’” Priz said.

Still, according to Coppelman, the current method of calculating experience modification rates remains largely accepted by insured businesses. Coppelman said he does not hear any groundswell of complaints about workers’ comp premium calculations. 

“It may be that it’s so technical” that businesses simply don’t want to invest any time or energy in pursuing premium calculation issues, Coppelman speculated. Another factor may be that businesses understand that, barring any continuing problems with claims, an adverse modification rating can be overcome in three years, he suggested.

And, Coppelman went on to say, any concerns about modification rating are being expressed in an environment where workplace injuries — and thus, workers’ comp premiums — are trending downward.

Overall, while there are some anomalies that can affect experience modification rate calculations, “it’s a tolerable situation — it’s a stable one” and calculations are “usually pretty close” to accurately reflecting claims experiences, he added.

Still, if there is one issue that NCCI should address, it is the way that the current rate calculation protocol can affect small businesses, he said. One possibility might be the development of a sliding-scale “split point” to help shield small businesses from adverse consequences, Coppelman suggested.

NCCI reviews its experience modification rating process on a regular basis, according to Gerald Ordoyne, the council’s director of experience rating. Those reviews are wide-ranging, in order to ensure that experience rating is performing as intended, he explained.

One of the ideas behind experience rating, Ordoyne said, is to foster improved workplace safety, and to help ensure that injured workers return to work more quickly.

His point is also made in an NCCI document titled  "ABCs of Experience Rating", which notes that because “experience rating gives individual employers some influence over the final premium they pay, it provides an incentive for employers to develop loss prevention as well as incentives to have the injured employees return to work as soon as reasonably possible. In this way, experience rating benefits employers by promoting occupational health and safety.”

Coppelman echoed that view, saying, “No matter how you calculate premiums, you’re always going to reward” workplace safety and wellness initiatives.

“Those behaviors are key,” in determining policy rates, Coppelman said.

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