E-Mods LDFs Are Like Credit Scores From Hell NCPRIMA

September 22, 2015 By JL Risk Management Consultants

E-Mods LDFs Are Like Credit Scores

Are E-Mods LDFs like credit scores from hell? Over the past few months, I have presented this material at various conferences. I thought I would attach the PowerPoint that I used at the NCPrima Conference last week.

E-Mods and LDFs_NCPRIMA_presentation 2015

Man Climbing on Credit Score Number E-Mods LDFs Concept

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I have received a few requests for the PowerPoint slides. Ironically, the projector would not work when I presented the slides. Luckily, I had large-sized printed them on paper as a backup.

The interesting fact is all of the slides are taken from articles that were written in this blog over the last eight years. I had combined them for presentations. Actually, this blog was originally conceived as a way to have material on hand for presentations and to possibly write a book.

Credit scores have been used as an easy comparison to E-Mods and LDFs by me for a few years. The differences between credit scores vs. E-Mods LDFs are just as important.

The presentation slides may not seem to make sense. The links in the preceding paragraph will explain much of the information on the slides.

The main theme of the PowerPoint slides is that credit scores can be much more easily changed than E-Mods. The results of a credit file correction can show results in 30 days. E-Mods have many limitations on how they can be changed once the Total Incurred is reported to the Rating Bureaus.

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Loss Development Factor – Do I Need One – How Do I Get One

August 28, 2014 By JL Risk Management Consultants

Loss Development Factor Critical For Self Insurance

Do I need Loss Development Factor? Loss Development Factors (LDF’s) are one of the under-the-radar parts of the Workers Compensation system. This was a question received last week by a reader that found the blog on Google.

Picture of Loss Development Factor Business Infographic

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LDF’s can be thought of very generally as the Experience Modification Factor (E-Mods) for self insureds. The Ultimate Claims Value (Ultimate Loss) is a very important term that distinguished self insured analysis from a regular WC policy.

E-Mods (also referred to as X-Mods) are limited in scope to a maximum of almost five years in the past in certain situations. LDF’s cover up to 10 years as the risk of being a self insured is your company or organization will be responsible for paying the full value of the claim.

There are many companies, including ours, that can calculate LDFs for you. In fact, you can calculate it yourself if you have the right software. The caveat, as any actuary or claims statistician will tell you is the concern about accurate inputs into the LDF formula.

Woman Employee Loss Development Factor Customer Paying

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The old saying about GIGO (garbage in- garbage out) applies here to the hilt. Usually, there may be some type of statistical “smoothing” such as lessening the impact of one or more outliers that can make the LDF become somewhat inaccurate.

The bottom line is – as a self insured- how do you budget for claims presently? If you have a method that works, then you are ahead of the curve. However, LDF’s will usually be the most accurate way to assess your present and future WC needs.

It may be good to obtain one to see if your projections agree with the calculated ultimate claims value. Are you looking for 5+ years into the future? If not, an LDF may assist you with long term budgeting.

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Workers Comp Data Mining From Inside Out – A Look Inward

March 12, 2013 By JL Risk Management Consultants

Workers Comp Data – From The Inside Out

Most Workers Comp Data analysis reeks of being too standard in nature. Workers Comp and general insurance data mining was one of the presentations at the SC PRIMA conference this week. The presentation was great. The two Willis Companies presenters covered such areas as:

Picture Of Businesspeople Workers Comp Data Presentation In Conference Room

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GIGO – Garbage In = Garbage Out
Combining data sets
Analyze results
Benchmarking against other available data

The main premise was to take all the Workers Comp data from the outside including competitors if possible and look inward. Overall, this is a great way to analyze Workers Comp. This method does require a large amount of data trimming and time to accomplish. The process does work in most instances.

There may be another way to examine the data – from the inside out – which is different from the aforementioned method. Most employers have an Experience Modification Factor (Mod). Self insured employers should have a Loss Development Factor (LDF) calculated each year. The LDF is similar to a Mod.

The LDF or Mod is based upon claims data that has hopefully been input correctly by the Workers Comp claims staff. The most crucial part of the data is the Total Incurred = Paid + Reserves.

