HBC Experience Mod Number Changed

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WHY HAS MY EXPERIENCE MODIFICATION NUMBER CHANGED?

By:  Terry M. Koplan, CIC

BACKGROUND:  Experience modification numbers change annually for a variety of reasons.  This article is to help explain the common reasons an employer sees a change in their experience modification number.

First thing to understand is that all experience modification numbers are calculated and established in California by the WCIRB (Worker Compensation Insurance Rating Bureau). 

The second important issue to recognize is that all insurance carriers must provide loss and payroll data to the WCIRB on all employers. 

The third concept is to realize that an experience modification number is based on 3 years of your payroll and loss history.  The three years used in the calculation does not include your most recent expired policy term. 

Finally, all workers compensation carriers in California are legally obligated to use the experience modification number calculated by the WCIRB.

(For employers that have operations in other states there is an organization called the NCCI which performs a similar function to California’s WCIRB.)

THE QUESTION:

A very common question we get is “why has our experience modification number changed when we have had no new claims”?   (Of course it would come as no surprise that this question occurs most often when the modification number has gone up.)  

To answer this question, there needs to be a basic understanding of the fundamental mechanics of an experience modification number.  It is not simply the losses incurred. 

The major components of an experience modification number consist of the following: 

Ø  Losses  (Severity and Frequency)

Ø  Payroll

Ø  Class Code  (Specific to your type of business)

Ø  Bureau Rating Factors

All of these components are used in calculating an experience modification number.  Changes in any single one of these factors will affect the final calculation and result in a change in your experience modification number. 

ADDITIONAL DETAILS:

Ø  Losses:  The frequency and severity of losses has a significant affect on an employer’s experience modification number.  Claims under $2,001 are lumped together and have a lesser affect on the calculation than a claim of $2,010.  Large claims are factored down as to not overly penalize an employer on a single claim.  For example, a $100,000 claim may be factored down in the calculation to look like the claim is only a $20,000. 

Ø  Payroll:  The larger your payroll the more premium you will be paying.  Large payroll also reflects a larger pool of employees and thus a higher probability of a claim.  An employer with a large payroll has the potential for a much lower experience modification number than an employer in the same business but half his size.  A large employer with a single claim might still have an experience modification number lower than a similar but much smaller business.

Ø  Class Code:  Experience modification rates have factors that relate specifically to your industry.  Expected losses for a particular industry are factored into the final rate.  These factors change annually and are based upon industry averages.

Ø  Bureau Rating Factors:  All losses and payrolls are submitted to the WCIRB and then are put into a computer which generates Rate Factors.  Rate Factors do change from year to year based on all claims history in California.  It is the changing of these factors which will cause fluctuations in your experience modification number even when there are no changes in payroll or claims. 

  Many small employers never earn an experience modification number.  As of 2009, in order for an employer to earn an experience modification number an employer must have averaged for 3 years $17,300 of paid workers compensation premium.  As classification rates fluctuate the WCIRB adjusts the premium required to earn a experience modification number. Next year it could take an average of $16,000 for 3 years or even $19,000 for three years.  We never know until the WCIRB publishes the figure.

 Employers may stop earning an experience modification number if their premiums don’t average over the minimums for a period of time.

Can Errors Occur and Can they Be Corrected:  On rare occasions the data submitted by the carrier is inaccurate.  If it is truly an error, the experience modification number can be corrected and will be applied retroactively to the insured’s current policy. 

Failure to Complete an Audit:  If for some reason the carrier is not able to complete an audit with an employer, they will not submit any records to the WCIRB.  This will adversely affect your experience modification number since it will be based on 2 instead of 3 payroll years and will result in a higher experience modification number. 

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