How does safety pay dividends to the business owner?
Time and resources spent on developing a culture of safety repays the business in the long run. Safety cultures rely on reducing the number of workers compensation claims, in return, the odds of a disastrous claim are reduced.
Business owners with Workers Compensation experience modifications above 1.25 need to review their safety policies with professionals. It is possible one year or even one claim causes this situation; but it should not be ignored. Discover and repair the root cause.
A 1.01 to 1.25 modification indicates worse than average experience. State rates can be less than adequate for a short period of time. The actuarial or mathematical calculations just incorrectly reflect the average expected claims. Slightly elevated modifications may be caused by these issues; however, review your losses by department in these cases and see if a problem area exists.
For slightly elevated modifications, review the safety program and types of losses. Seek out a professional risk manager for help if needed. Look for patterns in the losses, and consider changes in safety equipment or procedures to reduce problem issues.
Proactively nurturing a safety culture will pay long-term dividends. Experience modifications will decrease with positive results. How?
Each state calculates Workers Compensation experience modifications independently. Many states do utilize the services of the National Council on Compensation Insurance (NCCI) to gather data and promulgate base rates and experience modifications; but each state regulates its own Workers Compensation system.
Workers Compensation experience rating predicts future behavior by analyzing past performance. It is a consequence of loss control performance, neither a reward for no losses nor a punishment for too many claims.
The generic formula for experience modifications follows some rules:
Just as payrolls are the basis for the standard premium, they form the basis for expected claims. Payroll is multiplied by an average claim factor to produce total expected claims. A discount factor is then applied to predict the potential severity of the claims. The product of this equation is expected losses. Actual medical only (MO) claims combine and report as a number of claims/total amount. Some states designate the MO claims as primary (maximum average) and excess, and then apply a discount rate to one or both of these amounts. Most states set a limit on the value of any one claim, and then discount large claims on a sliding scale. This historical claim experience is divided by expected losses. That quotient is the experience modification.
The insurance industry spends millions of dollars to find ways to predict the future. Loss analysts discovered one important fact: the best predictor of future claims is the frequency with which companies suffer losses in the past.
Frequency reflects the number of claims per employee, usually expressed as claims per payroll unit ($100), claims per year, or claims per time unit. Frequency, however, more importantly, reflects the safety culture of the business.
If the frequency of claims is predictable, how about the severity of an individual loss? No, severity, the magnitude of the loss, is not predictable. With greater frequency, however, come greater odds that a severe claim will occur.
Experience modifications indicate the status of the safety culture within a business. Good management listens to risk management and loss control experts who ultimately reduce Workers Compensation costs.
