Controlling Workers Compensation Costs for Employers

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X-MOD: Don't be a Victim of X-MOD Ignorance

what is  x-mod


Almost every employer knows, once a year, they get something called the X-MOD (Experience Rating Modification). They also know it has an effect on their work comp premium – either good or bad. Beyond that, employers don't understand much about the X-MOD. That is too bad, because when it comes to what an employer will pay for work comp insurance, nothing has a greater impact. It could mean the difference of tens of thousands of dollars.

What is the X-MOD?

First – what is the X-MOD and where did it come from? The X-MOD for each employer is calculated and published by the WCIRB (Workers' Compensation Rating Bureau). The WCIRB is an organization all the insurance carriers writing work comp insurance in California are members of. The WCIRB has two functions – recommend Pure Premium rates to the California Insurance Commissioner and calculate X-MODs for employers.

Does every employer get an X-MOD?

Not all employers get an X-MOD. Statistics show there are approximately 550,000 employers in California. Of those, approximately 180,000 qualify for an X-MOD, based on what their premium would be - calculated on payroll times the pure premium rate. For those smaller employers that do not get an X-MOD rating, it is a mixed blessing. Absent a published X-MOD, the carriers assume their X-MOD at 100%. If a small employer has had low (or none) work comp losses, it is a disadvantage. If a small employer has had large losses, it is an advantage.

For employers that receive an X-MOD it appears to be relatively simple. Employers with low losses receive a low X-MOD rating and (hopefully) lower work comp premiums. Employers with a high losses receive a high X-MOD rating and (sadly) higher work comp premiums.

It is not that simple. The X-MOD rating is more complicated. Because all insurance carriers are members of the WCIRB they are required to report all losses. This gives the WCIRB the near perfect statistical model – they have 100% of the data. The WCIRB can compare an employer's losses, based on work class code and payroll, with the losses of all other employers in the state with the same class code. If actual losses per $100 of payroll for a class code were $2 per $100 of payroll and employer experienced $4, the X-MOD would be 200% - or, if the employer experience $1, the X-MOD would be 50%.

That is the basic premise. But, the X-MOD calculation isn't that simple. The WCIRB uses something called the 'Rating Procedure' to adjust the X-MOD for every employer. The adjustment has three purposes:

  1. Punish Frequency – an employer with a large number of small claims will have a higher X-MOD for obvious reasons. Each claim represents an opportunity for the claim to become an expensive claim with heavy losses.
  2. Protect small employers from catastrophic losses – a very small employer with a large loss could be severely affected. For small employers, large losses are adjusted downward.
  3. Make sure everyone pays something into the Pool – even a small employer with no losses in the last six years will have to pay something into the pool.

X-MODs are based on Unit Stats (Unit Statistical Reporting). This is the reported 'incurred' (not actual paid) cost of a claim. The window is three years based on figures 18 months old to 42 months. Because the loss figures are older historical the X-MOD isn't always a good indicator of an employer's current loss profile. It is like driving down an interstate highway at 90 mph and looking in the rear-view mirror – trying to figure out when to turn left.

The lower the X-MOD, the lower the work comp premiums

A low X-MOD score is like a FICO (credit rating) score in reverse – lower (not higher) is better. The lower the X-MOD, the lower the work comp premiums will likely be – for two reasons. The first reason is the simple math calculation:–

Gross Payroll × Rates × X-MOD = Premium

The second reason is more complex. The lower the X-MOD the more likely an underwriter will discount the calculated premiums. Assume for a moment underwriters are some of the smartest people on the Planet. They are looking for an 'underwriting profit'. An employer with a low X-MOD is more likely (regardless of calculated premium) to turn in a lower loss ratio – thus a greater profit.

If all this sounds like the employer is a helpless victim – nothing could be further from the truth.

How to reduce your work comp premiums

Every employer CAN have a large impact on their X-MOD and their work comp premiums. By working with their insurance broker, they can influence and direct how a work comp claim is handled and resolved. The system is designed for the employer (not the claims adjuster) to have the maximum control. Working closely with the insurance broker is the best way for an employer to control their X-MOD and their work comp premiums.

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