# Who is auditing your Experience Modification Ratio?

Updated on July 24, 2012

Overview:

It has been my experience when reviewing a company’s Experience Mod that about 50% of the time the information in one form or another is incorrect, resulting in improper calculation of the client. This article explains the workers comp experience modification ration, i.e. “Mod” and gives some common pitfalls and tips of how to actively manage and ensure optimize the mod for your organization.

What is the Mod?

In simple terms, it is the government’s method of adjusting an organization’s workers comp premium using past experience to reward good performers and penalize poor performers from a loss perspective. It takes the actual losses over a three year period and compares these to the expected losses for the size and type of industry you are in. It is expressed as a ratio with the average, i.e. actual divided by expected equals 1.0. An organization with higher losses than expected has a ratio higher than 1.0, e.g. 1.21 and an organization with better than expected losses will have a ratio below 1.0, e.g. 0.90.

What makes up the Premium Calculation for my Workers Comp?

a) The class code – based on the business you are in (as determined by NCCI Scopes Manual),

b) The payroll for each class code,

c) The rate for each class code for each specific insurance carrier,

d) The Experience Mod, and

e) The deviation factor, expressed as Scheduled Credit/Debit, a carrier assigns for pricing.

How does the Mod affect my Workers Comp premium?

The Mod is applied after the “manual” premium is calculated, i.e. after you multiply the class code rate and the payroll. If an organization has \$10,000 in manual premium and a 1.20 Mod, the net result (before Rating Factor) is equal to 20% higher than average cost of the workers comp. Conversely, a 0.90 mod results in a 10% lower than average premium.

How is the Mod Calculated?

The mod calculation is an algebraic equation with several factors using payrolls, class codes and losses for a three year period. Fore more details, see Breaking Down the Experience Mod Calculation. As mentioned before, the actual data for the three year period is in the numerator portion of the equation and is divided by the expected data in the denominator producing a numerical ratio.

Who Calculates the Mod?

In most states, the National Council on Compensation Insurance (NCCI) performs the actual calculation, in North Carolina this is performed by the NC Rate Bureau following the same rules.

Who’s Supplying the Data?

Summary:

Knowing what the Mod is and how it works can drastically put you in the drivers seat and enable you to actively manage what you are in control of regarding your workers comp premium and not rely on insurance carriers and NCCI/NCRB. Staying on top of claims, implementing a strong loss prevention program are also equally important factors discussed in other articles. If you are interested in a confidential review and analysis of your mod, please contact me at the information below.

Jacob E. Dahlin is a Commercial Lines and Risk Management Specialist at Mountcastle Insurance Agency in Winston-Salem, NC. He can be reached at jdahlin@mountcastleinsurance.com or 336-596-7477.