NCCI Changes the Experience Mod Calculation
In my last post, I discussed the upcoming changes to the E-Mod calculation. The NCCI changes may look simple, but the cost of operating an unsafe business will be substantial. Your Risk Manager and Safety Department will be 100% more valuable overnight.
I thought I would analyze the calculation on a very basic level and put everything in layperson terms so the difference between the two calculations shows the financial impact to a company. A safe company will also see a marked difference in their E-Mod in a positive direction.
The basic E-Mod Formula is Actual Losses / Expected Losses. See the bottom of this article for links to more info on some of the terms in this post.
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
Let us look at a quick example. These are the numbers if a Mod is calculated before 2013. 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 No | Loss | Primary | Excess |
| A101 | 15,500 | 5,000 | 10,500 |
| A102 | 12,430 | 5,000 | 7,430 |
| A103 | 9,350 | 5,000 | 4,350 |
| A104 | 8,200 | 5,000 | 3,200 |
| A105 | 7,300 | 5,000 | 2,300 |
| A106 | 65,000 | 5,000 | 60,000 |
| A107 | 2,350 | 2,350 | 0 |
| A108 | 2,800 | 2,800 | 0 |
| Total | 122,930 | 35,150 | 87,780 |
The E-Mod is calculated as:
(35,150 + (87,780 *.3))/57,750 = 1.06
After 2013 the numbers would change dramatically
| Claim No | Loss | Primary | Excess |
| A101 | 15,500 | 10,000 | 5,500 |
| A102 | 12,430 | 10,000 | 2,430 |
| A103 | 9,350 | 9,350 | 0 |
| A104 | 8,200 | 8,200 | 0 |
| A105 | 7,300 | 7,300 | 0 |
| A106 | 65,000 | 10,000 | 55,000 |
| A107 | 2,350 | 2,350 | 0 |
| A108 | 2,800 | 2,800 | 0 |
| Total | 122,930 | 62,930 | 60,930 |
The E-Mod is calculated as:
(62,930 + (60,930 *.3))/57,750 = 1.41
The numbers I had chosen for this example were from an actual policy and rating bureau/NCCI Experience Rating Sheets. The employer would have paid 25% more for the same Workers Compensation coverage.
There other parts of the premium calculation that will change the premium to a degree. I used this as more of an example. This is a stark example of what can happen if there is no E-Mod reduction plan by your company or organization.
For more information on the terms in this article, check out this post on calculating E-Mods and this one.
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