The Complete Guide to Worker’s Compensation

For whatever reason I can’t explain Worker’s Compensation seems to be both a mystery to some and a done deal with others. Those are flawed ideologies. At its core Worker’s Compensation is one of the most predictable and manageable coverages a business will have. From a straightforward formula to calculate the cost to factors that can be exercised to manage said premium it never has to be a guessing game nor should it be draining your company’s bottom line.

This will be a live article not because Worker's Compensation changes often, but my way of explaining the concepts should, I hope, get clearer over time.

What is Worker’s Compensation insurance?

Worker’s Compensation as we know it started in the early 1900s when business owners decided to pool their money together to alleviate the costs brought on by injured workers. A master pool composed of attorneys, roofers, accountants, butchers, everyone and anyone got together. Up until this point, it’s very similar to how many insurance programs work.

At its core Worker’s Compensation is one of the most predictable and manageable coverages

But there was a problem.

Businesses who seldom suffered employee injuries (think attorneys/accountants) noticed that those with a high number of accidents (roofers, no offense) were constantly dipping into the funds to pay for their injured employees.

It was here when those of similar jobs and industries started to pool their monies, instead of a free-for-all. Bakers pooled with butchers, roofers pooled with artisans.

The rates were now averaged to industries of a similar type. But the new model had some holes. Carpenters and bricklayers went about their daily lives but the roofer kept having more accidents. They continued to pull from the funds more frequently than other contractors. The difference between occupations became more clear and steps were taken.

The rates were averaged to each classification within an industry. But there was one more thing businesses could do to further tailor their costs. Enter the Experience Modification Factor.

What is the Experience MOD?

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Have you ever looked at your worker’s comp policy and asked yourself, what is the mod? What does that mean?

It’s not hard

Your experience mod is based on your business’s actual past experience versus that of a similar business in the same industry. And it’s based on a calculation of two things, your payroll and any claims you may have had in the last few years, also known as your loss history.

Insurance is a fraction of what’s affecting your bottomline.

Now, the mod is defined by the National Council on Compensation Insurance, also known as the NCCI and it’s important to note that it is not decided by your carriers or your insurers.

In the end, the mod helps tailor the cost of your workers’ comp and helps promote a safer work environment within your company. But now, how does it come into play?

What does the Experience Mod Do?

As mentioned, insurance spreads or shares the cost of a loss with members of a group that is likely to experience similar losses. While the cost and probability of the injury can be predicted with a fair degree of accuracy it’s impossible to determine which member will be responsible for the costs.

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This is why insurance exists.

If predictability were perfect, the members of the group that would not experience a loss would have no incentive to purchase insurance. On the other hand, the premium charged for the members that will experience a loss will have to include the value of the loss, which won’t be determined until it actually happens.

Historically, we know that serious individual injuries are rare and they can vary from minor amounts to millions of dollars. If the rating system went no further than the manual rating, then insurance companies would look for employers with lower than expected costs and completely avoid those with higher than expected costs.

Since experience rating gives employers some influence over the premium they pay, it provides incentives for those who create a strong loss prevention program…

To avoid this scenario, the rating system is further refined. Experience rating is one such refinement. When it comes to workers’ compensation, the actual payroll and loss data of the individual employer is analyzed over a period of time. Usually, the latest two years of data are compared to similarly grouped employers to calculate the mod. In general, an employer with a better than average loss experience will receive a credit or mod below a one. Whereas an employer with a worse than average loss experience will receive a debit or a mod above a one.

The two primary benefits of experience rating are that it

  1. Tailors a cost prediction at a net premium cost to the individual employer a lot more closely than manual rating does
  2. Provides added incentives for loss reduction that are not included in manual rating alone.

Since experience rating gives employers some influence over the premium they pay, it provides incentives for those who create a strong loss prevention program, as well as incentives for those who create a safe return-to-work program for those employees to return to work as soon as reasonably possible. In this way, experience rating benefits, employers who promote occupational health and safety.

