Quick Mr/Mrs/Ms Businessowner! 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.
----------------------------------------------------
Eric D. Patrick is an attorney and Chief Operating Officer
of Consumers Insurance Agency Inc.
http://www.consumers-insurance.com . He also engages in
insurance consulting and legal work through The RiskAssure
Consulting Group. Please contact him for further
information.
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