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Modification factor gets a makeover.

Insurance is a complicated endeavor that requires expertise from your agent in helping you manage your exposures, your coverages and your premiums. To a business owner/ manager, the easiest line-of-business in insurance to understand a direct correlation between the claims you have and the premiums that you pay is that of workers compensation. In 2013, there is going to be a change to the methodology that could affect your experience modification factor and thus the premiums that you pay for workers' compensation. It's the first major change in over 20 years, and it's step one of a three-year plan. With all of the regulatory changes happening in rural telecommunications that are affecting your revenues, Telcom Insurance Group thought it was important to get this insurance regulatory change to you for budgeting purposes over the next few years.


The National Council for Compensation Insurance (NCCI) and several state plans have recently enacted regulatory changes that will influence your experience modification factor (the mod) and will take effect with the January 1, 2013, renewals for all carriers. NCCI evaluates all class codes of employees in a particular state and mathematically determines what losses, or claims, it expects a business to have as primary losses and excess losses. This dollar value of losses has a complicated formula, but it's basically determined by your payroll and the kind of jobs your employees are doing.

For example, class code 7600 is for outside telecommunications employees (I&R techs, plant, etc.) and 8901 is for inside telecommunications employees (customer service representatives, human resources, etc.). So, NCCI calculates that for x amount of payroll in 7600 in your state, you should have y amount of primary losses (individually under $5,000) and x amount of excess losses (over $5,000 individually). Then your actual primary and excess losses are compared with every other similar company, using the same class code of employees, in your specific state, and you're given a number to represent your mod. A mod of 1.0 means that your primary and excess losses/ claims are exactly what was expected. If it's under 1.0, then you had few losses or less expensive losses than your peers in your state, and you get a discount on your workers' compensation insurance. If you mod is over 1.0, that means that your losses/claims are more expensive/ cost more than your peers, and you will pay a higher rate for your workers' compensation coverage. The mod covers three years' worth of claims data but does not include the most current year. For example: Your 2013 mod will not take into account claims in 2012, but rather will look at claims from 2011, 2010 and 2009. The same expected primary and excess losses will be attributed to all three years on the mod calculation. So, this current change is going to impact prior year's losses.

NCCI uses both frequency (number of claims) and severity (cost of claims) as factors in the methodology of determining your specific mod. All carriers report claims specifics to the rating bureau every six months. They all report incurred loss totals. What they expect the claims ultimately to pay out when "all is said and done" is what they report. This is one reason it is important that you have a good claims liaison to help manage the claims reserves.

There is a philosophy in insurance that "frequency leads to severity." This simply means that if you have a lot of similar claims that are small, there is a problem with the process, training or equipment and that eventually you'll have a large loss. Because of this, NCCI weighs its mathematical formula heavily to the frequency of claims as opposed to the severity of claims in determining your mod. The current rating system limits the losses in the primary layer to $5,000 each. However, with the change in January 2013, the primary losses (frequency) are being increased to $10,000. The following year, the primary layer will be increased to $13,500, and in the third year it will be increased to $15,000.

Reason for the Change

Why are they making this change? Simple. Over the course of these past 20 years, the average cost of all workers' compensation claims has more than tripled. In 1988, the average cost of a workers' compensation claim was approximately $2,500, and in 2011 it was almost $9,000. Because of this, the portion of the cost of the claim that goes into the primary layer is much smaller than it was 20 years ago. This results in the plan giving less weight to your actual experience because most claims cost more than the primary layer. NCCI says this change is necessary to keep this as a true reflection of your actual experience.

NCCI estimates that 18% of all mods will see an increase of more than two points (which equates to 2% more premium costs), and 46% of employers will see a drop of two or more points (which equates to a decrease in premium by 2%). How do you know how your specific mod will be affected? In general, if none of your workers' compensation claims exceeds $5,000, then you'll likely see a decrease in your mod. Conversely, if you have claims that exceed $5,000 but are less than $10,000, then you will likely see an increase in your mod. If you have high frequency and high severity, you should expect to see large increases, like 10% or more, in 2013.

Another example, pre-2013, for a $12,000 loss: $5,000 would be primary and $7,000 excess, but the primary portion of the loss has a much greater impact on the calculation of the mod than does the excess portion. The $5,000 cap is doubling to $10,000 in 2013, and eventually going up to $15,000 by 2015. Therefore, in 2013 the $12,000 loss will split as $10,000 primary and only $2,000 excess. Since the primary layers weigh more heavily on the mod, this example would cause an increase in your workers' compensation mod.

NCCI or your state rating agency sends a copy of your workers' compensation mod that lists your claims and their incurred costs to every employer that has a mod. It's usually approximately two to three months before you insurance renews. Your agent should also look at the claims to be sure they are correct, but you should take a look too.

The prevailing thought is that the frequent claims are claims that employers can control through good risk management. As a result, they can control their mod and their workers compensation premium. Therefore, it really does help underscore the need to invest in safety practices, not only to protect your employees, but also to protect your bottom line.

Example of Mod for Oklahoma

Manual Old Standard New Standard
Premium Old Mod Premium New Mod Primary
 w/$5k w/$10K
 Primary Premium

Employer 1 $100,000 0.96 $ 96,000 0.94 $ 94,000

Employer 2 $ 50,000 1.08 $ 54,000 1.12 $ 56,000

Total $150,000 $150,000 $ 150,000

Marilyn A. Blake is chief operating officer of Telcom Insurance Group. She can be reached at
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Title Annotation:RISK Manager
Author:Blake, Marilyn A.
Publication:Rural Telecommunications
Date:Nov 1, 2012
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