The Experience Mod: What Story Does it Tell?

| September 01, 2022

For many employers, workers’ compensation insurance is all about one number—the premium quoted. Understandably, employers want to pay the lowest amount possible on this mandatory coverage. The amount you pay for workers' compensation premiums is based on a rating of your loss history called the experience modification factor, or mod.

What is the mod factor?

The mod factor is a number that represents whether a company’s workers’ compensation losses are better or worse than average. The mod works as a credit or debit that is applied to your workers’ compensation premium. A mod factor greater than 1.0 is a debit mod, which means that your losses are worse than expected and a surcharge will be added to your premium. A mod factor less than 1.0 is a credit mod, which means losses are better than expected, resulting in a discounted premium.

Numerous factors affect whether a company is experience rated. In general, very small companies may not be eligible. The mathematical determination is based on the sum of a company’s payroll by classification code multiplied by the pure premium rate for that code. If this total exceeds the state’s premium threshold—a number that is updated each year—then the company is experience rated.

Who Calculates the Mod Factor?

In California, the Workers' Compensation Insurance Rating Bureau of California (WCIRB) calculates employers’ experience modification factors. The WCIRB is a private, nonprofit association comprised of the companies licensed to transact workers' compensation insurance in the state.

Outside of California, most other states use the National Council on Compensation Insurance (NCCI) to perform a similar function. However, the following states also have their own rating bureaus: Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Texas and Wisconsin.

How Is the Mod Calculated?

The mod is calculated using loss and payroll data for an experience rating period. The experience rating period typically includes data for three policy years, excluding the most recently completed year. Three years of data is used to provide a more accurate reflection of the losses, smoothing out the impact of any exceptionally bad or good year for losses.

The actual loss data is separated into primary and excess pools. Primary losses, which are the first $7,000 of every loss, measure frequency. Excess losses—or amounts more than $7,000—measure severity. The formula penalizes loss frequency by including all loss amounts in the calculation. The reason for this is that these types of claims can be controlled through proactive loss control programs. Large losses are capped at levels that can vary each year. This minimizes the impact that any single claim can have on your premium.

Expected losses are then calculated using your payroll data by class code and applying the Expected Loss Ratio (ELR). ELRs are provided by the bureau and usually updated on an annual basis. These figures are also broken down into expected primary losses and expected excess losses. Credibility factors, also supplied by the bureau and determined based on expected losses, are applied in a final step of the calculation.

How We Can Help Tell Your Story

With the help of analysis, your mod tells a story—about where your business has been and what it can do to improve. With the power of our experience modifier software tool, we’ll analyze your mod and tell your story. Specifically, we can do the following:

  • Calculate and project costs associated with the mod.
  • Identify opportunities for improvement.
  • Analyze cost of losses in terms of mod points and premium.
  • Reveal cost drivers and the impact of the mod.
  • Focus on problem areas, such as frequency or severity of injuries.
  • Examine loss trends for types of injuries, departments and more.
  • Create loss control and risk management strategies.