October 4, 2016 Leave a comment
We live in a world where bigger is better. There are of course exceptions, such as taxes and a company’s workers’ compensation experience modification factor (e-mod). Generally, the larger the e-mod, the higher the premium.
But e-mods were never intended to reflect a contractor’s commitment to safety and, by extension, its eligibility to work on a job site. Here are 10 reasons anyone using e-mods in the contractor hiring equation should reconsider.
E-mod is a pricing modifier – The Texas insurance industry is limited to fewer than 400 base rates for business classification groupings. So it is impossible to accurately price policies for thousands of different kinds of business. E-mods adjust the base rate to help insurance companies accurately price policies, but e-mods are not a report card on safe practices
E-mod data is old – E-mods look back as many as four years, but they ignore a company’s current safety practices. Project owners should assess what contractors are doing today to reduce accidents.
Reserves change – Reserves on open claims change, sometimes dramatically. A reserve that is too high or low can cause an e-mod to be inappropriately high or low.
E-mods can be artificially lowered – Some employers pay claims out of their pocket. By not reporting claims to their carrier, employers artificially lower their e-mod without improving workplace safety.
Subrogation takes time – Subrogation recoveries offset reported claim amounts, but these cases are often litigated. By the time the carrier recovers the funds, the recovery is not reflected in the e-mod.
The e-mod formula changes – The National Council on Compensation Insurance (NCCI) promulgates e-mods used by workers’ compensation insurers. In 2015, NCCI increased the split point in their formula (Texas) from $5,000 to $15,000. This resulted in dramatic increases/decreases at the employer level, without real changes in underlying safety.
The bar keeps getting higher – Technological and safety improvements in business have resulted in decreasing claim frequency. Some contractors, even if they have no losses, may see an increase in their e-mods driven primarily by the drop in claim frequency, not by deterioration in their safety practices.
Business models change – Companies are merged, sold and acquired every day. And it is not uncommon for companies to dispose of unprofitable business segments and/or venture into new segments. E-mods react slowly to changes in the underlying business model. For example, a bakery could add a trucking component to its distribution system. The bakery might operate safely, but the trucking exposure does not. In this case, the e-mod would be artificially low, reflecting only the safe bakery operations.
Stuff happens – Consider an electrical contractor traveling from between job sites. Another driver dozes off, crosses the median and hits the contractor. Because the contractor was injured in the scope and course of employment, he is entitled to workers’ comp benefits. Neither the contractor nor his employer did anything wrong, but this claim will adversely the e-mod.
Fraud affects everyone – Most claims are legitimate, but some employees fake injuries, exaggerate injuries or otherwise cheat the system. When they do, they drive up claim costs and e-mod values for even the most safety-conscious employers.
Agents: Arm your clients
If we put too much stock in e-mods, we unfairly disqualify safe contractors from bidding on jobs. Risk managers should instead focus on a company’s current safety and business practices. And agents should begin working with their contractor clients to arm them with knowledge to face the changes ahead. For more information about e-mods, visit Texas Mutual and NCCI online.