Experience Modification Rate Review
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There are Experience Modification Rate errors. They are more common than you imagine. And, those errors are very expensive; inflating premiums for 3 years or more. As stated on our Premium Audit page, the frequency of errors are what allow us to work on a contingency; not billing clients for our time, but rather a percentage of the refunds we obtain for you.
Don't just take our word for it. Read what one large work comp carrier says about experience rating (http://bit.ly/AmTrust_on_experience_mod_errors):
"HOW CAN AN EMPLOYER REDUCE THEIR EXPERIENCE MOD?
....In addition, it is important to check the calculations on the experience modification worksheet each year. Most calculations are correct, but mistakes can occur. Common mistakes include inaccurate, outdated or incomplete data provided to the statistical rating bureau. The most common errors are incorrect or incomplete payroll data, missing data for a year or portions of a year, and claims included at the wrong amounts or even claims that belong to another employer. Experience mods can be recalculated if there is a clerical error, there is a recovery from a third party, or a claim that has been reported is found to be noncompensable by an official ruling."
If we were writing the above paragraph, it would indicate errors are even more common and that there are numerous additional causes of errors. But, at least it is understood that the Experience Modification Rating system isn't perfect. Errors do occur.
The reason you may have never discovered mistakes in your own Experience Modification Rate, even though you have been in business for many years, is that most don’t understand how many moving parts there are to promulgating an accurate experience mod. Conducting a proper audit of an experience mod is very time intensive and requires a number of documents. At least one set of necessary documents, the Auditor’s Worksheets, are considered confidential by insurance companies and won’t be released to anybody but an officer of your company.
So, when you or your broker perform an experience mod review what is the objective? To make sure your experience mod is correct; right?
But, in all likelihood, your review is performed with as little information as your experience mod worksheet and currently valued loss runs. Maybe some Modmaster reports telling you what your experience mod would be without any claims, breakdown of the claims most impacting your mod, or some other what-if analysis. Good information. But is your experience modification rate correct?
Here is a list of of what you need in front of you to determine whether or not your experience mod is accurate:
· Experience mod worksheet
· Loss runs for the last 5 years valued on your valuation date (the date your insurance carrier is supposed to transmit your data to NCCI)
· Final audit statements for the last 3 years
· Auditor's worksheets for the last 3 years
· Copies of (or good working knowledge of) Experience Rating Plan manual rules and applicable state rules and regulations
Even with the necessary documentation you still need both the necessary technical knowledge and the time to do a thorough analysis. It can take many days (for someone who knows what they're doing) to perform a comprehensive review depending on the size of your company, number of claims, number of states where you operate, number of business units, classifications, etc.
Your experience modification rate is a measurement of your actual claims experience relative to your expected claims experience. Expected claims is based on your company size (payroll) and how your employees are classified. If your employees are graphic designers or architects, you are going to have insignificant expected work comp claims compared to, say, a roofer.
So, accurate classification of employees and determination of work comp payroll (both determined by your insurance company auditor) is as important to the determination of your experience mod as claims data. The Auditor's Worksheets (mentioned above) are important because, if your insurance carrier gives you the complete report, they contain a Description Of Operations. The DOO should include a list of class codes your auditor thought applicable to your operations and why. Sufficiently detailed worksheets should also demonstrate how the auditor arrived at work comp payroll by class code and by state (if multi state operation).
Also keep in mind that claims may have unique circumstances that require different reporting depending on the state in which they are reported. This is why it's important to have at least a good working knowledge of the rules in those state where your business operates.
In order to have a proper mod review whose goal is to determine your experience mod's accuracy, you need to have an auditor who specializes in workers' compensation insurance perform a comprehensive premium audit on your program. While they're at it they may find cost saving opportunities beyond your experience mod too.