10 reasons to stop using e-mods to evaluate safety

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.

One of the best ways to reduce an e-mod is to prevent workplace accidents. Visit worksafetexas.com for free safety training resources.

One of the best ways to reduce an e-mod is to prevent workplace accidents. Visit worksafetexas.com for free safety training resources.

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.

 

There’s Nothing Wrong with a 1.00

iStock_000002585243SmallThe number 1.00 means different things to different people. In baseball, 1.00 represents a perfect batting average. But in college, a 1.00 grade point average is about as bad as it gets. In workers’ compensation, a 1.00 experience modifier, or e-mod, has long been seen as the standard for determining whether or not a company is safe, but that may be changing.

There are a number of factors to consider when evaluating safety, and simply questioning whether or not a contractor has an e-mod of 1.00 or below may not be the best measurement. A 1.00 e-mod means something different today than it has in years past, and its meaning will continue to change in the future. Simply put, the meaning of a company’s e-mod is in transition. It is a moving target and may not be the best gauge of a contractor’s safety standards and practices.

Watch for Changing E-mods

Effective July 1, Texas will utilize the National Council on Compensation Insurance (NCCI) experience modification plan. The calculation of experience modifiers will undergo several changes all at once, which could have a material impact – up or down – on a policyholder’s experience modifier.

The changes to the e-mod formula could trigger increases in the experience modifiers for many contractors, even if there are no changes in loss experience. For some contractors, the increase could be significant. The change could bring about negative consequences as many project owners and general contractors use the experience modifier as an indicator of the contractor’s safety record, which is why it’s time to change the way we think about e-mods.

An unexplained e-mod increase could inadvertently disqualify Texas contractors from competing for some projects if their experience modifier rises above 1.00. Given the circumstances, project owners should revisit the requirements of an experience modifier below 1.00 because it doesn’t indicate what it has traditionally.

What Have You Done for Me Lately?

Another potential shortcoming of using the experience rating plan as a gauge of safety is that it looks back as many as four years to assess current safety levels. When evaluating someone’s abilities, do you rely on what they did two to four years ago, or do you look at their performance over the last 12 to 18 months? The e-mod completely ignores a company’s safety performance and experience in the last 18 months. Project owners would be well advised to assess what contractors are doing today to reduce workplace accidents, and not penalize safety-conscious employers for accidents that occurred three or four years ago. The company could have made substantial improvements in safety and the employees involved may be long gone from the company. On the other hand, if you trust the modifier as a gauge for safety, you may not recognize that a company that was using safe practices a few years ago could conversely be much less safe now.

What E-mods Really Represent

With the meaning of e-mods changing from an often-used measurement of safety to something far different, you may be wondering why they’re so important. In short, e-mods help the insurance industry assess premium more accurately. They represent the point at which a company ranks within a rating class code containing similar companies, with different exceptions of loss. It’s a necessary part of assessing workers’ compensation premium, but is an inaccurate gauge of performance.

While companies with high e-mods are generally thought of as unsafe, the more correct interpretation of a high e-mod is often that the business is in a class grouping that has several industries with very different exposure risks, and additionally they are in an industry that has a higher risk than other industries in that grouping. For instance, all roofers will be placed in the same class code, but their exposures can vary greatly depending on the type of roofs they work on, the height of the buildings and whether they’re commercial or residential. They are all classified the same, but each business has unique risks. A higher e-mod may be assigned to a business working on tall, commercial buildings because they are in a riskier industry, but that doesn’t necessarily mean they have less safe practices than a roofing company that works on low, residential buildings and faces less risk.

Looking Ahead

E-mods are a tool used by the insurance industry to guide rate decisions. They are not report cards of a company’s safe practices. Some may look to a company’s e-mod simply because it’s difficult to evaluate truly outstanding performance, but using that as a single gauge can potentially lead to faulty assessment of risk expectations. With changes coming, risk managers should turn their focus to evaluating a company’s current safety and business practices rather than relying on a number.

