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Claim Severity vs. Frequency Effect – One Claim Can Ruin Your Mod

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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.  

Diagram of One Claim Severity vs. Frequency
fhwa.dot.gov

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.

Business People Claim Severity In Conference Room
StockUnlimited

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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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.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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