The intent of the ERM is to reward or punish employers whose loss results either overperform or under perform against the average. The idea is simple: even though all employers pay a similar rate due to grouped "class codes" corresponding to hazard risk, individual employer cultures can have a drastic affect on losses.
The "experience mod" acts much like an insurance credit score, warning potential insurers of a bad loss risk, or indicating the most desirable employers. Similar to the effect of your credit score on your interest rate, the experience mod can have a significant impact on the final cost and viability of your insurance policy and thus on the overall profitability of your business.
Recent Changes Catch Up on Last 12 Years of Cost Changes
The current mod formula takes into account actuarial ratios to determine what the National Council on Compensation Insurance would consider to be "average." Amazingly, these ratios have remained relatively consistent for the past 12 years, meaning costs for items such as fuel, materials, labor and medical expenses are out of date.
Consider for a minute you run a shipping company and your budget for predicting cash flow is based on the cost of goods and services 12 years ago. You would be budgeting for a gallon of gas to cost $1.00! Any fleet fuel expense estimates would be wildly inaccurate given the current $3.40 or higher cost of gasoline.
1. At its most basic, your business could be paying much higher workers compensation insurance premium rates
2. A high mod rating could affect how you're perceived in your industry and might cause OHSA to examine your company for safety violations
3. You might find that you can't even bid for specific jobs if your rating is too high
Just as we spend time watching our payment history, potential credit lines, and available credit to debt ratio to maintain our credit score, we should also devote a similar amount of time to understanding the mod formula. We should watch the number of claims, size of claims, insurance company reserving practices and other factors, to keep our insurance score the best it can be. Your question should be: "How low could my mod score be and what can I do to make it lower?"
Cobb resident Paul Baker is a Principal with Sterling Risk Advisors, a full-service insurance and surety brokerage firm that has offices on Powers Ferry Road. ]]>