Using the claims data from a loss run along with the NCCI or State Rating Bureau Mod, the data can be distilled into the claims that affect the Mod the most. The same can be said for the LDF. The claims data is on the right side of the Mod sheet.

Picture Of Hand Holding Magnifying Glass Workers Comp Data With Bar Chart Concept

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LDF calculations are usually more complex to follow. You may want to ask the company or person that provided your LDF what were the data inputs and possibly receive them on some type of spreadsheet.

Following those claims back to the loss run from either the LDF or Mod, one can easily see how they are calculated for the most part. The claims on the loss run that are on the Mod or LDF sheet are the ones which deserve the most attention. The questions to ask about those claims are:

What caused the accident?
Was there an element of safety that was not in place?
What body parts were injured? – inquire if this is noted as miscellaneous
What happened such as slip, trip or fall, hit by machinery, etc?
What type of medical treatment did the injured employee receive?

These are a few of the questions to ask yourself about the data or your loss run and LDF/Mod. This quick method will have your company on the path to a lower Mod or LDF.

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Reinsurance/Excess Insurance Market Hardens

February 11, 2013 By JL Risk Management Consultants

Reinsurance Market No Longer Soft

The reinsurance/excess Insurance Market has started to change from a commodity marketplace. The excess insurance market is usually the bellwether for the rest of the marketplaces.

Picture of buildings Insurance Market place

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Reinsurance/Excess Insurance is basically defined as a risk management technique. The employer will purchase this type of insurance to cover claims that exceed a certain payout per claim or an overall claims total known as an aggregate.

According to a recent article in Business Insurance, the employers may not be able to choose their Third Party Administrator (TPA) and then just pursue the lowest priced reinsurance. Reinsurers are starting to use more predictive analysis when underwriting a risk.

Hand Pointing Towards Insurance Market Icons

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Insurance companies are not offering the same standalone product for reinsurance as in the past. The reinsurance/excess insurance market is now operating with ever-thin margins due to the return on investment the carriers are receiving for premium invested in stable investments such as money market funds.

The striking quote from article is that employers should expect a 10% increase in their excess insurance premiums. The other change is that re insurers are going to require employers to endure the same process as other insurance coverages.

The 10% increase is also for the employers with normal loss histories. Employers may see more severe increases with higher Mods or Loss Development Factors (LDF’s). The re insurers will likely analyze the same variables as normal Workers Comp carriers. One area that will receive more attention is whether or not an employer has a full safety and loss prevention program in place.

The one component that keeps the reinsurance market from actually being deemed hard is the availability of reinsurance. There are many carriers still offering reinsurance.

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Safety and EMods – Highlights From My Presentation From Today

October 10, 2012 By JL Risk Management Consultants

Presentation Highlights – Safety and EMods Are Very Related

How Safety and EMods intermingle was the basis for most of the highlights from my presentation. The NC Mid State Safety Council was kind enough to ask me to do a presentation on how safety programs impact an employer’s bottom line from a Workers Comp standpoint. I am the Treasurer for the organization.

The highlights from my presentation were (you may want to print this one):

Safety Departments can be easily scored by their E-Mods. It is the same as a personal credit score but much harder to improve quickly.
Self Insureds do have an EMod, better known as an LDF (Loss Development Factor). If your company is self insured and does not have an LDF, you are operating a blind WC budget
Due to the economy, there are now temporary employment agencies that may not have their WC policy in force. In this case, the employer will often get stuck with the bill if a temporary employee is injured on the job.
Subcontractors that are operating without a valid insurance policy or with an expired policy actually become employees as the Workers Comp courts are going to go up the Ladder of Insurance (c) to make sure the injured employee will receive WC benefits
Calling the carrier (not the agent) that is listed on the WC certificate of insurance is a good idea just to make sure there is coverage in place for temporary agencies and subcontractors
Do not use your company’s Workers Comp funds to pursue a fraud prosecution.
Workers Comp supplements paid to an injured employee will only make them much more resistant to return to
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The Four Ways To Cut Work Comp Costs from a claims standpoint are:
- Filing First Report of Injury to carrier immediately
- Medical treatment network in place
- Return to Work program in place
- Treat the injured employee as if they are still on the job as they are still your employee
North Carolina Scheduled Rating Plan – discounts are available if a great safety program is in place and your carrier understands your company’s safety measures
An example of how not having a medical network in place = $1.1 million dollar claim
The new NCCI split points can be a benefit or a curse to a safety program
- High EMod companies are going to take a hit
- Lower Emod companies will experience a benefit
- Safety programs and professionals will be worth their weight in gold for the next few years
Bottom Line – Safety is going to be heavily judged by their WC E-Mod even though the safety department may not be involved in some of the WC decisions

