Warning: This post is for those of you that understand the basics of how your experience modification affects your workers’ compensation insurance, but want to delve deeper. There’s going to be some math and technical terms involved, but we’ll do our best to keep things simple and concise. With that said, let’s jump right in.
Well, that’s intimidating.
Before you have a panic attack, we want you to understand one thing: This is the equation in its most complicated form. Essentially, the WCIRB (Workers’ Compensation Insurance Rating Bureau) puts this version of the equation on their website because it can cover all of the special cases that may come up.
It’s absolutely essential to understand that as of January 1st, 2017 the value for Credibility Primary (or Cp) is 1 and the value for Credibility Excess (or CE) is 0. If you work those numbers into the equation, everything gets quite a bit simpler. In fact, it looks something like this:
(Ap+Ee)/E = Modification
Definitely easier to work with. So let’s break this down letter by letter.
First up, “Ap” or Actual primary losses. This is easily the most important number here because it is the only number in this equation that you as a business have control over. This number is the Primary Claims cost from any worker’s comp claims that you’ve had over your three year rating period. Prior to 2017, your actual primary loss number was calculated by adding up the first $7,000 of each claim. This $7,000 limit was called the split point. In other words, if your business had three claims that cost $100, $1,000 and $10,000, your primary claims cost would be $8,100 (100+1,000+7,000). However, that system was changed on January 1st, 2017. Your business’ split point can now be anywhere from $4,500 to $75,000 and is decided by your expected losses. (Check out the table at the bottom of the post if your curious about where your business’ split point is now.) The reason why this change to the split point is such a big deal is that, for most businesses, it allows their actual primary losses to get larger than ever before which then inflates the experience modification and ultimately their premiums.
Next up is the Ee or Expected Excess Losses. We’ll be short here as this is one of the parts of the equation that the business has almost no control over. Basically, this number is your total expected losses, which we’ll talk about next, multiplied by something called the D-Ratio. The D-Ratio is a number associated to each class code after years of study into the claims severity for each particular job. (For more information on that or to see a complete list, go to WCIRB.com and type in “D-Ratio” in the search bar.) The most important thing to understand here is that this value in the equation is why your ex-mod can never get to 0.
Finally, we have E or Total Expected Losses. This number is calculated from the size of your business (in payroll) and the risk factors assigned to the class codes that that payroll is allotted to. Essentially, the more payroll your business has and the riskier the jobs that your employees do, the higher this number will go. Again, like expected excess losses, the business has very little control over this number, so the most important thing to understand is that you always want your other two number (Ap and Ee) to add up to less than this one. Another way to look at this is that you want the top of your equation to be lower than the bottom.
And that’s all there is to it. Not too bad, right?
Okay, maybe don’t answer that last question. Obviously, when it comes to calculating experience modifications, things can get complicated in a hurry.
But let’s keep it simple. If your business is able to keep the Actual Primary Losses number low, you’ll have a lower ex-mod.
That’s one of the things we do here at Whiteboard, and we would love to strategize with you about how best to do that for your organization.
P.S. – If you made it through that whole thing, you get an A+.
P.P.S. – Here’s that Split Point chart that I promised you in the post: