Quick Mr. / Mrs. / Mrs. 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 the “closed” sign. Are you still giving up? It is the calculation that determines the workers’ compensation experience modifier (mod). You know, the number that can save or cost you thousands in your workers’ compensation premium.
In case you’ve forgotten, most companies are assigned a number based on your history of workers’ compensation claims. In Pennsylvania, the Pennsylvania Compensation Qualification Bureau (PCRB) calculates this number and places it on your workers’ compensation policy. 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 greater than 1,000 (such as 1,100) means that your company’s losses are higher than expected. A number below 1,000 (such as 0.900) means that your losses are less than expected. But what it really means is that you will be charged or credited based on your loss history.
For example, let’s say you run a construction company. Suppose 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 the average for a construction company, your premium will still be $ 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 the average. On the other hand, if you had fewer claims, your mod could be 0.850. Your premium would be $ 85,000. So 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 an inferior mod could gain a competitive advantage? Do you think the company with the top mod could see its long-term viability threatened?
So now that we understand why calculating your mod is important. Let’s review how it is calculated. These are the necessary steps in the above equation.
1. (A) Actual losses are multiplied by (C) Credibility;
2. (E) The expected losses are multiplied by the (L) limitation charge multiplied by 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 to 3 are added and divided by (E) Expected losses
Actual losses are determined by your insurance company. The credibility charge, expected losses and limitation are listed in the PCRB qualification manual.
So it was easy, right? I forgot to mention that there are several other rules that will be considered in your last assigned mod despite completing the mod equation. For example, regardless of what the number turns out to be, it cannot be more or less than 25% of the previous year’s change.
Now let’s talk about why you should keep an eye on this. Obviously, an incorrectly calculated mod could have a serious impact on your bottom line. And the great complexity of the calculation and all the rules and sub-rules to which it is subject lend themselves to error. The PCRB obtains your claims history from your insurance company. It is enough to lose a comma or a decimal point somewhere in the data exchange (through a rather complex calculation) and you are financially affected. The figures used in the calculation are available from PCRB and your insurance company. Therefore, you may want to sharpen your pencil and break your calculator once a year and check the “official numbers.” Doing so could pay off big dividends.