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Experience Mods: What they are, and how they affect net premium.


Managing a business comes with a variety of financial responsibilities. Controlling costs is crucial for success. Now let's talk about an important part of controlling those costs, experience mods.


The experience modification rate, or Ex-Mod, is used by insurers to describe both past injuries and future risk. In simple terms, an experience mod is a factor that influences workers compensation premiums. Using a highly complex formula the issuing authority produces a companies experience modification rating. Although ex-mods are not the only factor used when calculating workers compensation premiums, they are one of the few that businesses can control. An Ex-Mod above 1.0 represents a higher cost and risk and thus a higher premium. An Ex-Mod below 1.0 garners clients a discount on their premiums. Therefore, the goal should be to keep experience mods at 1.0 or lower. Let's examine the effects of high and low experience mods:


Company A: Experience mod = 1.65


Annual Payroll

Divided by 100

Rate per $100 of payroll

Unmodified Premium

Ex Mod

Modified Premium

$500,000

$5,000

15.50%

$77,500

1.65

$127,875

Total Premium = $77,500

Mod Factor = 1.65

Modified Premium = $127,875

 

Company B: Experience mod = .80


Annual Payroll

Divided by 100

Rate per $100 of payroll

Unmodified Premium

Ex Mod

Modified Premium

$500,000

$5,000

15.50%

$77,500

.80

$62,000

Unmodified Premium = $77,500

Mod Factor = .80

Modified Premium = $62,000



Undoubtedly, the experience modifier affects the cost of Workers Compensation insurance for employers. However, a secondary impact of experience rating has surfaced in recent years. The experience mod is now widely used by potential customers as a measure of a firm's safety, and they prohibit firms from bidding on work if their modifier is too high.


I think at this time we can agree experience mods are crucially important. Stay tuned for our next blog post focusing on what agents and clients can do to control and even lower a companies Ex-Mod.




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