If you’d like to know more about upcoming NCCI changes and what they could mean for your business, visit texasmutual.com/NCCI.

Your Experience Modifier : How to Control it, and Why You Should

By Shelly Horelica, Senior Marketing Specialist

By Shelly Horelica, Senior Marketing Specialist

Most people don’t often think of their workers’ compensation policy until they pay their premium or file a claim. You may be surprised to learn that you can take small steps during the year to save money when you renew your policy. Your experience modifier (e-mod) is one of the keys.

In part one of this two-part series, I explained what an e-mod is. In this installment, I will give you tips for controlling your e-mod and your workers’ comp premium.

Prevent workplace accidents

The best way to reduce an e-mod is to reduce losses. The best way to reduce losses is to prevent accidents. Employers have access to thousands of free workplace safety materials through the Occupational Safety and Health Administration, the Texas Department of Insurance and Texas Mutual Insurance Company.

Focus on return-to-work

When on-the-job injuries force employees to miss work, some employers react by replacing them and moving on with business as usual. That approach is costly for both parties.

A return-to-work process helps injured workers return to productive employment. If they are unable to perform all of their normal job duties, the process provides alternative productive work they can do while they recover.

Employers who join a workers’ comp health care network have access to additional return-to-work services.

Help fight fraud

By 2015, fraud will cost the property and casualty insurance industry $80 billion a year. Those costs will trickle down to everyone in the form of higher premiums. Employers can help insurance carriers fight fraud and its cascading effects if they learn the red flags.

Learn your role in subrogation

If a third party contributed to an on-the-job accident, your insurance company may be able to recover some or all of the costs from the third party. The process is called subrogation, and it can help reduce your claim costs and your premium. Most subrogation recoveries involve vehicles, products or premises. You can facilitate the subrogation process if you know what to look for.

Come to a free workshop

If you are an insurance agent who wants to learn more about e-mods, class codes and other workers’ compensation topics, come to a free Texas Mutual workshop. You will earn 3.5 CE credits for attending.

Texas Mutual also hosts free workshops for employers. Topics include fighting workers’ comp fraud, preventing workplace accidents and managing claims.

About the author

Shelly Horelica is a certified insurance counselor with 25 years’ experience in workers’ compensation insurance. As a senior marketing specialist, Shelly partners with independent insurance agents across the state and helps them get the most value for their clients’ premium dollars. Shelly shares her expertise with agents as a presenter at Texas Mutual’s free workers’ comp workshops.

The Basics of E-mods

What is an experience modifier?

Let’s start with a refresher on how we calculate workers’ compensation premium. We multiply the rate for Imageeach class code per $100 of payroll for employees who work in that class. Then, we introduce the experience modifier (E-Mod) to the calculation.

An E-Mod is an adjustment in premium to reflect an employer’s loss experience. It allows insurance carriers to distinguish among employers in the same rating class or of a similar premium size.

E-Mods are based on a formula: Actual Losses/Expected Losses=E-Mod.

Loss experience is a more reliable predictor of future losses for larger premium. So, we do not apply an E-Mod to employers who have less than $5,000 in premium. Small employers are, however, eligible for a Small Employer Incentive Credit. See the Texas Basic Manual of Rules for Workers’ Compensation and Employers’ Liability Insurance, Rule XVII for more information.

How do E-Mods affect premium?

The E-Mod formula puts a cap on larger losses. It also gives greater weight to accident frequency than severity. Claims with $0 losses are not considered in the frequency calculation and do not affect an employer’s E-Mod.

When can the carrier change an E-Mod?

An employer’s losses fluctuate over time, but insurance carriers generally cannot change an E-Mod. The Texas Department of Insurance allows exceptions if a clerical error was made, a subrogation recovery was collected or the claim was later declared noncompensable. If a carrier needs to lower an E-Mod, it must do it retroactively to the inception date of the policy or the anniversary rate date, if it is different than the effective date.

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