Claim Frequency And Your Experience Modification Factor
Updated: Jan 5, 2022
Experience Modification Rate: Frequency vs Severity
Which of the following scenarios would you think hurts your NCCI Experience Mod the most? Which one the least?
A) You have 100 medical-only claims each of which is $1000. Total claim cost $100,000.
B) You have five $20,000 lost-time claims. Total claim cost $100,000.
C) You have one severe $100,000 lost-time claim. Total claim cost $100,000.
So, the cost to your insurance company or you if you are on $100,000 or higher deductible program is $100,000 in all 3 scenarios.
The answer is B; five $20,000 lost-time claim hurts your NCCI Experience Mod surprisingly much worse than A and C. One severe $100,000 claim is the second worst option and option A with 100 med-only claims is the least damaging to your mod.
Frequency of occurrences of lost-time claims really do damage to your mod; especially lost-time claims in the $20,000 range. I thought to write about this after NCCI published a report last month (NCCI Explains It’s Top 3 Frequency Measures) about claim frequency. It’s an interesting report for a work comp and/or claims professional, but not so much for the businessperson who wants to understand “How does frequency effect the calculation my NCCI Experience Mod?”
For those who don’t want to be immersed in the complexities of experience rating, you can stop here. For the rest of you, here we go.
Experience Modification Rate: Frequency Not As Bad As It's Reputation
Answer A. Your medical-only claims get reduced by 70%. So, only 30% of the cost of those claims are factored into your mod irrespective of the number, or frequency, of med-only claims. Thirty percent of $100,000 is $30,000 and that is the amount that will count against you even if you have 100 separate thousand-dollar claims.
Experience Modification Rate: Frequency & Severity A Bad Combination
Answer B. The first $16,500 of lost-time claims count against you (that is the NCCI “Split Point”) plus a percentage of every dollar beyond $16,500. I have a client’s mod worksheet in front of me and that percentage for this client is 32% (look in the box labeled “(A) Wt.” on your worksheet to find this factor for your company).
So, if your weight factor is 32% and you have five $20,000 lost time claims, $88,100 will count against you! The first $16,500 of all five claims ($82,500) plus 32% of everything over that ($5,600).
Experience Modification Rate: Severity Alone
Answer C. If you have one severe lost-time claim totaling $100,000, $43,220 will count against you. You have to count the first $16,500 and 32% of everything over that which is another 26,720.
I used that client’s experience modification worksheet that I mentioned (which is a 1.06 by the way) to run some test mods on NCCI’s web site.
When I added $100,000 in med-only claims the mod increased from a 1.06 to a 1.10.
When I added five $20,000 lost-time claims the mod increased from a 1.06 to a 1.19!
When I added one $100,000 lost-time claim the mod increased from a 1.06 to a 1.12.
How Frequency & Severity Of Claims Impact Your Experience Modification Rate
From the standpoint of frequency and it’s impact on your mod it’s the frequency of lost-time claims that really inflate an experience mod; especially those in the $20,000 range. If your claims in dollar terms are steady or, hopefully, declining but your mod is still creeping up, you might want to take a look at the makeup of your claims to see if this might be the cause.
Stuart Cytron, MBA has been published in trade journals such Construction Forum St. Louis and St. Louis Business Journal among others. You can read more about Stuart and how he developed a passion for helping businesses reduce work comp expenses on his website.