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Quick Mr./Mrs./Ms. Business Owner! What does the following formula mean to
you?
M = AC+E(LC)+E(1.00-C) / E No, it has nothing to do with
Einstein’s famous equation. However, it could mean the difference
between a fat bottom line or permanently hanging up the “closed” sign.
Give up yet? It’s the calculation that determines your workers
compensation experience modifier (mod). You know, the number that can
save you or cost you thousands on your workers comp premium.
Just in case you’ve forgotten, most businesses are assigned a number
based on their workers compensation claims history. In Pennsylvania,
this number is calculated and placed on your workers compensation policy
by the Pennsylvania Compensation Rating
Bureau (PCRB). The PCRB calculates the expected losses for each
class of business in the Commonwealth. The number 1.000 means that your
organization’s workers compensation losses are average for your line of
business. A number over 1.000 (such as 1.100) means that your company’s
losses are higher than expected. A number under 1.000 (such as 0.900)
means that your losses are lower than expected. But what it really
means is that you are either surcharged or credited based on your loss
history.
For instance, let’s say you run a construction company. Assume that
your workers compensation premium is $100,000 for your carpenters,
salespeople, and clerical staff. If your claims are in line with what
is determined to be average for a construction company, your premium
will remain $100,000. However, if you’ve experienced more claims than
usual, your mod might be 1.105. Therefore, your premium would be
$110,500 or 10,500 more than average. On the other hand, if you had
fewer claims, your mod might be 0.850. Your premium would be $85,000.
Thus the difference between a 1.105 mod and a 0.850 mod is $25,500 for
this hypothetical company. Do you think the company with a lower mod
could gain a competitive advantage? Do you think the company with the
higher mod could have its long term viability threatened?
So now that we understand why calculating your mod is important. Let’s
review just how it’s calculated. Here are the steps necessary in the
equation above.
1. (A) Actual losses are multiplied by (C) Credibility;
2. (E) Expected losses are multiplied by the (L) limitation charge times the C)
Credibility.
3. (C) Credibility is subtracted from 1, the result of
which is multiplied by (E) Expected losses
4. The results of steps 1 through 3 are added together and divided by (E) Expected losses
Actual losses are determined by your insurance company. The
Credibility, Expected losses, and Limitation charge are listed in the
PCRB rating manual.
So that was easy wasn’t it? I forgot to mention that there are several
other rules that will factor into your ultimate assigned mod despite
completion of the mod equation. For instance, despite what the number
comes out to be, it cannot be more or less than 25% of your prior year’s
mod.
Now let’s talk about why you need to keep an eye on this. Obviously, an
incorrectly calculated mod could have a serious impact on your bottom
line. And the shear complexity of the calculation and all the rules and
sub-rules it’s subject to lend itself to error. The PCRB gets your
claims history from your insurance company. All it takes it one comma
or decimal point to be misplaced somewhere in the exchange of data
(throughout a rather complex calculation) for you to be financially
impacted. The figures used in the calculation are readily available
from the PCRB and your insurance carrier. Therefore you may want to
sharpen your pencil and breakout your calculator once a year and double
check the “official numbers”. Doing so could pay big dividends.
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