Characteristics of the Experience Mod

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When it comes to your experience rating, it’s a matter of frequency versus severity. A significant feature of the experience rating is that the cost of an accident is far less predictable than the fact that the accident occurred.

For example, the survivor benefits of a worker in their twenties who leaves behind a spouse and kids are going to be considerably greater than that of a worker in their fifties who leaves no dependents. The important fact is that the accident did occur. So experience rating gives more weight to the fact that it happened than to how much it actually costs.

I’ll repeat that for emphasis. It gives greater weight to the accident frequency than to the severity of it.

This reliance on accident frequency also measures employer differences. For example, let’s compare two similarly sized employers of the same classification. Employer A has one loss totaling $50,000. Employer B has 10 losses totaling $50,000. Which employer would you expect to incur the higher workers’ comp costs in the future? Statistically speaking, employer A with the large claim is more stable, whereas any one of the 10 claims that employer B incurred could easily have gone over $50,000 if the right circumstances were involved. In other words, when it comes to two similar employers, the one who has a higher frequency will be paying the higher workers’ comp costs. This doesn’t mean that an employer with a small number of injuries that have very high costs will be ignored.

When it comes to your experience rating, it’s a matter of frequency versus severity.

The final measure will be a blend of both the costs and the occurrence of the injury. But frequency will always weigh more than severity. In fact, large losses are so infrequent that every state has its own actual limitation cap to how much of their claim is actually going to be weighed against the employer. So say an employer has a loss of $500,000. Well, in 2021 here in Florida, only $271,000 of that claim will be weighed against the employer. That’s what’s going to be called the ratable loss and everything else will be non-ratable. So what is your experience mod now? What is being weighed against you? These are good questions to consider with your current representation.

Now let’s go over price.

Worker’s Compensation: It Costs More Than You Think

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It does.

Your risk management program is but a small fraction impacting your bottom line. The truth is that indirect losses from a workers’ comp claim can amount from TWO to TWENTY times the amount of that claim. Time spent investigating that claim, hiring new hires, training those new hires, the overtime for your current employees to covering for that injured one, turnover because employee morale drops, and the time that admin spends handling the claim.

That’s why at the Bunker, we want to make sure you have the latest worker’s comp resources at your disposal. We’ll provide you with employee safety manuals that’ll help you take steps to reduce workplace injuries. Now sure, this is going to help with the workers’ comp costs, but it’s going to further promote a positive culture within your company and further strengthen your reputation.

The point here is to make sure that you pay for that injury or illness one time.

We’ll also provide you with return-to-work resources. These will help reduce the length of your workers’ comp claim and provide further support to you and your employees. This will come in the form of policies, forms, and employee communications to make sure that everyone is on the same page and focused on recovery. The point here is to make sure that you pay for that injury or illness one time. These resources can help you establish the best practices for investigating the true sources of incidents and make sure that you don’t have any re-occurrence.

The more employees you have, the greater the risk. Now, if you have an employee who injured himself and it was a one-off event, that happens, but if you continue to have three, five, ten employees that injure themselves every single year, it points at something bigger. And if you have a mod that is above a one, you’re telling insurance carriers that there’s a problem with safety within your organization. Lastly, we’ll provide you with workers’ comp articles on the latest developments that will be comprehensive and easy to read so that your business can say prepared before, during, and after a claim.

At The Bunker Insurance & Risk Management, we focus on total cost of risk. We’re here to solve problems, not sell you a product. Insurance is but a fraction affecting your bottom line. That’s why we’ve developed a risk management program that focuses on a lot more than just insurance. Ask yourself, what is your current representation doing now to make sure that your business stays profitable?

When we talk about the Bunker Edge system: discovery, lockdown, reinforcement, and permanence; it’s the permanence part that makes sure that your business keeps its doors open day in and day out, year in and year out. So if you feel like this is you give us a call and we’ll make sure we move your business from danger to a safe place.

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