A Great Example of Workers Comp Math
The crazy world of Workers Comp math has driven many people batty. Why?
Last week, I wrote an article that pointed out no one claim can wreck your Workers Comp Experience Mod. A few readers contacted me in reference to my quote that the Mod will be increased not by the one big claim, but it will cause any of the other claims to be more costly.
The key is the number of claims. Even though your company may have quite a few small claims, the chance of those becoming larger claims exists for each and every claim. The risk is additive.
The following is an example of Workers Comp math at work from a basic risk standpoint.
| Claim # | Total Incurred | Risk Factor | Total Risk |
| 1111 | $10,145 | .3 | .3 |
| 1098 | $2, 356 | .2 | .5 |
| 2034 | $9,874 | .7 | 1.2 |
| 3123 | $1,123 | .4 | 1.6 |
| 4998 | $,1454 | .8 | 2.4 |
You are going to have to do a little outside the box thinking on this one, but it is the main concept that E-Mods, X-Mods, etc. are based on overall.
The Risk of Increase is how most people look at Mods. However, you have to think of the Total Risk as an additive figure. Each claim is not a standalone risk. The chance of any claim increasing is greater when the risk is spread over more claims.
The above table shows that the Risk Factor of the group is 2.4. The Risk Factor numbers are picked arbitrarily. They are just examples. The concept is the point of this article.
If your company only had two claims – 1111 and 1098- the Total Risk Factor = .5 As you add in more claims, the Total Risk Factor increases to a higher level.
Any one of the above claims, could have a big increase in Total Incurred over the Experience Period. Five claims will cause the risk of any one or more claims to be higher than two claims.
This articles rehashes the old saying – Five $20,000 claims are much more costly/riskier than one $100,000 claim. The chance of an increase goes up with each claim, not the dollar amount of each claim.
©J&L Risk Management Inc Copyright Notice
