The premium a member pays for a Workers’ Compensation policy is primarily determined by considering three items:
- The types of work done by employees (which are grouped into “classifications”)
- An experience modification
- The amount of payroll for employees in each classification
Classification grouping is done to reflect the fact that employees in certain jobs (such as roofers) have a greater risk of injury than employees in other positions (such as office jobs). Members pay higher workers’ compensation rates for employees in higher risk job classes.
The experience modification (“experience mod”) is an adjustment made to reflect each member’s own past loss experience. Members with few or no past losses generally receive a “credit” experience mod, which lowers their premiums. Members with many or large past claims often receive a “debit” mod, which increases their premiums. Experience mods provide APEI members with a financial incentive to work on preventing accidents and help injured employees return to work.
Experience mods “follow” an employer if that employer changes insurance companies. This means that APEI is able to fairly calculate and apply an experience mod when writing new business, as well as for our long-term members.
Since employers generally have more control over the frequency of accidents than the cost of the injuries resulting from those accidents, the formula calculating the experience mod gives more weight to the number of claims than to the cost of those claims. It does this by dividing each claim into two portions: a “primary” loss amount, and an “excess” loss amount. While all of the primary loss amounts are included in the calculation of the experience mod, only a portion of the “excess” losses are included.
For many years, the “split point” between primary and excess losses has been set at $5,000. Thus, the first $5,000 of each claim has been considered primary, while amounts over $5,000 have been considered to be excess. Inflation has caused the $5,000 split point to become outdated, with more claims falling into the excess category.
In an attempt to better reflect cost increases, this split point will be increasing, first to $10,000 in 2013, and then to $15,000 and higher over the next several years. This change is intended to be revenue neutral, so the average experience mod for all APEI members should not change. The experience mods will change for most members, though, with members who have high-cost claims likely seeing an increase in their experience mod, and members with few or low-cost claims seeing a decrease.
These changes mean that a member’s premiums will be more sensitive to their loss history than in the past, and make it even more important to implement loss control measures to reduce the likelihood and cost of accidents. APEI provides loss control services that can help with this. For information on these services, contact Cole Cummins, your loss control manager, at email@example.com.