I’ve already addressed how your restaurant workers compensation insurance rates are determined. The four factors are:
- The market tier you are in, either ‘Preferred’ or ‘The Pool’
- Employee classification
- Your exposure which is the gross payroll per classification
- Experience Modification Factor also know as Experience Rating
In workers compensation, the Experience Modification Factor is one of the critical components of the premium calculation. Here is a basic overview for you to understand how Experience Modification affects your restaurant workers compensation rates.
What is the Experience Modification Factor (Experience MOD)?
The Experience MOD is a calculation that compares your actual losses to the average losses of businesses like yours. Your workers compensation premium calculation will look like this:
Rate x Exposure (Gross Payroll) x Experience MOD = Premium
Application of the Experience MOD factor in the rate making formula will either result in a premium that is lower (a credit) or a premium that is higher (a debit).
An Experience MOD greater than 1.0 means your losses are worse than expected and your premium will increase. An Experience MOD less than 1.0 means losses are better than expected, resulting in a premium decrease.
For example if you have an experience modification of 1.20 the Experience MOD is multiplied by your gross premium. So, a 1.20 modification factor increases your restaurants workers compensation insurance rates by 20%. If you have an experience modification of .89 your restaurant workers compensation insurance rate would reduce by 11%.
What Makes the Modification Factor?
The Experience MOD is calculated using claim data from the three of the 4 most recently completed years, excluding the expiring term. To determine your 2014 Experience MOD, payrolls and claims from 2010, 2011 and 2012 will be included. First, each claim incurred (paid plus reserved) value is listed. Next, the frequency of claims is evaluated.
A business with one $10,000 claim will fare better than one with five $2,000 claims. In spite of the equal dollar amount, the second business is more prone to claims. In some states only a percent of the ‘medical only’ claims are used in the formula, further adjusting the calculation which puts more weight on frequency of claims than severity of claims.
Finally, these adjusted claims are compared to the expected losses for the class and size of your business, which determines the Experience MOD assigned to your business.
My next article will provide tips to reduce your restaurants workers compensation claims. A restaurant with low losses has a lower Experience MOD which results in more affordable restaurant workers compensation rates.