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Self Insured Pools – Are They Really Worth It?

July 26, 2012 By JL Risk Management Consultants

Self Insured Pools Are Really Worth It ?

Self Insured pools for Workers Compensation can be a great risk management technique. An employer that is not large enough to be self insured may find that pooling their premiums and risk with homogenous entities to be a great budget saving technique.

Vector Graphic of Hands With Plant Self Insured Pools Concept

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Self insurance pools have seemed to lose popularity over the last few years. I think some of it is due to bad press. Some of the reasons for the bad press was justifiable. There are a few areas to consider when joining self insurance pools.

Are the groups homogenous or at least somewhat similar. Predicting risk for a pool where the insureds are not related can be difficult. If you are a restaurant , would you want to be in the same pool with an oil transporter?
When do assessments from the pool occur?
If your company leaves the pool or if the pool fails, for how long can your company receive assessments into the future? We have clients that are still being assessed five years later.
Is the law of large numbers in place? How large is the pool? If you only have a few members and one of the companies has a very bad year, your company may have to pay very large assessments while having a great safety program.
How are the Mods or LDF’s calculated? How does the pool differentiate the risk among members?
Who is going to handle the claims? Some TPA’s are better than others.
Why did the prior members leave the pool?
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Are all the legal requirements met for each state? What happens if your company expands into another state or states?
As a member, what are your company’s voting powers? What voting powers does the administrator have in meetings? The administrator may have more votes than each individual member
What happens if the pool fails or is deemed insolvent by the state?
What happens to the claims if the pool fails? Does the pool pay into some type of state insolvency fund? This is very important as a way to avoid being stuck to handle your claims after already paying into the pool.
What percentage of the total operations budget is held back to pay claims? Most states consider any type of insurer or pool insolvent at less than 15%.
Who is the reinsurer? Can you obtain a copy of the reinsurance contract?

There are many other considerations. I wanted to list a few of them. The questions come from files that have been shipped to us to handle after a pool fails and there was no backup. I basically reversed engineered the questions.

Picture Hand Holding Credit Card Self Insured Pools Close Up

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Bottom Line – pools are great for self insurance if properly investigated and all angles have been examined before joining the pool. I may be a little jaded to them as we have had to handle many claims where:

The pool failed.
There was no state backup to handle the claims.
The reinsurance contract gave the reinsurer an out.
The claims had not been adjusted for over 90 days.

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Captive Reserve Question From Our Readers – How To Calculate Mod

May 25, 2011 By JL Risk Management Consultants

Captive Reserve Question Concerning LDF’s

A good question about Captive reserve from readers. I am responding to a question from Wayne on this post. I will paraphrase the question. How do I calculate the reserves required if I have had a workers comp captive since 2005? This is a very good question.

Picture of Open Book with Question Mark Captive Reserve LDF

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The easiest way to calculate the reserves required is by calculating a Loss Development Factor. The definition of an LDF is here along with my last article on LDF’s. There are two schools of thought – one that says use the triangulation method and my school of thought that says use the triangulation method and a regression model.

The LDF will analyze the reserves and especially the IBNR (Incurred But Not Reported) part of your required reserves. We often calculate hybrid LDF’s for our clients. LDF’s are usually based on the claims experience you will have for the next 10 years. It is not the most accurate statistic, but it is what you have to work with in reference to Captive Workers Compensation claims.

