Inverse Relationship
One of the areas where we so much confusion on E-Mods and X-Mods is their inverse relationship with Class Codes. If an employer is not careful with their audit disputes the may end up paying substantially more than if everything was just left alone.
The reasons are very straightforward. If your Mod is 1.0 and you have higher risk class codes, this means that when compared to similar higher risk companies, your company has the same amount of claims.
However, when you are re-classified into less risky class codes, your E-Mod may increase. The reason is your company will now be compared to less risky companies. The very basic Mod formula is
Mod = Actual Losses
Expected Losses
For example, with your old riskier class code, let us say your company had $48,000 in losses. Your expected losses were also $48,000 for your company’s risk level.
Mod = Actual Losses = $48,000 = 1.0
Expected Losses $48,000
Now, if your company is moved into a less risky classification code, the insurance carriers would expect that you would have a lower expected loss amount.
Mod = Actual Losses = $48,000 = 1.2
Expected Losses $40,000
The bottom line is that if you wish to DIY your Mod dispute, you may end up paying more than before the dispute. Usually, the higher your Mod was to begin with – 1.25 and up, it pays to be very careful before asking your carrier and Rating Bureau to change the codes.
This is not a plug. You may need an expert opinion before proceeding with a class code dispute. In the previous example, recalculating the Mod after the class code changes may be a critical part of the pre-dispute process.
The example is not meant to discourage Mod disputes as usually the offset of the difference in class codes makes up for the Mod readjustment.
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