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Posted: October 05, 2009

How to save on workers’ comp

Only one in 500 insurance agents truly understands the system. Do you?

Zachary Stock

Depending upon your experience modification factor,  you could either be paying 50 percent less than your competitors for workers' comp or as much as 300 percent more.

Controlling your experience mod is the best way to lower your workers' comp premium. Companies that actively work to control their mod can see huge savings. Here are some common myths regarding the experience rating system:

Myth #1: My experience mod is based on my premium paid in and claims paid out.

This is perhaps the most common misconception regarding the experience rating system. Many businesses and insurance agents think that your experience mod is a calculation based on the premium the business paid in versus the claims paid out in a given year.

This couldn't be further from the truth. In fact, your premium has nothing to do with your experience mod, which is calculated based on a formula established by the National Council of Compensation Insurers (NCCI). NCCI has gathered the payroll and claims information of thousands of businesses over the years and has established the experience rating system as a way of either crediting or debiting an insureds' workers' comp policy based on their loss performance compared with peers in their industry.

If a company has fewer losses than their industry peers, they receive a credit mod or a mod lower that 1.00; higher than average losses result in a debit mod above 1.00. The actual calculation of the experience mod is based on the amount of payroll in each workers' comp class code and the actual losses incurred by the company over a three-year period.

 Nowhere does premium become involved in the calculation.

Myth #2: An experience mod of 1.00 is good!

This is another common myth perpetuated throughout the business community. A mod of 1.00 means simply that you are average. A mod of 1.00 means your claims history is in line with that of your peers, but it doesn't mean you are receiving the best workers' comp pricing possible. For many businesses, their experience mod can go to the mid .80's or lower, saving them thousands on workers' comp insurance.

For a company that spends $50,000/yr on workers comp, a .87 mod would save them $19,500 over three years. Every business has a different minimum experience mod based on their size and type of business; find out what your minimum experience mod is and aim to get as close to that minimum as possible.

Myth #3: Large claims hurt your experience mod the most.

While the experience rating system does penalize you for large or severe claims, the formula behind the system is actually designed to reduce the impact of large claims on your experience mod.

Large claims frequently impact employers much less than they would expect due to the intricacies of the experience rating system. For most employers, mishandled small indemnity claims are what drive up their experience mod. 

Myth #4: There is nothing you can do to control or lower your experience mod.

This is the most frustrating myth for employers; there are many ways they can take control of their experience mod and reduce their workers' comp cost.

By completely understanding the formulas behind the experience rating system, employers can effectively manage claims, reduce the impact of small claims, implement and effective return to work programs, implement a no-accident certification program, explore the use of deductibles and loss-sensitive program as well as many other small changes that can lead to a lower experience mod.

A lower experience mod can reduce workers' comp insurance costs dramatically and position your business to be a fierce competitor, no matter what industry you are in.

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Zachary Stock, CRIS is a principal of Apex Risk Solutions a Denver-based risk management and insurance brokerage
firm. Zach specializes in workers' comp program design and management. Contact Zach at 720-988-4529 or at
zstock@apexrisk.com

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