by Tim Coomer, Specific Software
(The following relates to experience rating in states that use the NCCI or similar rating methodology.)
“Do zero-dollar claims have an impact on the mod?”
“Do the number of claims directly impact the mod?”
“Claim frequency affecting the mod is a myth – isn’t it?”
These variations on the same question are very common here in the support department of Specific Software – from both our WorkCompEdge beta users and our ModMaster users. It’s a confusing issue because while the answer is officially “no,” it can also appear to be “yes.” Let me explain.
Experience rating does not directly count the claims.
Experience rating does not directly count the claims. Don’t be misled by the fact that the experience rating worksheet often shows a claim count for small losses. This is for documentation purposes only, as far as the experience rating formula is concerned.
When you look at the formula itself, you never see claim count as one of the variables. Instead, experience rating uses a system called “split rating.” Each loss is split and put into two buckets: primary and excess. In most states that use the NCCI or similar formula, the first $5,000 of each claim is placed in the primary bucket while any loss amount over the first $5,000 of a single claim is put into the excess bucket.
A zero dollar loss has absolutely no impact on the mod because there is no loss amount. However, the number of claims, when the loss amount is greater than zero, is indirectly measured by the amount of dollars in the primary bucket. Here’s a brief example:
Employer A: $100,000 in losses. 2 claims – $40,000 and $60,000.
Employer B: $100,000 in losses. 20 claims – $5,000 each.
The two employers had identical total losses, but Employer A will have only $10,000 in primary losses while employer B will have $100,000 in primary losses. Employer B’s mod will be much higher than employer A. This is due to the frequency of claims as measured by the amount of primary losses. So, the claim count does matter, but it is never directly included in the experience rating formula.
To take this illustration just one step further, let’s consider:
Employer B: $100,000 in losses. 20 claims – $5,000 each.
Employer C: $100,000 in losses. 100 claims – $1,000 each.
Because ALL of these claims in both cases are less than the $5,000 split point, the formula doesn’t measure any effect of 20 vs. 100 claims. If all other things (i.e., payroll and loss rates) were the same, Employer B and Employer C would have the very same mod. So in this case, the claim count doesn’t matter – but only because all claims were under the split point.
WorkCompEdge members can learn more about this issue and access an online tool for analyzing the mod in Learn the Lessons Your Experience Mod Can Teach You.
Keep Taking Our Quick Survey!
Thanks to those of you who have participated in our quick survey we posted last week – and to those of you who let us know when there was a slight glitch with it. If you haven’t taken it yet, please do! So far, responses are all over the board. We’re hoping that more responses will help shake out some identifiable trends. The survey is for both insurance professionals (to answer on behalf of their clients) and employers themselves. Take it now.
http://www.WorkCompEdge.com
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Filed under: Experience Rating (the Mod)
