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The Downside Of Declining Work Comp Rates

Updated: Jan 5, 2022

The news is full of good reports again about declining work comp insurance rates. This is the continuation of a good trend that has been going on for years. Today, I saw this article in Insurance Journal about rate decreases in New Hampshire, and earlier this week I saw this one in Business Insurance regarding Florida.

I wrote a LinkedIn article a year ago and posted it on my blog about how you can’t count on premiums going down just because rates are falling. You can revisit that one here.

Rates are set based on expected losses. When work comp losses are down expected losses fall and, correspondingly, so do rates. The down side of this otherwise positive trend could reside in your Experience Modification Rate.

Experience Modification Rates

Experience Rating formulas are complicated, but they all boil down to one thing:

Actual Losses vs Expected Losses

Or, in other words, how are your actual losses compared to the Rating Bureau’s (NCCI in 35 states) determination of your expected losses?

If Actual Losses are $100,000 and Expected Losses are $120,000 your Experience Modification Rate will be .83 (100000/120000).

Your Experience Modification Rate is a measurement of 3 years of actual vs expected losses. Right? Each year 1 policy year (the oldest) falls out of the equation and a new one rolls into it.

Assume you have a 1/1 renewal date. Currently, your 1/1/19 Experience Mod has the following policy years’ data:

· 1/1/17-18

· 1/1/16-17

· 1/1/15-16

If you just examine the 2 years worth of data in your current experience mod that will also appear in your next, renewal experience mod (highlighted in red), what changes from one experience mod to the next when rates fall?

1/1/19 Experience Mod: Actual Losses / Expected Loss

1/1/20 Experience Mod: Actual Losses (same) / Expected Losses (LOWER!)

Assume the 2 years that are in your current mod that will also appear in next year’s have 100,000 in actual losses. If the expected losses this year are 120,000 for those 2 years, the experience rating for just those 2 years will be a .83.

If next year the expected losses for the same 2 years fall (due to rate decreases) to $105,000, the experience rating for those 2 years would be .95 (100,000/105,000).

An Experience Mod with 2 years of data is a hypothetical, but, at the same time, we know that your starting point for 2/3 of the data in your next mod indicates a higher experience mod. The key is going to be whether or not the new year entering your mod calculation has substantially better Actual Incurred Losses than the old year that’s rolling out; enough so to offset the negative impact of declining rates on your experience mod.

Also, FYI as rates fall, you’ll find that your mod will move faster in the wrong direction if you have an uptick in claims activity.

Experience Modification Rating errors can and do happen. Enough so that we can afford to perform work comp premium audits (including experience modification rate calculations) at no cost; contingency fee. We put our money where our mouth is.

You don’t have to take our word for it that an Experience Modification Rate review is a beneficial engagement and that errors occur. Take the word of one of the largest insurance brokerages in the world and a large work comp carrier:


....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."

“Errors on this document, while rare, do occur and can add significant costs to your workers’ compensation insurance premiums….

Correcting Errors & Refiling First of all, it’s important to review your worksheet immediately when you receive it from the rating bureau. This review doesn’t have to be complex, but should include:

  • Ensuring your payrolls are listed accurately 

  • Comparing listed losses to those on your current loss runs, looking for file closures and to determine if re-files are appropriate 

  • Confirming that claims are classified appropriately (i.e. all closed claims should be labeled as closed, etc.)

If you do find errors on the worksheet, communicate these to your agent and/or insurance carrier immediately to have them corrected.”

If we were writing the above quotes, we would indicate our opinion that we find errors much more frequently, and we could list numerous other causes of errors. But you get the picture.

Even if you don’t choose Cytron Group LLC to perform your independent audit, we still recommend you have an independent audit performed.

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.

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