What is an Experience Modification and Why Does it Cost Me So Much Money?

ex modAnyone who has the “privilege” of handling a Business’ workers’ compensation program has probably heard of an Experience Modification (X-Mod, E-Mod or Mod’s as they are often referred to), but many do not know what it is or what function it serves in a workers’ compensation program.  Today I will give you some clarity on the subject of X-Mod’s.

An X-Mod is a factor that compares your Business’ Workers’ Compensation claims history to the claims history of a business that maintains a similar payroll within the same industry.  If this explanation confuses you, you are not alone.  Simply put, an X-Mod is a factor that is used by Rating Bureaus to adjust your Business’ Workers’ Compensation premium based on your Business’ actual losses versus your expected losses. Since workers compensation is class rated (meaning all business’ that are in the same industry get the same rate) the X-Mod is a way for the carriers to get a better determination of the actual risk your business represents.

So how does this work? During your workers compensation policy period your business is expected to have workers compensation claims. These are called your Expected losses and they are determined by many factors, one of which is the amount of payroll that you have.  Theoretically, the larger your payroll the more losses you should “statistically” have. If your Actual losses are lower than your Expected losses your X-Mod will be below 1.0. If your Actual losses are greater than your Expected losses your X-Mod will be above 1.0.

Now let’s look at how does it affect your premium? As mentioned above, the number of losses drives your experience mod up and down.  Using  $100,000 as the example premium,  you can see that with more claims comes a higher experience mod and premium.  Likewise, fewer claims results in a lower experience mod and lower annual premium over time.

Manual PremiumX-Mod                  Final Premium

$100,000                          1.5                           $150,000

$100,000                          1.0                           $100,000

$100,000                          .8                             $80,000

 

In a nutshell this is what and how an X-Mod works. There are many factors that make up the complexity of the Workers’ Compensation system and equally as many smart and effective solutions that help to create a successful workers’ compensation program.  This topic is the first in a series that is forthcoming.  I will continue to explain in more detail the workers’ compensation system as well as all of the variables that go into creating a successful workers’ compensation program in my next blogs. Please look for them in the future.  For more information on how you can better manage your Workers’ Compensation costs, call the FBinsure office and speak to myself or any Business Insurance Expert.

*Please note there are other factors that go into the final premium other than anX-Mod