In certain states, contractors can have a tough time bidding on new business if their experience modification rating (mod) is greater than 1.00. Mods are factors that compare an employer’s claims portfolio to others similar in size (i.e., payroll) and industry. The disclosure of mods is a continued requirement and relative measure of perceived safety practices.

How a Mod is Calculated

Each experience mod is calculated using claims data from the three most recently completed years, excluding the current term. For example, when calculating a 2018 mod, payrolls and claims from 2015, 2016 and 2017 will be used. The formula used adjusts the actual losses during this time frame so that the frequency (number of claims) is given greater weight than the severity (size of claims). For example, an employer with one claim totaling $50,000 will bode better its their mod calculation than an employer with five $10,000 claims.

How to Reduce the Mod

Because frequency of losses is weighted more heavily than severity of losses, investing in safety controls to help minimize loss frequency will help effectively manage workers’ compensation costs. Implementing a solid safety program, return to work plan and loss prevention procedures will aid in mod reduction and positively impact bottom line in return. Knowing the company’s experience mod and how it applies to the premium can help identify whether additional steps need to be taken to further reduce workers’ compensation premiums.

Use of Mods in the Construction Industry 

When it comes to a company’s mod, it’s important to make sure workers’ compensation classification codes are correct. It seems logical to keep payroll in the lowest rated classification if possible, but this isn’t necessarily true. Here’s an example of a classification dispute that impacted the mod of a commercial and industrial painting contractor.

For years, the contractor’s entire payroll was included in the 5474 painting code (painting NOC and shop, drivers), rate of $11.80. However, the company does a fair amount of painting operations that exceed two stories, including some bridge painting, which would be 5037 (structures over two stories, drivers) at a rate of $39.11. Although both classifications were included, the 5037 code was listed on an “if any” payroll basis. The painter never included the higher-rated payroll under this classification and the auditor never questioned the exposure.

The experience mod quickly increased to a 1.06. Because the mod was now greater than a 1.0, the business was no longer eligible for the contractor’s credit. In addition, the contractor was no longer eligible to bid on certain projects based on contractual requirements of a 1.0 mod or better.

After digging into the operations and payroll exposures included in the modification calculation, it was determined that a significant amount of payroll should have been included in the 5037 class code, as the contractor was painting industrial structures over two stories tall.

As a result of redistributing payroll to the 5037 class code, several improvements occurred: 

• the experience mod was reduced to a .89 from a 1.06;
• the contractor is now eligible for the Illinois contractor’s credit (equated to 37 percent);
• the premium was reduced by 20 percent based on the reduction in the mod and the use of the contractor’s credit; and
• the contractor is now eligible to bid on projects that require a 1.0 mod or better.

One of the primary drivers affecting the mod factor is the classification. The tougher the classification (i.e., the higher the workers’ compensation rate), the more credit is applied in the mod factor.

If a company finds itself suffering from a high mod, it’s important the insurance broker understands all the determining factors that are driving up this number outside of just losses and can articulate this to the procurement offices. Ultimately, a high mod will impact premiums and the ability to bid on projects.