Claim Severity – Where One Claim Can Ruin Your Mod
The Claim Severity vs. Frequency Effect can result from one claim. One severe claim cannot hurt your Mod as bad as a number of smaller claims. This is one of the misnomers that exists today in Worker Compensation insurance rating system.
The frequency statement is partially true. Late last month, our company consulted with an employer who previously had a .87 Mod.
The employer had incurred a very severe accident that was going to show up in their Mod at renewal. The employer was not a micro-employer. According to the size segments used by the Feds, they were still considered a small employer.
Using the prior data, we were able to forecast the Mod of the one claim. The Mod was going to jump from .87 to over 1.50 in one year. I thought, hold on a minute, everyone has always been told that one bad claim will not wreck a company’s Mod.
One thing that helped the employer is that almost all states have limited losses. This is a limit that kicks in when Total Incurred (Paid + Future) reaches a certain level. In this case the limit was approximately $220,000. The limited loss was used when calculating the 1.50+ Mod.
I decided (on my own time) to re-calculate the Mod using four claims of 55,000 which would be the same value as the limited loss. The Mod was recalculated with the four claims and the Mod ended up at 1.79.
The statement that one bad claim cannot harm your Mod is not always true. One bad claim can harm your Mod. However, the other statement that is often mentioned held true. Frequency does affect the Mod more than severity. In the real-world example, the Mod was higher by .29.
The size of the difference between the severity and frequency has other factors that should be mentioned such as:
- Employer size
- Payroll amount
- Previous Mod
- Classification Codes
- Number and severity of prior claims
- Insurance carrier Loss Cost Multiplier
The takeaway from this article is that a safety program is very important to even avoid one bad accident or a series of accidents. This will make your next renewal a less painful process.
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