Workers Compensation: What is an Experience Mod?

Every business owner with one or more employees is required to carry workers compensation insurance. Workers compensation is a form of insurance that provides compensation to employees injured as a result of their employment. For many business owners, workers compensation is the largest property or liability insurance policy that they purchase. Luckily, it is also the policy in which the policy holder has the most control over the total premium being paid.

To incentivize safe working conditions, an experience mod is applied to the workers compensation premium calculation for each employer who qualifies. An experience mod is essentially a comparison of total claims you should have had, compared to what you did have. It compares the claim profile of the employer to the claim profile that would be expected of an employer of a similar size in the same industry based on three previous years of claims history not including the most recent (or just expired) year.

An experience mod of 1.00 is the average for the industry. An experience mod greater than 1.00 shows that this employer experienced worse than expected losses during the rating period (3 previous years not included the most recent) compared to the industry. An experience mod that is less than 1.00 indicates that the employer’s losses were better than the industry average for the rating period. That mod is then multiplied by the cost of the policy which can create a debit or a credit for the insured.

For example, an employer with a workers compensation premium of $100,000 and an experience mod of 1.30 would end up paying 30% more, a total premium $130,000 for that same policy. On the other hand, if that same employer had better than average claims history during the rating period and received an experience mod of .80, they would only pay $80,000 for the same policy and would be receiving a 20% credit to the total premium.

Premium Experience Mod Modified Total Premium
$100,000 x 0.80 = $80,000
$100,000 x 1.00 = $100,000
$100,000 x 1.30 = $130,000

The requirements to receive an experience mod vary by state to state, but a mod is typically granted by one of the following two methods:

  1. Have enough premium subject to experience rating in the most recent 24 months
  2. Achieve the established premium threshold on average over the entire experience period.

One final thing to note is that while both frequency and severity of claims is used to calculate an experience mod, frequency has more of an impact. For example, consider the following:

Employer A
1 loss totaling $50,000
Employer B
10 losses totaling $50,000

Which employer would you expect to incur the higher workers compensation costs in the future? Even though employer A had one sever claim, employer B would be paying more for their workers compensation insurance. This is because claims do happen and having one large claim can just be a random occurrence. However, having multiple claims that are smaller indicates that there may be something wrong with regards to the current safety measures and working conditions for employees.

It is important to have a full understanding of your experience mod and to use it to your advantage. If you are still unsure, or would like to begin reducing your experience mod, your trusted advisors at J Krug & Associates would be more than happy work with you.

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