Thursday, January 7, 2010

New Wrinkle in Reducing Mods

I was talking to an agent/broker in Tennessee the other day, and he mentioned helping a couple of clients reduce their experience modification factors in a way that struck me as both innovative and questionable.

For many employers in the construction trades, keeping an experience modifier below 1.00 is more than just a matter of keeping Work Comp premiums down--it's the difference between being able to bid on certain projects at all. For many projects, a requirement for being able to bid is that your experience mod is 1.00 or lower.

This TN agent explained that he had helped some clients lower their mods by arranging for them to buy back the indemnity portion of some claims from the insurance company. That is, the employer reimbursed the insurance company for what the insurer had paid out for the indemnity (lost time) part of the claim. Not only did this reduce the overall cost of the claim that the insurer reported to the rating bureau for use on the mod, it changed those claims to "medical only" status. In many NCCI jurisdictions, "medical only" claims are heavily discounted in the mod calculation formula.

Now, this is certainly innovative, as I said before. I'm a little surprised that insurance companies were willing to go along with it, though, as it really seems to be improper in a number of ways. Just because the insurance company has been reimbursed for the indemnity costs of the claim doesn't really make it a "medical only" claim. And this practice would give an employer a lower modifier than the employer would really have earned, absent this bit of dollar swapping, giving the employer an advantage over competitors, even though the "dollar swapping" employer really doesn't have a better loss record.

This also eats away at the credibility of the experience rating system, allowing deep-pocketed employers to avoid the mod impact of serious claims.

I understand that the state of Wisconsin has already outlawed this practice, and I'm trying to find out more about what, if anything, other states have done.

For the moment, I certainly can't in good conscience recommend that employers try this trick at home. They might want to be aware, however, that some of their competitors may be gaining unfair advantage over them when it comes to experience modifiers.