Fixing Your PEO's Workers' Compensation Experience Mod

The experience rating modification process is designed to measure whether or not the performance (loss experience) of the client companies in your PEO’s book of business is better or worse than the expected loss experience of similar companies. Expected losses as a function of payroll are actuarially determined by workers’ compensation class codes.

An experience modification rate of 1.0 is “average.” Experience ratings greater than 1.0 result in higher workers’ compensation premiums, while experience ratings lower than 1.0 result in discounted premiums. The premium you will pay is partially determined by multiplying your basic premium times your experience modification rate. Clearly, a favorable experience modification rate can provide a competitive pricing advantage at the point of sale.

Whether or not your PEO is in a guaranteed cost workers’ compensation program structure, the experience modification rating provides important insight into how well your book of business is performing against peer companies.

How Experience Modification Works

Experience rating covers a three-year period, not including the most recent year. This is designed to minimize the impact of a “bad” or a “good” year during the period. The experience rating measures both frequency and severity through primary and excess losses. Primary losses measure frequency of claims and are capped at $5,000 per claim. Excess losses measure severity of claims and reflect losses per claim above the $5,000 amount. Each state caps single losses at a certain amount for experience mod calculation purposes.

Analyzing and Controlling Your Mod Rate

Accuracy of Data

Workers’ compensation insurance carriers are charged with reporting payroll and losses to the National Council on Compensation Insurance (NCCI). Depending on a carrier’s internal reporting systems and automation, even with the best of intentions, there may be occasions when information is miscoded or erroneously transmitted to NCCI for the mod calculation.

I am aware of one case in which the carrier reported losses for a large component of the PEO’s book of business without reporting the accompanying payroll, resulting in a significantly skewed negative mod calculation for the PEO. When adjusted, the PEO’s final mod rate dropped by more than 100 points.

A good rule of thumb is to begin any mod analysis by comparing data on the mod worksheets to independent payroll and loss documents to ensure reporting accuracy.

Claims Management

Depending on the PEO’s size, the PEO’s organizational structure may allow the PEO to invest in claims management professionals to oversee the PEO’s book of claims. This may often allow a PEO to manage carrier/third party administrator reserving practices, claims closing strategies, and claims closing rates more closely than the general population of small business clients they serve.

The experience mod three-year calculation period (not including the most recent year) provides PEO risk management professionals with an opportunity to aggressively manage open claims prior to carrier reporting and mod calculation. Special consideration should be given to the following areas:

• Closing open claims as quickly as practicable
• Assessing claim reserve levels to ensure that reserves are reasonable but not overly conservative
• Assuring that credit is applied to cases where subrogation has occurred and recoveries have been achieved

The PEO risk management department may wish to consider establishing performance metrics for carrier and third party claims administrator claims offices. Such metrics should quantitatively measure and score their claims handling performance on a monthly or quarterly basis and provide a numerical performance score.

Risk Control

Because e the experience modification rate measures both frequency and severity of claims, a review of the modification worksheet may provide valuable insight into areas where proactive risk control may help reduce the modification rate.

A comparison of expected primary losses to actual primary losses can provide an indication of whether or not there is a frequency problem. If actual primary losses exceed expected primary losses, it would be prudent to review the PEO’s book of business to determine if there are any specific injury frequency drivers (such as slips, trips, and falls) that can be addressed through proactive risk control programs and activities.

Similarly, a review of actual excess losses versus expected excess losses can provide an indication of whether or not there is a severity problem that needs to be addressed. Again, a review of the PEO’s book of business should be performed to determine if there are any systemic severity problems that can be addressed through proactive risk control programs and activities.

Underwriting

Requiring prospective PEO clients to provide current experience modification rate information is a reasonable expectation. This will allow the PEO to determine whether or not to accept the client’s risk and to determine what level of risk management oversight/service a client may need to reduce an unacceptable modification rate to a level that will not harm the PEO’s overall performance. Small businesses that are properly motivated should actually benefit from the risk management discipline and structure a PEO can bring to their workers’ compensation programs.

Conclusion

Experience modification rates are designed to create a “leveling” effect on workers’ compensation pricing by rewarding good performance and penalizing poor performance. PEO’s who understand the dynamics of providing clients with excellent risk control and claims support should benefit from lower than average experience modification rates and improved workers’ compensation program pricing.

Key factors in managing and controlling modification rates are:

• Ensuring the integrity of data reported by the carrier to NCCI
• Aggressively measuring and controlling claims management performance
• Analyzing claims frequency/severity and providing appropriate risk control solutions
• Properly evaluating and underwriting risk

PEO’s who implement risk management best practices will benefit from lower program costs and have a competitive advantage whether they are in a loss sensitive or guaranteed cost program structure.

^{David E. Carothers is a Risk Manager and Managing Principal with Praxiom Risk Management in Tampa, FL.  David is a founding and still active member of the Advisory Board to the Certification Institute for PEO Workers Compensation.  He has also been a speaker at NAPEO conferences and authored several articles for the PEO Insider.  Praxiom is a full-service outsourced Risk Management consulting firm specializing in PEO safety, loss prevention, claims management, and insurance placement.  Praxiom works with PEO clients nationwide.  Comments and questions are welcome at dcarothers@praxiom-rm.com.}