Preston Diamond
There has been some chatter online recently regarding the waning importance of experience rating and the increased use of “predictive modeling” by insurance companies. The argument is that because large insurance companies are beginning to track more and more data and are pushing for their pricing to match what their global models want, rather than simply measuring the experience of a single employer, the experience mod is largely an out of date tool and should not be of much concern to employers.
While there is no doubt that many insurance companies are making efforts to leverage “big data” and we hear increasing reports from agents about companies “pricing to target,” there are a few things that have not changed, such as:
- The experience mod is critical for employers who must manage it below a given level to bid on jobs.
- The experience mod is still a piece of the workers’ comp premium calculation. This means that even if the carrier is pricing to target, you can still measure the impact of an individual injury on the experience mod and on their costs.
- We can’t see the insurance companies internal models, so the experience mod remains the best way we have to keep score on an employer’s performance in workers’ compensation.
The experience mod is the sum of an employer’s payroll and their history of employee injuries. It measures a business against the average of other businesses like theirs.
Individual results still matter. An employer who is classified correctly, has a recovery at work program, a physician relationship, and all the other critical components of a successful workers’ comp program will have better experience, which will translate into a lower experience mod. That lower experience mod will almost always lead to an employer paying less for their workers’ compensation than a comparable employer who has an elevated experience mod.
Bottom line: The experience mod is showing no signs of becoming less important in workers’ compensation. If anything, with the advent of businesses using the experience mod as a proxy for safety performance, it could be argued that the mod is more important than it has ever been.
There may be a day in the future where rating bureaus and the entire concept of experience rating becomes obsolete.
But that time just isn’t here yet. Insurance company underwriters will always be interested in writing profitable business and until the companies start sharing their models with us (spoiler alert: they won’t), the experience mod is the most effective tool that agents and employers have to measure the performance of an employer.
Preston Diamond is the founding member and current Managing Director of The Institute of WorkComp Professionals, which educates, certifies, and mentors insurance agents in Workers’ Compensation insurance. During his long career, Preston has taught insurance at a California Community College, chaired a week long insurance agency management school for six years, presented more than 300 times at seminars and workshops and has consulted with more than 400 insurance agencies. For more information visit www.workcompprofessionals.com
