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Premium Audit Question On Class Code Changes

We received a Premium Audit question on classification codes last week.  

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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

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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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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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