Workers' Compensation Experience Modification
The only constant in life is change. That holds true for most things, and the Workers' Compensation Experience Modification (e-mod) is no exception to the rule. For many electrical contractors, 2013 may bring an additional level of change when it comes to the e-mod.
The e-mod is one of many factors that determine Workers’ Compensation (WC) premium. This factor is calculated by the National Council on Compensation Insurance (NCCI) or an independent state bureau, and is used to reflect an individual company’s loss history in the cost of WC insurance. Companies with better than average experience will see a credit and reduced premium, while companies with loss experience above the industry average will see a debit and an increase in premium.
To calculate the e-mod, a formula uses actual and expected losses. Three years of loss history is evaluated in total and in a limited or primary layer. Primary losses are small losses that have a minimal impact on the e-mod. Losses above the primary level, or split point, have a larger impact on the e-mod. Expected losses are determined by rates and the discount ratio, or d-ratio, which splits expected losses into total and primary layers. Rates and d-ratios are adjusted each year based on industry experience. In addition to rates and d-ratios, the split point will also be changing this year.
The split point was last adjusted 20 years ago, and had remained at $5,000 per claim. To put that in perspective, a gallon of gas cost $1.06 20 years ago. Medical and indemnity costs for WC claims have increased just like gas prices. According to the Bureau of Labor Statistics, for 2010, the core Consumer Price Index (CPI) was one percent, while the medical CPI was 3.4 percent. Medical costs have been rising faster than overall costs for some time. Indemnity costs have also risen since the split point was last adjusted. The average WC claim 20 years ago was $2,500; today it has risen to $9,000. As medical and indemnity costs have risen, more claims are in the excess layer of the e-mod calculation, causing all e-mods to increase over time. Because of increasing claim costs, the NCCI has decided to change the split point, increasing it to $10,000 with planned increases over the next few years as well.
So how will this impact WC premiums? And how will it impact qualifying to bid on jobs that use the e-mod as a qualifier?
Going back to the fact that change is a constant, the split point change is just another variable among many that impact the e-mod each year. Rates are being updated as they are each year, and the d-ratio (which determines the primary and excess portion of expected losses) will be adjusted for the new split point. The impact of the split point change will likely be minimal, with disruption to e-mods in-line with normal annual shifts. Of course some e-mods will increase, but increases are much more likely to be caused by changes to a contractor’s loss history than by the change to the formula.
Over the next several years, many additional increases to the split point are planned and will eventually be tied to inflation. Various states will implement the new split points as they adopt new rates. So, of course, this change will be ongoing.
The best way to maintain a low e-mod is to control losses by creating and implementing an effective safety program, a robust return-to-work program, and by working closely with your agent and insurance company to manage claims. A return-to-work program can have a great impact on the calculation because many states discount medical-only claims by 70 percent when calculating e-mods. By making sure an injured employee returns to work as quickly and safely as reasonably possible, indemnity costs can be controlled and a good e-mod can be maintained.
Some contractors with an e-mod close to 1.0 may be impacted in terms of job qualification. If this is the case, try pushing back. This may only work for smaller general contractors and project owners, but there are several arguments against using the e-mod as a job qualifier. Reserves for claims that are still open (and may decrease) are included in the e-mod calculation. Also, claims included in the calculation may be from up to four years prior, and thus do not reflect recent improvements in safety. Additionally, the e-mod was never intended as a job qualifier, but has been adopted as such due to its widespread use and availability.
So as all things continue to change, know that your e-mod is likely changing a bit more than usual this year. But also know that by controlling risk and managing claims, you can make a change for the better.
Aaron Kock, CRIS, CLCS, is an underwriting director with CNA Insurance in Chicago, Illinois. He has 10 years of experience at CNA in both underwriting and actuarial roles. He participates on the IEC National Safety Committee and is involved at many national and local chapter IEC events. CNA is the nationally endorsed insurance carrier for IEC and an IEC National Platinum Partner.