Employers have long been concerned about the rising cost of workers’ compensation insurance. Insurers determine each employer’s premium expenses by calculating the “experience modification rating” or x-mod factor based upon a business’ likelihood of experiencing injuries, illnesses or triggering work comp claims. By lowering your x-mod, businesses can effectively lower their work comp premiums in the long-term.

With workers’ comp rates reaching new heights, employers are scrutinizing the calculation of their x-mod scores now, more than ever. By making yourself familiar with the general concept of experience ratings you may allocate more concern and attention to the process through which your future workers’ compensation premiums are calculated. Once you are familiar you can begin to make changes which prevent erroneous data from negatively affecting your score and implement safety and loss controls to manage workplace claims.

Your Experience Modification Factor or x-mod (e-mod outside of CA) is critical for managing and keeping your worker’s compensation expenses as low as possible.

An x-mod factor is like a temperature reading which tells the employer and everyone in the workers’ compensation insurance market, if your business is “healthy”. This factor applied to your insurance rate will either raise or lower your premiums. In this way, the cost of insurance is tied to the performance of each individual business.

Those businesses with high-cost or frequent workers’ compensation claims will see an increase in their x-mod rating which warns insurers of potential risks and financial losses associated with offering this business workers’ comp coverage. On the other hand, employers with historically safe workplaces and low x-mod rating will earn lower premiums as a reward for their “health.”

The x-mod rating is calculated by the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) – a California unincorporated, nonprofit association comprised of all companies licensed to transact Workers’ Compensation Insurance in California with over 400 member companies – using the statistical comparison of an individual business’ workers’ comp claims (losses), payroll and Discount Ratios (D-Ratio) to compare against the average loss rates of similar size businesses (in California) for a given period.

The Expected Loss Rates reflect the expected cost of benefits based on projections of industry loss data for the upcoming policy period. Multiplied by the payroll for each classifications gives the Expected Losses for each company. And the D-Ratio of ‘preventable’ losses to ‘non-preventable’ losses according to industry standards, accounts for the severity of claims.

An x-mod of 100% (1.0) is exactly average – this means your workers’ compensation losses were in line with industry expectations and would cause no change when applied to your insurance premiums.
An x-mod over 100% (1.0 and up) means your company’s workers’ comp losses are worse than the industry average and will increase your insurance costs when applied to your premiums.
An x-mod rating lower than 100% (.99 and down) means your workers’ compensation losses are less than the industry average and will reduce your premium. This x-mod rating is the aim of every employer. Get your x-mod rating below industry standards and your business can reverse the rising tide of workers’ comp insurance premiums.

Verifying the accuracy of your current x-mod is not only wise, it’s smart business; particularly if you have experienced a sudden rise in your workers’ comp premiums. Errors or inaccurate data used to calculate an erroneous x-mod can seriously affect your insurance premiums for several years.

If you sit down with an experienced broker to audit your x-mod rating and workers’ compensation coverage, assess and reassess the following factors which could be affecting your premiums:

• Payroll Amount is wrong – A difference between actual and expected payroll reports may inflate your x-mod rating
• Claims Belonging to a similarly named Business – losses assigned to your business may not actually belong on your records
• Improperly stated claims/clerical errors
• Changes in Claim Status Prior to Report Preparation – the severity of a claim may change and lower your x-mod rating
• No account for Subrogation recoveries – it may take years to report losses recovered from a responsible third-party

The only variable in the x-mod rating calculation a business or employer can control is the workers’ comp claims experience – from prevention to claims management.

Preventing claims before they occur and managing them once they occur Following is a list of ways to prevent and manage claims:

• Hiring Competent and Effective Employees
• Implement a Safety Procedures and Training Program
• Offer Ergonomic Office Equipment
• Reward Safe Behavior (Days without Accident, etc.)
• Offer Access to OSHA Safety Classes
• Implement a Comprehensive Accident Investigation & Reporting Procedure

• Active Involvement in Management of Each Workers’ Comp Claim
• Review and Manage Medical Expenses
• Implement a Return to Work Program to Reduce Length of Claims and Overall Costs
• Audit Claims with a Trusted Insurance Specialist to Develop a Practical Insurance Premium Reduction Plan

Today, business owners are educating themselves in order to protect their company assets and play an active role in the management of business risk, insurance protection and expenses. If you are an employer, speak with your trusted financial advisor and insurance broker to keep a lid on the rising costs of Workers’ Comp insurance by auditing your company’s risk portfolio and reducing your x-mod rating.