How to calculate workers' comp
As with other types of insurance, workers’ compensation insurance requires that policy owners pay a monthly or annual premium to access the benefits of the insurance plan. However, instead of charging policyholders flat rates based on income or level of benefits, workers’ comp insurance companies calculate their rates using a complex formula that takes many different elements into account.
Premium costs vary for every business, based on factors such as:
- The industry in which the business operates
- Total employee payroll, or the number of employees on staff
- Experience modification rate
The industry can be a critical factor in determining total premium amount. Businesses in more high-risk industries, such as logging or construction, might automatically have higher premiums, simply because their industry usually has higher rates of workers’ comp claims. Some providers, such as CompSource Mutual, examine both the business’ claims history and the industry’s unique risks to provide coverage that is well-researched and reasonably priced
The total employee payroll is also an important factor. Typically, insurance companies have a standard formula that charges companies a certain amount per every $100 in payroll. Different states may have different rates, ranging from $1.50 per $100 of payroll to $3.00 per $100 of payroll. For policyholders, this formula usually means that companies with more employees, or with more expensive employees, end up paying more.
The experience modification rate is another factor in the premium equation. This number, also called a mod rate for workers’ comp or mod rate, considers the history of a business as it pertains to workers’ comp. In other words, a company’s workers’ comp claims history can determine how much that company will pay in premiums. The mod rate is a way of customizing insurance and making sure that companies have an incentive to reduce their number of workers’ comp claim and maintain a higher level of workplace safety.
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How is the mod rate for workers’ comp calculated?
A mod rate for workers’ comp is calculated using a specific formula. This formula looks at the claims history of a company, expected losses, payroll, and other factors to create a single mod rate. All of the factors that go into a mod rate are calculated using an Experience Modification Rating Worksheet, similar to a tax worksheet, that breaks down each component and shows how the formula is calculated.
The experience modification rating is designed to help create an incentive for companies to have safer workplaces and thus, fewer workers’ comp claims. It uses a weighted rating system that helps avoid unfairly burdening small or new businesses with high workers’ comp premiums. This rating system also gives a higher weight to frequency of claims over severity of claims; in other words, it more heavily penalizes companies with frequent workers’ comp claims. For instance, a company that files many claims will be penalized more heavily than a company with one large, costly claim.
A company may receive a higher experience modification rate if it shows a clear history of frequent claims that the nature of which is recurring. This higher rate increases the premium that the company must pay. In essence, this higher rate acts like a penalty against the company for having higher number of claims or claims that are recurring, indicating that the safety issue responsible for the injury has not been resolved. The company is incentivized to reduce the number of workers’ comp claims because then it will pay a lower premium amount.
In contrast, a company might receive a lower experience modification rating if it has only filed one claim over the past several years. A lower rate means either no change to the premium, or perhaps a discount to the premium, reducing the amount the company must pay.
Companies need to show a history of workers’ comp claims before they can “qualify” for a mod rate. A new company will not receive this type of rating at all since it does not have a history of workers’ comp claims. New companies need to wait several years or until they have accrued enough premium amount (i.e., paid enough) to qualify for a mod rate for workers’ comp.
Types of mod rates for workers’ comp
Mod rates can either be rated as 1.0, below 1,0, or above 1.0.
A mod rate of 1.0 is neutral. It means that the company’s premium will not increase or decrease. It also means that the company receiving the rating is average in its number of workers’ comp claims for that particular industry.
A mod rate less than 1.0 means that the business receives a credit. This means that the company will receive a discount on their premium. A credit mod rate can occur when a company has a very safe workplace and does not incur many workers’ comp claims.
A mod rate greater than 1.0 means that the business receives a debit. This means that the company’s premium increases. A debit mod rate can occur when a company has a long history of many workers’ comp claims. This can indicate that the company needs to spend more time prioritizing having a safer workplace.
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CompSource Mutual has provided Oklahoma businesses with workers’ compensation for more than 85 years. Our team offers top-notch expertise to the businesses that support the Sooner State’s economy. Get the coverage and insight that you need from our experienced team. Get a quote.
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How is a mod rate calculated?
At its core, the math used in determining the mod rate for workers’ comp is quite simple: Actual Losses divided by Expected Losses equals Experience Modification Rate. An employer with a mod rate of 1.0 is exactly average in its claims cost loss experience compared to businesses of similar size and industry.
What is considered a “good” experience modification rate?
The lower the mod rate, the lower the worker compensation insurance premiums will be. An experience modification rate of 1.0 is considered the industry average for any given business class. This means that a “good” experience mod rate is anything below a 1.0 rating.
What does “mod” in “mod rate” stand for?
“Mod” stands for “modification.” The full phrasing is “experience modification rate” or “experience modification factor.”
Can a new business get a mod rate for workers' comp right away?
Typically, no. A new business must have several years of payroll or another specified amount of time or claims history to qualify for a calculated mod rate for workers’ comp. Until this period is met, a mod rate will not be applied.
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