Monday, November 24, 2014

A Perfect Storm For Experience Modiers

I keep returning to the subject of experience modifiers, because for so many of our clients in the construction or staffing industries, experience modification factors are vitally important in two ways. First, of course, they directly impact Workers Compensation insurance premium charges (a 1.25 e-mod means a 25% surcharge while a .75 mod means a 25% discount) but also because more and more of their customers and potential customers are using the experience mod calculation as a benchmark for even quoting on work.

The way this works is a client says, "to bid on this project, your experience modifier must be 1.00 or lower". They may set the bar slightly higher sometimes, say, at 1.05, but you get the idea. This rating factor that was developed for the purpose of adjusting insurance premiums is now being used as the be-all and end-all determination of workplace safety. And it's a bad, misleading measure.

It's also becoming the "perfect storm" for a lot of companies because of two changes in the insurance industry: a change in the NCCI rating formula and decreases in manual rates in many states.

I've written before about the new formula that's been devised by NCCI to calculate experience mods--the main difference is that more of each claim is being fully counted in the formula. In the prior formula, everything above the first $5,000 of each claim was discounted. Now, that "set point" has been raised, in increments, so that now the first $13,500 of each claim is counted (increasing next year to $15,000).  This means that the historical loss data used to compute a company's X-Mod has increasing impact on the mod calculation, if there are any losses in excess of $5,000 apiece.

But the second element that is driving modifiers up is that, in many states, manual rates have been declining in recent years.

Now, that's typically touted as good news for employers. Here in my home state of Illinois, for instance, politicians have been hyping the decline in manual rates as proof that recent 'reforms' have paid off for employers.

That's not really such an obvious truth--insurers have lots of ways to keep premiums high even when manual rates decline. But what hasn't been hyped so much is that when manual rates decline, so too do the "Expected Loss Rates" that are used in experience mod calculations--and those declines aren't such good news for employers.

Expected Loss Rates, or ELRs, are the way NCCI calculates what they think losses should have been for the average employer of your type and size in your state. They compare that to what's been reported for your past losses to calculate your experience mod.

So here's what's happening, thanks to these two unrelated changes. The change in the rating formula means that your historic losses have greater impact on your mod, while the decline in ELRs means your historic payroll info has less impact than it used to. So everything else being equal, with the very same prior loss and payroll data, your experience mod is likely taking a big jump.

So at the very same time that more and more customers are using the experience modifier as a make-or-break factor in bidding on work, behind-the-scenes changes in insurance rating and manual rates are pushing up modifiers, making companies look less safe than they used to be, even when you control out changes in losses.

Worse yet, these X-Mods are shutting out perfectly safe companies from bidding on new projects.

We're getting more and more calls from clients asking us to review their experience mods, to see if something can be done to reduce a suddenly disastrous mod calculation that threatens to put the client out of business. Often, we can find ways to reduce these mods. Often, but not always.

I'm not sure what the solution is, other than getting the word out that an experience modifier is not a fair or reliable benchmark for workplace safety, and that these technical changes made by the insurance industry have significantly re-set the mod formula and tilted mods higher for many employers without there being any change in their safety record or operations.

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