More Changes Ahead – E-Mod Calculation
Last week, I discussed the upcoming changes to the E-Mod calculation and gave an example. One area I wanted to clarify is that the new E-Mod calculation going into effect for any polices that commence AFTER January 1, 2013.
For example, if a state publishes its ratings on 4/1/2013, then any polices starting AFTER 4/1/2013 will be affected due to the changes. I had planned on commenting on the 2014 changes later in the year. Due to the number of questions that I received, I will do it now.
There was quite a buzz generated on the two articles I wrote last week on the new E-Mod changes. There is actually much more to the rating increases for companies with higher E-Mods. On January 1, 2014, the Primary Loss split point (ceiling) increases to 13,500.
As I mentioned, in the prior two articles on the E-mod changes, I want to keep everything very basic. The basic E-Mod Formula is Actual Losses / Expected Losses.
Adding in the Primary and Excess Loss variables –
(Actual Primary Losses + Actual Excess Losses) / Expected Losses
If we break that down further the formula would be
E-Mod = (Total Actual Primary Losses + (Total Actual Excess Losses * Discount Factor))/Total Expected Losses
This is the example table for pre-2013 polices. As in the last example, we are going to use a .3 discount factor for the excess losses. The Expected Losses are 57,750. The Expected Loss figure basically is calculated from payroll per classification code.
The E-Mod is calculated as:
(35,150 + (87,780 *.3))/57,750 = 1.06
After 2014 the numbers would change dramatically
The E-Mod is calculated as:
(69,430 + (53,500 *.3))/57,750 = 1.48
This results in an E-Mod of:
- 2012 – 1.06
- 2013 – 1.41 (calculated in last example post)
- 2014 – 1.48
The increase (5%) is not that large from 2013 to 2014. However there was a two year increase of 28%. This type of E-Mod increase can affect your company in two significant ways:
- If your company is bidding on contracts, the main contracting company will usually only accept bids from a 1.0 E-Mod sub-contractor.
- The increase can push a company into the risk pool where Workers Comp becomes prohibitively expensive in an already bad economy.
As mentioned in one of the previous articles, this example was taken from an actual policy and rating bureau/NCCI Experience Rating Sheets. I do realize there are scheduled debit/credits etc. that would figure into the final premium paid.
All of the examples I gave were for comparison purposes only. Employers with many accidents are going to see their E-Mod jump significantly even with no additional claims or reserve increases.
There are many techniques to reducing your company’s E-Mod. This blog has many recommendations on how to decrease your Mod for any company. The main concept to remember is the E-Mod (X-Mod in California) system is a delayed system. A company cannot wait a few months to start an E-Mod reduction program. The time is now.
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