Don’t let the title of this blog fool you into thinking there are only a few errors that businesses can make when it comes to handling their workers compensation program. There are dozens of errors a business can make. If I had to choose one that I believe most frequently causes businesses to be overcharged for their workers compensation program , the answer would be simply inaccurate Experience Modifications (XMods).
An Experience Modification factor is the variable used to adjust premium based on previous loss experience. Generally speaking, if your actual losses exceed the amount of expected losses in a policy year, your Experience Modification will rise above 1.0. If your actual losses are less than the amount of expected losses in a policy year, your Experience Modification will decrease below 1.0. Once the Experience Modification is calculated, it acts as a multiplier to calculate the premium for a workers’ compensation policy. (Example #1 if your manual premium is $20,000 and your Experience Modification is 1.5 your actual premium would be $20,000 x 1.5 = $30,000). (Example #2 if your manual premium is $20,000 and your Experience Modification is .70 your actual premium would be $20,000 x .70 = $14,000).
As a worker’s compensation expert I see inaccurate Experience Modifications for small and large businesses alike. When I discover one of these errors for a prospective client they almost always ask how this could happen. It happens because no one is looking for the errors. Typically the rating bureau, which varies depending on what state your business is in, will release a business’ Experience Modification and that is what the insurance agent and carriers use for the policy. If no one is cross referencing the information that the rating bureau is using with the payroll and loss information that the carrier provides…there could be errors galore.
If your workers compensation agent is not providing you with detailed reports of what is going into your Experience Modification factor and how that figure is calculated, you may be overcharged for errors between the carrier and the rating bureau, so be careful.
*Please note that some states have an additional multiplier called the ARAP of Assigned Risk Adjustment Program or All Risk Adjustment Program that functions similar to the Experience Modification, which also increases costs. For more information contact your insurance agent.