Workers’ compensation insurance is one of the major expenses for any business. This program involves important processes such as medical record retrieval and medical chart reviews. Workers’ compensation may be the greatest insurance expense for the manufacturing, contracting, and farm/agriculture industries that have huge payrolls and involve high risk. Being one of the most variable expenses an employer works with, business owners must take advantage of opportunities to reduce their annual workers’ compensation expenses. Otherwise they may end up paying more than what their peers spend.
How can employers optimize their workers’ comp spend? The practical way of doing this is by taking into account the XMod or Experience Modification Rate that rewards organizations with lower premium for above average management of workers’ compensation claims. The XMod rating is used to penalize businesses that are unable to effectively control their claims process by charging them higher premiums. Businesses can lower their XMod to effectively lower their work comp premiums in the long term. To lower the XMod, companies must successfully manage business risks, protect company assets, and control expenses.
The XMod factor evaluates your business against every other business in the state in the same class code. It looks at your payroll and historical loss history to determine whether your business performed better or worse than your peers. You will receive a credit modification factor if your business performed better by incurring either fewer losses, smaller losses, or both. If your performance was worse than your peers, you will receive a debit factor. The credit and debit factors make a big difference in the annual premium you pay. In other words, the cost of insurance is tied to the performance of each individual business in this way. A lower XMod factor shows your business is in good health, with a historically safe workplace, while a higher XMod factor is an indicator of bad health and signifies high-cost or frequent work comp claims. In the latter case, insurers will be warned of financial losses and possible risks associated with offering that business workers’ compensation coverage.
The XMod rating is calculated using the statistical comparison of your business’ workers’ compensation claims (losses), payroll and D-Ratio (Discount Ratios) against the average loss rates of your peers for a given period. Your company’s actual losses are compared to its expected losses by industry type. Company size, unexpected large losses, and the difference between the severity of the loss and its frequency are the factors taken into consideration. Typically, the XMod is calculated by the National Council on Compensation Insurance (NCCI), and in some states by an independent agency.
- XMod rating of 100% (1.0) is average. It means your work comp losses are in line with industry expectations, and would cause no change when applied to your insurance premiums.
- XMod over 100% (1.0 and more) signifies that your company’s work comp losses are worse than the industry average. This will increase your insurance costs when applied to your premiums.
- XMod rating lower than 100% means your work comp losses are less than the industry average. This will reduce your premium.
Some of the main factors that determine how your XMod is calculated are as follows.
- Premium thresholds: If you are below the premium thresholds, which in most states signifies premium spend of less than $5000 annually, you will not receive an XMod and an insurer will consider your modification as if it were 1.00.
- XMod looks at years two through four: Usually, your most current year and your fifth year out are not considered. If you have losses in the current policy, it may have an impact in the long term though not immediately. Those losses once they are part of the calculation, will stay with you for three years.
- The XMod formula requires payments or capitations for huge losses: If you have had one major claim, it could have a negative though not very severe impact. However, if you have had many medium-sized claims, it will have a huge impact on your XMod calculation.
The only variable in the XMod calculation that is within your control is the work comp claims experience, from prevention to claims management. You have to focus on preventing claims before they occur, and once they occur manage them well.
Here are some risk management measures to adopt.
- Make sure that you hire competent and effective employees
- Provide ergonomic office equipment
- Have a good safety procedures and training program in place
- Reward safe behavior
- Implement an efficient accident investigation and reporting procedure
- Provide access to OSHA safety classes
Suppose you are faced with claims. Consider these claims management measures.
- Make sure that your XMod worksheet reflects your accurate payroll. If your payroll is understated, it could increase your XMod. Also, check for clerical errors.
- Be actively involved in the management of each claim
- Encourage the injured employee to return to work so that you can reduce the length of claims and overall costs
- Review and manage medical expenses
- Develop a practical insurance premium reduction plan by auditing claims with a reliable insurance specialist
Business owners must educate themselves to protect their company assets and play a proactive role in managing business risk, insurance protection and expenses. Consult your insurance broker and trusted financial advisor to find ways of controlling any rising costs. If you are going to be hit with a debit factor because of a high XMod, make sure that your agent is aware of the steps you are taking to improve your functioning. This will help underwriters see that you are a risk that they would like to quote on. You may even get some schedule credits to balance the impact of the XMod in states that allow them.