Optimize your workers’ comp spend with experience modifications

Workers' compensation is one of the most variable spends that an employer works with, but many business owners are not taking advantage of opportunities to reduce their annual spend and may be overpaying relative to their peers.

Most expenses are directly correlated to the specific benefits the business receives. If you have a bigger payroll, you usually have more employees, and if you pay more rent, you can expect to have bigger or nicer space. A higher spend on Workers' Compensation coverage, however, is likely to leave you with the same coverage as your competitors, who might be paying less.

One of the biggest drivers of increased spend in workers' comp is the business' experience modification, but many businesses are not using this tool to reduce their insurance spend.

What is an experience modification?

An experience modification (often called an x-mod) is a factor that evaluates a specific business against every other business in the state in the same class code. Essentially, this factor looks at your historical loss history and payroll and determines whether your business performed better or worse than your peers. If your business performed better, by having either fewer losses, smaller losses or both, you'll receive a credit modification factor. If you have performed worse historically, you will receive a debit factor.

These factors can make a big difference in the annual premium a business pays. For example:

Business	Manual Premium	X-Mod	Standard Premium
Joe's Bakery	$10,000	1.25	$12,500
Jane's Bagels	$10,000	0.80	$8,000

Jane's x-mod is saving her $4,500 annually. If both Jane and Joe are working at the same 10% profit margin, Joe will have to produce an additional $45,000 in revenue to recover his extra workers' comp expense. That's a lot of baking!

Here are some key factors that determine how the x-mod is calculated:

The formula requires capitations (payments) for large losses. If you've had one really big claim, you will get dinged, but not that severely. If you've had several medium sized claims, however, this will make a big impact on your x-mod calculation.
The x-mod looks at years two through four. Underwriters don't look at your most current year, and they don't look at your fifth year out. If you have losses in the current policy, you need to brace for impact, but you won't feel it right away. Additionally, those losses, once they're part of the calculation, will stay with you for three years.
There are premium thresholds. If you are below the premium thresholds (in most states this means premium spend of less than $5,000 annually), you won't receive an x-mod and a carrier will treat your modification as if it were 1.00.

Managing the data that determines your x-mod

1. Make sure your X-mod worksheet is pulling the right data. The mod worksheet should reflect your accurate payroll. If your payroll is understated, the losses in that term (the numerator) will apply less payroll (the denominator) and therefore inflate your experience modification. Also, check for clerical errors. If there is an error, your carrier will make a correction.

2. Help your agent get the right data. Ask your agent for copies of your loss runs, and focus on the claims that are impacting your x-mod. Are all the claims listed even yours? Do you see claims that are open but you know have settled or returned to work? If they should be closed this can greatly reduce how they affect the calculation. Do you see claims in which subrogation is involved? (Subrogation means that another party was responsible for the claim; the most obvious example is a motor vehicle accident.) You should make sure that the claim expenses shown on the loss run are 100% accurate and reflective of your business.

3. Getting employees back to work. Bringing an employee back to work can have a material impact on lowering a claim. Many smaller businesses don't thoroughly explore options to bring employees back to work in a modified position. Bringing an employee back into the workforce sends a positive message, and you might be surprised at your other employees' willingness to help.

4. Getting started on the right foot. How do you treat your injured workers when they're injured? Do you let them know that you care about their well-being and want to make sure that they receive the appropriate care? The DNA of the claim is usually set within the first 24 hours. How that injured workers perceive the initial process, and their experiences, will go a long way to determining whether they are motivated to return to work. Set a positive tone from the beginning.

5. Create a culture of safety. Businesses that have a culture of safety are easy to spot. Your employees can sense it too. Do you conduct safety meetings? When you do, are you just going through the motions, or are you demonstrating your commitment to each employee? Your employees will appreciate working for a company that cares about their safety, and in turn will work more safely.

6. Take advantage of emerging safety trends. There are new and exciting techniques, tools and technology that can promote a safe work environment, and more of these are created every day. Pay attention to trends and look to adopt these. Remember that the X-mod is weighing you against your peers. If you're the only one that has not adapted, you will be challenged to keep your X-mod lower.

Not sure that the technology or tool will work? Try buying just one of them and pick an employee to pilot it. The employee will appreciate the effort you're making, feel empowered, and give you valuable feedback.

7. Tell your side of the story. What do you do if your X-mod is high and you're going to get hit with a debit factor? The first thing to do is make sure that your agent is aware of the steps that you're taking to improve your operation. By telling your story, in as detailed and concrete a manner as possible, underwriters will see that you're a risk that they would like to quote on, and you may even get some schedule credits to offset the impact of the X-mod (in states that allow them). No one can tell your story better than you can, so make sure it's understood.

Achieving a lower experience modification doesn't take a lot of work, but it does take consistent effort and attention. Taking the time to work with your agent and ensure your x-mod has all the necessary information can help to separate your company from your peers. The payoff can be considerable.

Matt Zender is vice president and Workers' Compensation Product Manager for AmTrust Financial Services, one of the top three workers' compensation insurers in the US. Contact him at [email protected]

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