Brief Introduction to the Experience Modification

It is a dawn of a new era for Workers Compensation in California. The experience modification formula has been altered for the first time since January 1st 2007. Those of you who are not familiar with the experience modifier, to put it simply, it is a comparison of your business’s claim frequency against other companies in your governing class code. The industry average is 100, and anything lower (say and 84) is a credit modifier, conversely anything higher (106) is a debit modifier. Credit x-mods (experience modifiers) can have a significant reduction on your estimated annual premiums, because the insurance carrier views you as less of a risk.

On January 1st 2010, the WCIRB (workers compensation insurance rating bureau) recalculated the formula by putting more weight on a companies claims frequency (rather than the overall cost of the claims), risk of specific industries (classes of business), and the amount of employees that different companies have in their designated classes. i.e. If you had a debit modification of 104 and hadn’t had any claims for the past few years, but are in a class of business that is more susceptible to claims and have a high employee volume, then your experience modification still went up. Also, if you have a few claims in 2010 that were miniscule in cost, then your experience modification increased more than the company that only had one large claim.

Please note: that this is an extremely basic explanation of how the new formula is calculated. For everyone’s sake, I took one paragraph to explain it, and didn’t want to get into the W/B formulas, and primary/actual values.

A few Issues with California Comp

In this ever changing economic environment it is important to keep overhead at a minimum (i.e. insurance premium payments). Additionally, this soft market and diminished rates has relieved many business owners from paying extensive w/c premiums and have a variety of insurance carriers to choose from….However, the market is cyclical and there are a few subtle signs that the tide is beginning to turn. Medical payments are on the rise and so are the costs for employee long-term disability. A lot of the w/c carriers that came into California a few years ago, with the expectations of undercutting the competition by using minimal/improper rates have been leaving the market place due to their under pricing of high loss ratio accounts. These high loss ratios (riskier and more expensive) businesses will be forced to become insured with financially secure and established insurance companies that will compensate for these “risky investments” by raising the rates, which will increase the premium dollars coming in.

Consequently, the market will inevitably subside and a restaurant owner’s rate of $2.57 for the restaurant tavern class rate will rise to nearly $5.00. Regardless of a future rate increases and market potentially firming up, the new experience modification formula is a problem for business owners that don’t hold a high standard for safety. Even in this soft market, the new experience modification formula is continuously crippling companies that previously had miniscule debit x-mod and are now paying thousands more in premium dollars.

1.So is it financially feasible for business owners to continue sacrificing sound operational practices to enhance their short-term savings?
2.Will these owners unintentionally be paying out more money in the long-run if they deal with an insurance carrier that’s notorious for poor claims management and sets reserves too high/has difficulties closing a claim?
3.What is the most cost effective way to combat fiscal punishing debit x-mod formulas and imminent rate increases?

Why Inevitable Rate Increases in the Next Few Years + the Recalculation of the Experience Modification Formula = A Greater Focus on Claims Management and Risk Reduction

If you are a company with a debit 130 x-mod or higher and have a history of an elevated claims frequency: At this rate, you are paying tens of thousands more in premium dollars than you should be and the market place (insurance carrier availability) is shrinking up on you. You continuously jump at the cheapest quote that is put in front of you (usually the lowest graded carriers with third party administrators who handle the claims management) as you desperately try to stay afloat and keep your bottom line in tact.

Advice: Stop deciding to do business with a poor, low grade insurance carrier (a.k.a. 1985 Pinto) just to save 5,000 bucks at renewal. Instead, pay for a better product that will work with you to proactively minimize your claims through loss control and risk management resolving techniques. In addition, these companies will “actually” investigate assumed fraudulent claims with their SIU (special investigations unit) more promptly than other insurance companies, and will consistently send claims representatives to hearings in order to negotiate lower medical reserves/get the claim closed a.s.a.p.

Basically, my advice is to pay an extra 5,000-15,000 for a quality company (a.k.a. Cadillac) immediately. Rather than staying with a low cost provider that doesn’t improve your company’s safety from an operational standpoint, or provide any customer service, and is slow to respond to any request that you may have. I’m certain that you will continuously be paying more year, after year, after year as your experience modification continues to spiral out of control, until your only option is the State Fund and your $50,000 estimated annual premium is a $93,000 annual premium. Just pay more initially, and you will save a ton in the long-term.

If you are a company who has an 82 x-mod and does not historically have a prevalence of claims: You are in a great position and every insurance company wants your business (depending on your business class of course) because you are viewed as a great risk! You either know how to run a safe establishment because of your tenure in the business, are a relatively new company who has had a published x-mod for three or four years, have gotten lucky, or are in a classification of business that typically has a minimal exposure for claims.

Advice: Make sure that your representative/insurance consultant does not become complacent. It is important to always be looking for ways to enhance the safety of your business without diminishing its efficiency. When w/c rates are on the rise, the only thing that will combat a premium increase will be a credit experience modification.

It is also crucial that your insurance representative is auditing your w/c policy quarterly in an attempt to reclassify your business and employees. This could ultimately recalculate your annual premium and reduce what you are paying monthly.
Finally, make sure that your insurance consultant is looking at different carriers before renewal. If you have a great loss history and have been established for a length of time, then many insurance companies will want your business, thereby reducing their target price (which can save you money from year to year).