California Employer Question
A California employer emailed in this question last weekend. “We are a medium-sized employer (dry cleaner) in central California. Our Experience Modification Factor increased significantly over the last few years. The increase seems to have resulted in our Workers Comp premiums rising significantly. What is in included in the Experience Mod calculation? Is this the same as the Mod that is produced by NCCI?”
The Experience Modification Factor in California is called an Xmod or X-Mod. It has the same basic function as NCCI’s Emod. E-Mods and XMods individualize the riskiness of an employer’s work environment as compared to other employers with the same job types or functions.
The XMod is produced by California’s Workers Compensation Independent Rating Bureau (WCIRB) and only applies to employers in CA. The calculation of the XMod differs from NCCI’s E-mod calculations.
a comparison of the loss or claims history of one company to all other companies in the same industry that are similar in size. Generally, an experience modification of less than 100% reflects better-than-average experience, while an experience modification of more than 100% reflects worse-than-average experience. Accordingly, an experience modification that is greater than 100% usually increases the cost of your workers’ compensation insurance premiums, while an experience modification that is less than 100% usually decreases the cost of your workers’ compensation insurance premiums.
The XMod is calculated by comparing the actual losses to the expected losses. Actual losses are the claims, both medical and indemnity, that an insurance company must pay as a result of a work-related injury. Expected losses represent a business’s share of the annualized cost of projected losses for the industry in which it operates. In other words, given its classifications and payroll, expected losses represent the statistical average losses that a business of a similar size is expected to incur. Given two businesses within the same industry, the larger the business, in terms of payroll, the more losses that business is expected to sustain.
If you were to read the NCCI’s definition of an E-Mod, you would see almost the same definition. The one main area of difference is what is called the Primary Loss. In the NCCI states, before 2013, the primary part of the loss was set at $5,000. The WCIRB has set their primary loss at $7,000.
The primary portion of the loss is more heavily weighted into the NCCI’s or WCIRB’s formula. In essence, your company will pay premium at a much higher rate for the first $7,000 part of a claim than the part of the claim that exceeds $7,000 known as the Excess Loss.
If you want to see why it costs more, you should check Primary vs. Excess Loss. The X-Mod formula is not included in this post due to readability and fit on the page.
There are other factors such as class code rates and payroll that may also have compounded your premium increase.
©J&L Risk Management Inc Copyright Notice