The way workers’ compensation experience modifiers are calculated is changing in the state of Texas, which could have either a positive or negative impact on your business, depending on your current situation. If your compensation experience modification is scrutinized before you can work or bid on jobs, you will want to take special heed. Charles Comiskey of risk management firm Brady Chapman Holland & Associates explains the changes and what they mean for your business below.
A workers’ compensation experience modifier is a comparison of a company’s actual incurred loss experience as compared to actuarially anticipated loss experience for a company of that same size and operations. Perfectly average loss experience results in a modifier of 1.00. A debit modifier (one in excess of 1.00) is indicative of adverse experience, and a credit modifier (one below 1.00) indicates favorable experience. The loss experience used to perform this calculation is based upon the three oldest of a company’s past four workers’ compensation policy periods.
Each loss is divided into primary and excess portions. Currently, the first $5,000 of every loss is considered to be a “primary” loss, and all amounts greater than $5,000 are deemed to be “excess” loss. Primary losses are fully weighted in the modification calculation, but the amounts of loss excess of that $5,000 limit receive a lesser weighting. This means that frequency of primary losses can have a more dramatic effect on increasing a modifier than large losses do.
Why should you care how this calculation is done? Because it’s changing for the first time in almost 20 years, as the formulas have not kept up with rising costs of medical care. In most states (but not in Texas) the change was effective Jan. 1, 2013. If you have operations in multiple states, your modification is likely already affected.
With this change, the level of fully weighted primary losses will increase from $5,000 to $10,000 when approved by each state, and it is projected to increase to $13,500 the following year and to around $17,000 the year thereafter.
Impact on Your Business
What does this mean to you? If your current modification is a debit, expect that penalty to increase. On the other hand, if your modifier is a credit, it will likely improve. If your workers’ compensation experience modification is scrutinized by others before you are permitted to work or even bid on certain jobs, take heed – this change could endanger your livelihood.
When will this happen in Texas? That’s a great question that deserves an evasive answer. This has not been announced by the Texas Department of Insurance and until it is, we don’t know. But the expectation is that it will be done, and not in the distant future.
Improving Your Modifier
Keep in mind that a modifier of 1.00 is not a goal to which your business should aspire. It’s average. It’s a “C” grade. Safety, quality and productivity go hand-in-hand, and good loss experience can be achieved. Every company whose workers’ compensation is subject to experience modification has a minimum possible modifier. Those that reach that level get an “A+”. The questions that should be asked are:
- What is our minimum possible modifier?
- What’s keeping us from getting there?
It can be done.
Charles E. Comiskey, CPCU, CIC, CPIA, CRM, PWCA, CRIS, CCM, is Sr. V.P. of Brady Chapman Holland & Associates. Comiskey is a nationally recognized expert and frequent speaker on risk management and insurance issues to various legal, construction and real estate associations and similar groups across the country. He has served as a pre-trial consultant/expert witness in approximately 200 matters in State and Federal courts, serving in behalf of both the defense and plaintiff. He can be contacted at 713.979.9706 or firstname.lastname@example.org.