A heavy metal steel fabricator has 100 workers and a 42% experience modification. Their best case is 41%. A trade contractor with 500 employees has a 54% mod rate. Contractors who are not as safety conscious as the two mentioned above have higher mod rates, and in some cases, much higher.
The fabricator has a base premium of $400,000, but the net premium after application of the 42% Mod is $168,000. The same firm with a Mod of 158% would pay $632,000. The delta is $464,000 of profit.
While the experience mod is only one of the factors that ultimately determines the net rate a firm is charged (other factors include schedule credits, territorial factors and premium discounts), it is the one factor that an insured controls.
What is an experience modification factor? An experience mod compares the loss experience of a company against all the similar businesses in a given state. If the loss experience is average, the mod is 100%. If it is better than average, like the two firms mentioned above, the mod is less than 100%, and if experience is worse than average, the mod is above 100%. The mod is generally based on the last four years of loss experience, excluding the current or most recent year. Absent self-insurance, there is no avoiding a mod.
In California, the experience mod is calculated by the Workers Compensation Insurance Rating Bureau of California. Other states either have their own bureaus that calculate mods or they are subject to the mods promulgated by the National Council on Compensation Insurance.
In addition to the impact that a mod might have on cost, it can also preclude contractors from working on certain projects. There are some developers, municipalities or other entities that won’t even do business with a company if their mod is above a certain threshold. Fixing the mod is not easy. One bad year will affect the experience mod for three years. A reactive approach to managing the mod doesn’t work. The key to a positive credit mod is a culture of safety, proactive claims management and comprehensive HR practices.
Safety Culture
If employees were asked about the safety culture, what would they say? “Safety is a major priority. Management goes out of their way to run a safe company.” Or, might their response be, “Safety culture? What safety culture? It’s all about getting the job done as quickly and as cheaply as possible.”
Safety starts at the top. If senior management is not driving the safety culture, the culture will suffer. When safety is a major objective of senior management, it cascades through the entire organization. When safety is a secondary priority, it is almost always reflected in a lousy loss history. Assuming a commitment from management, what else needs to be done to create a culture of safety?
- Appoint a Safety Coordinator. Someone needs to have overall responsibility for safety, and depending on the size of the company, there might be several people sharing this responsibility.
- Make sure the Injury and Illness Prevention Program is compliant. Every employer in California is required to have an IIPP so if a company does not have one, or cannot remember when it was last updated, it is out of compliance. An Injury and Illness Prevention Program is the cornerstone of an effective safety program.
- Create a safety committee that meets monthly and holds effective, results generating meetings.
- Track safety trainings for all employees and make sure they are monitored on a regular basis.
- Provide an effective safety orientation program for new hires.
- Perform as-needed inspections and have written policies as well as documentation procedures for:
- jobsite safety;
- field equipment;
- automobiles; and
- tools and machinery.
Claims Management
Even the best managed companies will have claims. How those claims are handled, however, will greatly affect the outcome and cost. How are claims managed? Do the appropriate people know what to do in the event of a claim or a circumstance that might give rise to a claim? Or, is every claim situation a fire drill that is handled by whomever happens to be in the vicinity when an accident happens?
Effective claims management goes hand in hand with a culture of safety. At a minimum, a solid claims management program will include:
- Appointment of an internal claims administrator. This is the person or people in the company that anyone can go to when there is a circumstance that could give rise to a claim or an actual claim.
- Education. Everyone in the company should be educated on claims identification and what to do if they become aware of a claim.
- Claim reporting protocol. Reporting protocol should be available on the company intranet or some other electronic bulletin board so everyone can access it.
- Relationship with the broker’s claims department and insurance company claims team. Regular open claim reviews should be held to make certain claims are being handled appropriately and everyone is on the same page.
Effectively managing claims is a collective effort that includes the insurance company and insurance broker. Steps taken to identify claims as early as possible and procedures designed to minimize those damages will go a long way to reducing the claims costs that ultimately drive the cost of risk.
Human Resources
While HR is not really considered a “safety” function, it is intricately related to a company’s loss profile. How well is the HR department performing? Is there a qualified HR professional in place who is up to speed on current employment and labor laws and who proactively interacts with staff to avoid issues before they become problems? Or is HR handled by someone with other responsibilities who does not really understand HR at all, and missed the meeting when the HR job was handed out?
- Make sure that human resources is not an afterthought. Companies with more than 50 employees should have a dedicated HR professional on staff. If that does not make sense, the person responsible should have an appropriate amount of HR training. At a minimum, this person has to know what they don’t know, so they know when to ask questions.
- Make sure the employee handbook is relevant and up to date. Has it been updated within the past few years? Does staff have a copy of the handbook and is the handbook relevant and effective? Does it include the safety protocols mentioned above?
- Are there written job descriptions for all positions within the company? Written job descriptions are a basic requirement for effective HR and are integral to a return-to-work program. They also spell out the physical requirements of each position. Avoid “hiring a claim.”
- Have a formal performance evaluation process for employees. Employees should be evaluated on a regular and consistent basis. If an employee is incapable of performing the physicalities of their position, it’s only a matter of time before they have a claim. This could include a pre-hire medical history questionnaire.
The experience modification can have a significant impact on a company’s operations and profitability. The mod, however, is a “lagging indicator” of loss experience. The current mod can be affected by claims that took place nearly four years ago. Because of this, the reactive approach to managing the mod won’t work.
Companies must be proactive
The safety manager of the trade contractor company explains its 54% mod. “We have a robust safety culture. Everyone working here knows that the owners of this company are first and foremost concerned about their safety, period. They invest in safety and we talk about it all the time. We invest in trainings and we are aggressive in managing our claims. It’s not inexpensive, but if you do the math, our return on investment is off the charts.”
