Having Zero Claims For Current Policy Year = Instant Savings? Probably Not
I came across this situation recently while reviewing a loss run with an agent. The question by the agent was if his insured client was having zero claims for their current policy, will that reduce premiums instantly?
My answer made me decide to write another article on how the Experience Modification Factor system works. I did not like having to tell the agent the semi-bad news – having zero claims will eventually bring down the Experience Mod but will likely not show up immediately.
For more on how an Experience Modification Factor is calculated – check out this article.
Experience Mod System Works on A Delay
The Unit Statistical System – also known as UNIT STAT works on an 18-month delay. We at J&L have heard from clients – what is the use if we do not see results? I usually say the system is what we have to work with to try to reduce premiums for them.
Generally, having no claims in a certain policy will help their Mod drop in two years. If their payrolls have remained steady, all the better, as the zero claim year will drop the Experience Mod like a rock in most instances. Two things must occur for the Experience Mod Factor to decrease rapidly –
- A sharp claims spike in the subsequent years cannot occur – consistently low numbers of claims are the key.
- They cannot have had really bad claims years in the two preceding policy years. If so, then having zero claims for the current year will be offset by adding in two bad years
The bottom line is that zero claims years cannot be surrounded by bad claims years before or after the great claims year. Yes, the effect will occur when the bad claims years are added, but to a lesser degree.
Having Zero Claims – Answer For The Agent Client
With the upcoming renewal for the insured, I explained to the agent the insured client must have changed some type of safety practice to go from five major claims over two years with several smaller claims to having zero claims.
Having no claims is usually more than just good luck after two bad years. The companies’ owners or senior management must have placed a higher value on safety than in the past. The best way to reduce Experience Mods is by instituting a safety program or by modifying the safety program that was in place.
I have heard experts say that the zero claims effect will drop the Mod by 1/3. That is not necessarily true. For example purposes, yes, but the Minimum Mod (a Mod with no claims) will still be in place. I had always thought of an approximation of a 1/4 drop each zero-claim policy year.
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