The number 1.00 means different things to different people. In baseball, 1.00 represents a perfect batting average. But in college, a 1.00 grade point average is about as bad as it gets. In workers’ compensation, a 1.00 experience modifier, or e-mod, has long been seen as the standard for determining whether or not a company is safe, but that may be changing.
There are a number of factors to consider when evaluating safety. A 1.00 e-mod means something different today than it has in years past and its meaning will continue to change in the future. Simply put, the e-mod is in transition. It is a moving target.
Watch for Changing E-Mods
Effective July 1, Texas will utilize the National Council on Compensation Insurance (NCCI) Experience Rating Plan. The calculation of experience modifiers will undergo several changes all at once, which could have a material impact — up or down — on a policyholder’s experience modifier.
The changes to the e-mod formula could trigger increases in the experience modifiers for many companies, even if there are no changes in loss experience.
For some contractors, the increase could be significant. The change could bring about negative consequences as many project owners and general contractors use the experience modifier as an indicator of the contractor’s safety record, which is why it’s time to change the way we think about e-mods.
An unexplained e-mod increase could inadvertently disqualify Texas contractors from competing for some projects if their experience modifier rises above 1.00. Additionally, some contractors are currently able to negotiate their experience modifiers downward with their insurers in order to be eligible to work on a project.
Effective July 1, 2018, negotiation of experience modifiers will be prohibited in Texas. That change may leave some very good contractors and subcontractors on the sidelines.
Texas agents and brokers should notify their contractor clients of the pending changes. We must first educate them regarding what’s on the horizon, then work with them to focus on safety as a means of keeping their experience modifiers low.
What Have You Done for Me Lately?
Another potential shortcoming of using the experience rating plan as a gauge for safety is that it looks back as many as four years to assess current safety levels.
When evaluating someone’s abilities, do you rely on what they did two to four years ago, or do you look at their performance over the last 12 to 18 months? The e-mod completely ignores a company’s safety performance and experience in the last 18 months.
Project owners would be well advised to assess what contractors are doing today to reduce workplace accidents, and not penalize safety-conscious employers for accidents that occurred three or four years ago. The company could have made substantial improvements in safety and the employees involved may be long gone from the company.
On the other hand, if you trust the modifier as a gauge for safety, you may not recognize that a company that was using safe practices a few years ago could conversely be much less safe now.
What E-Mods Really Represent
Even though the meaning of e-mods may be changing, they are still an important part of the insurance industry. They provide insurance companies with a generalized assessment of where a company ranks within a classification code containing similar businesses for the purpose of determining accurate workers’ comp rates.
An e-mod may not paint a completely clear picture of a company’s safety, but it is a necessary part of assessing premium. The insurance industry in Texas is limited to using fewer than 400 different base rates for business classification groupings, though there are obviously thousands of different types of businesses. With less than 400 rates it is impossible to accurately price policies for thousands of different kinds of businesses. E-mods adjust the base rate in attempt to help insurance companies accurately price policies, but they are not a report card on safe practices.
The e-mod will raise the base rate when a specific business’s expectation of loss is greater than the expectation for the class grouping. Conversely, it will be lowered for businesses with an expectation of loss that is less than the expectation for the class grouping. The experience factor is not intended to mandate the final workers’ compensation premium or to provide a gauge on performance. It is designed to debit and credit an insurance company’s filed base rates in order to help them more accurately rate thousands of different businesses using only 400 base rates.
Riskier Practices or Less Safe Work?
The traditional interpretation of an e-mod greater than 1.00 is that the business operates with poorer safety than the average business in that classification. Often, the more correct interpretation is that the business is just different from the average. Perhaps they are more frequently engaged in more hazardous activities than others in their classification. Of course we would expect more losses from these types of operations, but it doesn’t necessarily mean they use riskier practices. It could just mean the type of work they do isn’t as safe. Even the most safety conscious workers can experience injuries when performing difficult, hazardous tasks.
For instance, the majority of roofers will be placed in the same class code, but their exposures can vary greatly depending on the type of roofs they work on, the height of the buildings and whether or not they are commercial or residential. They are all classified the same, but each business has unique risks. The experience modifier often differentiates between different types of exposure, not different types of loss experience.
Looking Ahead
It is often hard to evaluate truly outstanding performance and measuring safety expectations is no different. But with the changes coming to e-mod calculations, an experience modifier may not be a good judge of a company’s safe practices. Risk managers should turn their focus to evaluating a company’s current safety and business practices rather than relying on a number, and agents should begin working with their contractor clients to arm them with knowledge to face the changes ahead.
Math is senior vice president of Underwriting and Dabney is senior manager of Corporate Underwriting at Texas Mutual Insurance Co.
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