Safety Equals Savings

The Natural Council on Compensation Insurance (NCCI) uses a complex formula to
calculate an experience modification factor (mod) for eligible employers. In layman’s
terms, your mod is simply the amount of your actual work comp losses divided by your
expected losses based on your industry.

Currently, companies with several smaller losses have a higher mod than companies with
one single large loss-even if the total dollars are the same. That’s because NCCI accepts
that accidents really do happen. The penalty goes to the company that doesn’t work hard at
prevention, allowing injuries to continue.

NCCI annually produces a mod worksheet that outlines the calculation and the data used to
develop your mod factor. Your mod worksheet contains three years of claims and the
payroll data, however, the most recent policy year is not included. For example, a
company’s mod worksheet for a January 1, 2012, policy would contain data for the 2010,
2009, and 2008 policy years, but not 2011.

In the formula the NCCI uses to calculate your experience mod factor, there is a big
difference between the primary and excess parts of a claim. There is a line defining these
two parts, and it is known as the split point of the claim.

For the past 20 years, the first $5,000 of a lost-time claim has been considered the primary
portion and any amount above $5,000 has been considered the excess portion of the claim.
The formula counts the entire $5,000 primary portion of a lost-time claim against your
mod but only counts a small portion (typically 5 to 15 percent) of the excess portion of the
claim against your mod. For example, using a $25,000 lost-time claim for a company
whose mod formula only uses 10 percent of the excess portion of the claim, just $7,000 of
the claim would count against the mod calculation, which means that the first $5,000
primary portion is fully counted but only 10 percent of the rest of the claim ($20,000 x
10% =$2,000) is used in the mod calculation.

Upcoming changes make safe workplaces even more important: NCCI is proposing a
major change to raise the split point of claims from $5,000 to $15,000 over the course of
three years. If approved, the split point will be increased from $5,000 to $10,000 in 2013,
then to $13,500 in 2014 and finally to $15,000 (plus two years of inflation adjustment) in

Starting in 2013, (and provided the proposal is approved in your state), $10,000 of that
$25,000 lost-time claim will count fully against your mod factor calculation. By 2015, more than $15,000 of that claim will count as the primary portion. And it will make a big difference. (See chart).

In the future, your mod will be largely impacted by the number of claims you have that are
over $5,000. If none of your claims exceed $5,000, you will generally see a decrease in
your mod because no additional losses will flow into the mod formula even with the higher
split point. Following that logic, it is safe to predict that companies with an above average
amount of claims over $5,000 can expect to see an increase in their mod factor.

Safety saves

Ultimately, these changes mean that the employers who are safety conscious will be
rewarded. Safe employers will see a reduction in their mod factors; those teetering can go
either way; those who aren’t safe will definitely see an increase.

Even though these proposed changes won’t become effective until 2013, the claims data
that the NCCI will be using for your 2013 mod is from your 2009,2010, and 2011 policy
years, so it is important to remember that safety today will positively impact your mod
over the next several years. Now is the time to create a safer workplace.