Graphics Of Central Processing Unit Captive Reserve With Software Icon

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ONE DANGER on using software to calculate LDF’s is that data cannot just be plugged into the LDF software and then have the numbers produced in a report. The data has to be extrapolated and altered to make all of the claim data fit into the LDF formula. We do LDF’s very often. LDF’s are very often calculated by actuaries.

As with most things involving Workers Compensation, the LDF is not necessarily a 100% accurate projection. It is not the same as an E-Mod, even though some of the conclusions are the same as LDF’s.

Captives can be great risk management tools in cutting Workers Comp costs. Projecting your company’s upcoming claim payouts is beyond critical.

We will soon open up a website called Synthnods where you can calculate an E-Mod or X-Mod to simulate what your risk factor is if you had a regular voluntary workers compensation policy.

Workers Comp Self Insureds LDF Is Experience Mod

February 16, 2011 By JL Risk Management Consultants

Workers Comp Self Insureds Have an LDF

The LDF (Los Development Factor) equates to the E-Mod for self insureds. I have posted a few times in the past on Self Insureds thinking they are out of the Workers Comp E-Mod system. Actually, nothing could be further from the truth.

Wikimedia Commons – Lilly_M

I have heard this during our presentations and at ,that Self Insureds are really not in the Workers Compensation system. I used to think companies or governmental entities did not know Loss Development Factors. Lately, I have come to the somewhat scary conclusion Self Insureds are not being provided with them.

If your company or governmental entity has not been provided with one, then you should obtain one immediately. Operating a self insured program without a LDF is like trying to run a budget by using a pencil and paper. Your company is operating in the dark.

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Where does one obtain this elusive statistic? Your actuary should be able to provide you with one or you can use software to project your factor. There is one caveat to using software. Often, the claims data cannot be just plugged in without a few or many adjustments. J&L does do LDF’s for our Self Insured clients on request. However, we have more of a claims angle on the LDF’s.

It is calculated using the triangulation method. I have been debating with actuaries for many years that other statistics such as Regression, etc. should also factor in to the LDF. The official definition for a LDF: element used to adjust losses to reflect the Incurred But Not Reported (IBNR) under the retrospective method of rating.

My own definition is – a forecast of the future budgeted values for the life of a claim extending up to ten years in the future.

The bottom line is that if you are Self Insured, make sure you have a LDF handy when you are reviewing your Workers Comp budget for senior level management and as a guide to how much liquidity is required by your Workers Comp program.

Is Loss Development Factor LDF Calculation Really Worth It?

April 29, 2010 By JL Risk Management Consultants

Term Of The Day – Loss Development Factor

The Loss Development Factor also is known as LDF is an element used to adjust losses to reflect the Incurred But Not Reported losses (IBNR) under the retrospective method of rating.

Calculating Loss Development Factor using calculator with pen and paper on the table

Wikimedia Commons – Steve Buissinne

Where I have seen LDF’s used the most are for Workers Comp Self Insureds. The LDF is somewhat analogous to the Experience Modification Factors (E-Mod or X-Mods). LDF’s are usually calculated using the actuarial Triangulation Method. I have calculated LDF’s for self-insureds for up to 10 years in the future.

During self-insured presentations, the great concern comes over me when I ask for a show of hands as to which self-insured organization knows their LDF. Many say they do not have one calculated for their company or organization. This is a BIG MISTAKE. Your company is operating your Self-insured Risk Management and safety without a map or GPS.

I give presentations on LDF’s and E-Mods (X-Mods) often. LDFs stretch over a five to 10-year span of time. They have similarities to Mods. They also differ from Mods greatly. The inputs to a Loss Development Factor should be considered as part opinion and part calculated numbers.

We have two current customers that use software to calculate their own LDFs. They sometimes call me to ask my opinion on the inputs to the formula and which test would be the best for their situations. A manufacturer’s LDF likely varies from, for example, a school system.

If you are self-insured and do not have an LDF, it is best to have one for future forecasting of the IBNR and existing claims. There are software packages that will calculate the LDF’s, but the info to be input may need to be adjusted to your specific Workers Comp situation. One size does not fit all with Loss Development Factors.