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 their 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
[email protected].