The 2003 workers’ compensation (WC) reforms created an extremely competitive workers’ compensation market in California. Numerous new insurance carriers emerged on the scene and a fierce competition among them has been pushing the rates down to new, unprecedented levels. Many businesses enjoy rates as low as 50 percent of the prereform levels.
Business owners noticed the extremely competitive market and are actively shopping their workers’ compensation insurance for lower rates. There is a catch, however, says Elizabeth Lisek, CIC, a commercial insurance broker with Westland Insurance Brokers.
“While lowering the rates is extremely important for any business owner and should be taken seriously, there is a hidden factor that may affect the business’s long-term savings a lot more than just a lower rate. That factor, often misunderstood by business people, is called Experience Modification (X-MOD) and is calculated by the Workers’ Compensation Insurance Rating Bureau (WCIRB),” says Lisek. “In order to truly save money on the WC insurance for the long term, one needs to have a basic understanding of the X-MOD to make wise decisions about their WC insurance and be proactive in the business’ safety and accident prevention program.”
Smart Business spoke with Lisek about the role of Experience Modification in the workers’ compensation package and how business owners can take an active role in lowering workers’ compensation costs.
What is the Experience Modification (XMOD) factor?
The X-MOD is calculated from loss information that insurance companies are required to submit to the WCIRB on an annual basis. The WCIRB calculates an XMOD for each employer provided the business meets a required premium threshold to qualify for an X-MOD. The formula takes into account reported paid losses, claim loss reserves and payroll amounts. It uses data of the past three years, but the most recently completed policy year is excluded. For example, an X-MOD effective in 2007 would use policy data from the policies effective in 2003, 2004 and 2005. The data from the 2006 policy would not be used until the 2008 X-MOD, when the data from 2003 would drop off.
Why is the topic of Experience Modification often overlooked by business owners and how does X-MOD affect businesses’ workers’ compensation premium?
While employers commonly realize that a lower X-MOD is somehow a good thing, many don’t make the connection between this number and their premium costs. Let me illustrate the tremendous savings a business may utilize by keeping its X-MOD at a low level. Let’s assume that an unmodified premium is $100,000. An X-MOD of 100 would be neutral as the premium would still be $100,000. With an X-MOD of 1.25, the rate is surcharged by 25 percent (the rate used by the workers’ compensation carrier is now multiplied by 1.25). The new premium would be $125,000. On the other hand, if the X-MOD is .75, there is effectively a 25 percent discount applied, so the $100,000 premium would now become $75,000.
It’s easy to see the tremendous surcharge, or savings, realized by the business depending on its X-MOD; in this illustration, the difference between the two factors translated into the $50,000 difference in premium. Such savings are hard, if not impossible, to realize just by cutting the rate.
What can a business owner do to effectively lower the X-MOD?
As I mentioned earlier, the X-MOD looks at the past loss history of the business. An employer may become more sensitive to the safety issues by creating safety programs and even monetary incentives to reward accident free teams/workers. Being that the number reported to the WCIRB is not just paid claims, but also all the reserves, it is extremely important to monitor the claims and close them as soon as possible, as well as make sure that the amounts reserved are kept at a reasonable level. In addition, since the X-MOD is calculated based on data reported to the WCIRB by an employer’s past insurers, incorrect or incomplete information can cause incorrect X-MODs. It may be worthwhile for employers to review the X-MOD calculations to make sure they are complete and accurate.
Why is it important to choose the right insurance broker to obtain the long-term savings on the workers’ compensation insurance?
The right broker can make a huge difference in the final cost of the business’s WC insurance. The broker should monitor all the outstanding WC claims and make sure claims are closed as soon as possible. If a claim stays open, the broker needs to discuss the reserves with the adjusters. The right broker can be successful in getting the reserves lowered, as well as in closing the claims.
The right insurance broker should not only be able to find you the best rate among different carriers, but should choose the company that will handle your claims quickly and efficiently and should also stay involved in monitoring your claims on your behalf.
ELIZABETH LISEK, CIC, is a commercial insurance broker with Westland Insurance Brokers. Reach her at (949) 553-9700 or firstname.lastname@example.org.