The Experience Mod Explained

By Genevieve Ventiere, Brokerage Marketing Manager

Many business owners may know that they have an experience modification factor that affects their workers compensation premium. Many do not, however, understand what exactly that means or how it’s calculated. As an insurance broker, you can help your clients by explaining the factors that go into an experience mod and how it affects their workers comp insurance premium.

It is worth noting that not every business will have an experience modification factor (often referred to an “X-mod” or just “mod”). Each state has its own threshold for the total workers compensation policy premium that will merit a mod. On average, this number is around $3,000 in workers’ compensation premium. It is not unusual, and no reason for concern if one is not produced for a small business.

The experience mod calculation is meant to tell an insurer whether or not a certain insured business’ losses are higher or lower than expected based on the loss averages of other businesses with the same governing class code. A business with an experience mod of 1.00 is considered to be exactly average in terms of losses as compared to other businesses within the same industry. Mods below 1.00 are above average performers, and mods above 1.00 are considered below average.

It’s a common assumption that the insurance carrier determines the mod. Experience mods are actually determined by either a state’s insurance rating bureau, or by the National Council on Compensation Insurance (or NCCI), then reported to the insurance carriers. Most states defer to the NCCI to determine mods, however several states do have their own rating bureaus. Some insured businesses with locations in multiple states will have mods from more than one bureau.

So how is an experience mod calculated? The experience mod worksheet spells out the numeric factors that go into the calculation of the mod. The loss performance is determined by comparing the loss dollars paid out to the amount of payroll the business records. These numbers are assessed for the three prior years and assessed for type to compute the mod.

Medical-only claims hold less weight in mod computation than Lost Time or Indemnity claims. Because medical only claims are less expensive for an insurance carrier’s claims department to adjust, the rating bureaus only assess approximately 30% of the entire claims cost to factor into the mod calculation. Since Lost-Time claims generally pay out more and stay open longer (some for years), they are weighed more heavily in the calculation of the mod. Typically, the first $10,000 of any lost time claim is weighted at 100%, and any amounts exceeding that are weighted less heavily on a sliding scale. Mods can also change dramatically based on the number of claims. For example, even a business with smaller, Medical-Only claims can be subject to a higher mod than a business with a large Lost Time claim if they have incurred a significant amount of losses.

While the calculation can seem complicated, the use of the mod by the insurance carrier and its effect is fairly simple. The higher a business’ mod, the higher their workers comp insurance premium will be. There are several factors that go into pricing any insurance policy – including limits, exposures, and rates filed – but for workers’ compensation, the experience mod is the most important factor in both pricing and understanding loss trends. Helping your clients to understand loss trends and having them work with Loss Control professionals is the single best way to reduce their mod, improve any dangerous conditions, and keep their employees safe and healthy. And after all, good employees are the backbone of any business.