Understanding the Workers’ Comp Experience Mod Factor

Workers’ compensation premium costs are expected to continue rising. The state with the highest share of workers’ compensation premium – California  — proposed a 4.1 percent overall increase in comp insurance. (http://www.californiahealthline.org/articles/2012/4/13/workers-compensation-insurance-group-seeks-41-premium-increase.aspx

)The central reasons for the premium increases, regardless of jurisdiction, stem from the amount of claims (claim frequency), rising medical costs (which run higher than for general health care) and increases costs from claim severity.

Please note that claim “severity” should not be confused with the severity of injury or occupational illness. Claims severity, refers to claim duration and costs. Of course, injury severity can affect a claim’s length, but the effectiveness of claims management is also a major contributor.

Most claims are referred to as medical-only claims, which is generally defined as any claim where the injured worker losses less than seven days from work. In such cases, and depending on the employer, injured workers generally use their sick time.

Most employers do not know their workers’ compensation premiums are going up until they get their insurance bill. Higher premium can be a real shock to the chief financial officer trying to work with human resources to contain overall employee costs.

How can employers know ahead of time if premium increases are likely to come?

The actuaries are the first to know. Workers’ compensation is a long-tail line. That is, because it can take a lot of time from when claims are filed until they are financially resolved, there is a delayed effect to what actually happened in a given year. Actuaries are the first to see changes in cost and other trends that ultimately affect premium.

Most employers do not know their workers’ compensation premiums are going up until they get their insurance bill.

You should be very in tune with your company’s experience modification factor, which reflects the amount and severity of workers’ compensation claims for your business and its industry classification. Safety programs and other initiatives, which I will cover in a future blog, can go far in improving the experience modification factor.

Employers should also be aware that insurers are increasingly applying predictive modeling to determine more accurate premium. You are probably familiar with predictive modeling for personal auto insurance. Like credit scoring, it considers more than experience including education and occupation as indicative of driver safety and potential car accidents.

Predictive modeling in workers’ compensation considers new variables to determine loss potential. These include the overall financial health of employers, the number of employees being covered and more detail about the workplace location.

Using the correct combination of information about an employer, some actuaries believe, is a more effective way of predicting future losses than the experience modification factor. I expect insurers will change underwriting and pricing assumptions due to predictive modeling. This will also be covered in a future blog.

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