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E-Mod Calculation Showing Formulas – More Changes Ahead

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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.

Picture Of Man E-Mod Calculation With Papers On Table
StockUnlimited

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.

Claim NoLossPrimaryExcess
A10115,5005,00010,500
A10212,4305,0007,430
A1039,3505,0004,350
A1048,2005,0003,200
A1057,3005,0002,300
A10665,0005,00060,000
A1072,3502,3500
A1082,8002,8000
Total122,93035,15087,780

The E-Mod is calculated as:

Picture of Hand Writing E-Mod Calculation On White Board Payroll Concept
(c) 123rf.com

(35,150 + (87,780 *.3))/57,750 = 1.06

After 2014 the numbers would change dramatically

Claim NoLossPrimaryExcess
A10115,50013,5002,000
A10212,43012,4300
A1039,3509,3500
A1048,2008,2000
A1057,3007,3000
A10665,00013,50051,500
A1072,3502,3500
A1082,8002,8000
Total122,93069,43053,500

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
Hand Presenting E-Mod Calculation Percentage Arrow Increase
StockUnlimited

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.

©J&L Risk Management Inc Copyright Notice

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2 Responses

  1. I cannot help but mention your examples are somewhat misleading because you have not made any changes to the expected losses portion of the calculation. While I agree that the example company is likely to be adversely impacted by the change, your examples exaggerate the impact.

  2. You are correct. However, this blog is/was mainly written for employers that may not know the ins and outs of the WC system. I try to keep all posts straightforward and uncomplicated. Your comment made me read the post again. I realized that the split point for 2014 is 13,500 not 13,000. I do welcome your comments as each one makes the blog better.

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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.

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