The secret to controlling costs—and maximizing revenue
Savvy business owners have a good grasp on the issues that impact their bottom line. And, in all industries, there are unique line-items that contribute to overall business expenses. In construction, one of these line-items is an important, often-overlooked financial component. This one “little” number, associated with every construction company, is the hinge on which success and failure can swing. It’s the Experience Modifier, and it is actually a very big deal.
Here, Risk Management expert John O’Grady provides insight on the Experience Modifier (E-Mod), shedding light on using it to take control of business costs and boost revenue.
First things first: What is E-Mod?
Calculated by the National Council on Compensation Insurance (NCCI), the Experience Modifier is the number used by the insurance industry to compare a company’s injury experience with that of similar companies. It will either decrease or increase your premium, depending on claims and injury history, as well as the frequency and severity of those claims.
In the same market, construction companies typically pay the same for labor, supplies, etc., so it’s the margin control that differentiates revenue levels. And your insurance premium plays an important role in your bottom line. The E-Mod is a key determining factor of that premium.
There are two buckets that affect your E-Mod: primary loss (frequency) and excess loss (severity).
The first $17,500 of any loss constitutes the primary loss. With this in mind, a claim frequency higher than the industry’s expected claim frequency (the number of claims) indicates a potentially serious problem. Here’s a hypothetical scenario to consider: Company A has one claim for $100,000, and Company B has five claims costing $20,000 each. Same total cost, so is there a difference?
The single claim for $100,000 will actually have less impact on the E-Mod. With five separate claims, the primary loss will be impacted five separate times. With the single large claim, the primary loss will be only $17,500. Higher primary losses indicate an accident frequency problem, which will have a negative impact on the E-Mod calculation.
Excess loss is the measure of severity. A loss in excess of the industry’s expected losses may mean that a company’s average claim is larger than normal. This could indicate an inability to control post-injury costs, poor hazards control, an active legal environment, or poorly rendered medical care.
Experience Rating Adjustment (ERA)
Some states offer an Experience Rating Adjustment (ERA) that helps eliminate the impact of frequent minor claims—and it can make a positive impact on your E-Mod. Claims values are adjusted to place more weight on actual excess loss. And, in states where the ERA is approved, medical-only claims are reduced by 70% before being applied to the experience rating process. For instance, if an employer can get an injured worker back to some type of work, the claim is considered a medical-only claim, and the ERA credit is applied. All states in the Builders Mutual footprint offer ERA.
Employers are encouraged to get employees back to a modified role within the state’s defined timeframe. (In Virginia and North Carolina, for example, there’s a waiting period of seven days.) This will reduce the impact of that claim by 70% before the value of that claim goes into the E-Mod calculation. For example, a $40,000 broken leg becomes a $12,000 injury within the calculation.
Formula for success
Even if math isn’t your strong suit, it’s important to understand the E-Mod formula in order to take control of your expenses. Your Builders Mutual Risk Management Consultant is also here to help and answer any questions you might have. This article provides details on the NCCI formula and calculations. Here’s a high-level overview:
Your E-Mod is calculated using the losses from the three years prior to the previous year. Your 2021 E-Mod is based on losses from 2017, 2018, and 2019. Claims from 2020 are not included, as they’re still in development.
The calculation is complex, but it’s created as an aggregate of those three policy years. So, if your company had a bad year in 2019, it would follow you through the next three-year cycle until it drops off. This is one reason it is vital to start managing claims quickly to get the cost(s) under control. Be proactive and establish a plan of care with the adjuster and the physician; begin thinking of ways to get the employee back to some type of meaningful work under a modified duty position.
Without providing the entire formula, what is important for you, as the owner of your company, to understand is that your company’s losses (frequency and severity) are being compared to those of other companies in the same industry sector (a masonry company to masonry companies, for example). And, the calculation is somewhat of a moving target. If your sector does better overall than the previous year, with a lower number of claims and lower cost of claims, your company’s claim numbers and types need to keep pace—or your E-Mod will increase.
In the end, your company’s actual losses become the numerator, and the industry expected losses become the denominator. Once divided, the result is your company’s E-Mod. All businesses start with a 1.0 E-Mod. So, if the resulting number is over 1, it is called a Debit Mod – which is not good. A Mod below 1.0 is called a Credit Mod – and that’s very good.
Here are a couple of examples that show the impact of both the Debit and Credit Mod:
Manual Premium x E-Mod = Premium*
$25,000 x 1.00 (Average) = $25,000
$25,000 x 1.10 (Debit) = $27,500
The difference between this Debit Mod vs. Average Mod= $2,500 additional cost.
$25,000 x 0.80 (Credit) = $20,000
The difference between an Average Mod and this Credit Mod is $5,000 in savings.
If your company can control claims and get below the expected loss in your industry, you get a Credit on your Workers’ Compensation costs. In this example, if your company generated a E-Mod of 0.80, you save $5,000 in premium.
*Additional credits or debits may apply.
As a business owner, you can take action to positively impact your Experience Modifier. Here are a few actionable ideas:
- Establish a good patient care program with healthcare providers.
- Report claims promptly, and use a quality medical provider.
- Establish a good employee safety program to reduce accidents.
- Implement and use a proactive Return to Work Program.
- Invest in training, and create a culture of safety.
Another key consideration to better manage claims and the associated costs is to avoid underreporting. The frequency of small claims has a minor impact on the E-Mod, but underreporting creates the risk of other issues, including increased potential for legal action, possible penalties from the state, and missed WC benefits legally due the injured worker. However, by reporting—and documenting—everything, you’ll ensure all injuries are captured on the loss runs by carrier, provide an opportunity for the adjuster to do interviews, and help keep small claims small.
Note that if the claim is minimal, and you (as the employer) want to pay expenses out of pocket, you can, but still report the claim to the carrier as a Notice Only or Report Only. The carrier will note the claim on the loss runs. There is no cost from the carrier, so these claims do not have to be turned over to NCCI for E-Mod calculation.
E-Mod is the difference-maker
So, what’s the bottom line of this bottom-line business factor? Here are the top five reasons to manage your E-Mod:
- General Contractors review the E-Mod as a measure of a company’s safety performance when taking on other contractors to join a project.
- When you have a lower E-mod, you’re paying less for your Workers’ Compensation insurance, making you more competitive when bidding on projects than you would be if you had to raise your prices to cover paying higher premiums.
- You’re adding revenue to your bottom line and boosting profitability.
- Your company will be sought after when bids come up, making you a “pull” partner because of your safety practices.
- When bidding on a Department of Defense contract, any company with an E-Mod over 1.0 may be disqualified due to poor safety performance.
If you’d like to learn more about impacting your E-Mod through controlling claims, implementing a Return-to-Work Program, or building a stronger culture of safety, please reach out to your Builders Mutual Risk Management Consultant.