Premium Audit Question On Class Code Changes
We received a Premium Audit question on classification codes last week.
We had worked on our own with our agent and got our classification codes changed which we thought would save us Workers comp premiums. That was not the case. Our Ex-Mod actually increased and what we thought would be savings disappeared. Now, with a higher Mod, we cannot bid on certain projects. Where did we go wrong?
Without seeing your premium info, I would think that your E-Mod increased as you changed your classification codes to much safer ones. This can cause problems as your claims data must be recalculated with the safer class codes. Your old X-Mod was based on the higher risk classification so your expected losses would be higher.
For instance, if you are a construction firm and your classification codes were changed to a painting company, the insurance industry would expect you to be a safer company as painting companies are less risky by nature. There is a type of inverse relationship between class codes and E-Mods.
For instance, if you had $125,000 of clams as a construction company, that would be more in line than with the same amount of claims as a painting company. The very basic E-Mod Formula is Actual Losses/Expected Losses. When you switched to a safer classification code, your Expected Losses decreased
If your losses were $125,000 and your expected losses were $150,000, then your E-Mod would have been .83, which is a good E-Mod. When you changed your classification code to one with lower Expected Losses (for example $115,000) then your E-Mod would have jumped to 1.08.
Most contractors want their subs to have an X-Mod of 1.0 or below. Overall, that is why all premium audit consultants recommend having a non-agent consultant go through the numbers before applying to change your classification codes.
I am not saying your efforts were in vain. Most of the time, there can be reductions in your overall premiums by reviewing your insurance policies and premium audits. However, reviewing your whole Workers Compensation situation may cut out a few surprises.
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