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Workers' Compensation Insights: Mods
A mod analysis can provide valuable insight into your business operations and workers’ compensation losses. If you have a basic understanding of how a mod (i.e. Experience Modification Factor) is calculated, you can use a few simple equations to gain a deeper understanding of the factors contributing to your number.
Determination of the Minimum Mod
The minimum mod, also known as the loss-free rating, is the lowest mod possible for your company. This value can be determined by plugging in zero actual primary and excess losses into the mod formula while maintaining the values for expected losses, ballast and weighting value. This gives the lowest mod value theoretically achievable by your company.
The minimum mod is not the same for all companies. For small staffing companies (as measured by expected losses), the minimum mod can be in the range of 0.90. As the size of the company increases, the minimum mod decreases. For very large companies, the minimum mod may be 0.40 or even lower.
Knowing your minimum mod is important. A large company with a mod of 0.95 may still be able to achieve significant savings through loss control and loss prevention activities. The company may perceive the 0.95 mod as “good.” However, if the minimum mod is 0.50, there’s significant room for improvement.
For a small company, the minimum mod can be used for setting realistic expectations; for example, a small staffing company that sets a goal of having a 0.80 mod will not be able to achieve it under any circumstance if the minimum mod is 0.85.
Determining the Controllable Mod
The controllable mod is the difference between your current mod and your minimum mod. This is the variable piece of your mod that fluctuates with losses. The controllable mod can be broken into the contribution made by primary losses and by excess losses. This helps you to identify the exact contribution of loss frequency and loss severity to your mod. By estimating your basic premium (the premium prior to application of the mod), you can calculate the cost of primary and excess losses in terms of increased premium. You calculate this by multiplying the premium by the increase in the mod caused by primary or excess losses. This will assist you in determining the potential value of loss prevention, loss control and safety programs.
Ratio of Actual to Expected Losses
By computing a simple ratio of actual to expected losses (both primary and excess), you can measure the degree to which your company’s losses differ from the expected loss values. This is a statistic that can be tracked over time to identify trends, improvements or problems relating to loss experience.
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