You ever done something that you thought would help, but you actually ended up shooting yourself in the foot. Hello, my name is Michael Stack. I’m the CEO of Amaxx. And today we’ll talk with you about this idea of the experience Mod, and the idea of how you’re classified. So there’s obviously a lot to the experience mod that we can go deep into that, but that’s not really the point of today. The point of all you need to know today, as far as this session is that the experience mod calculation is your actual losses over your expected losses. So your actual loss is over your expected losses. And let’s say your actual losses were 100 Thousand, just for the sake of example, that could be a million or 10 million or 50 million or 50,000 or 10,000. It doesn’t matter what your losses are, It’s all about the ratio.
So if your actual losses are a hundred thousand and your expected losses are a hundred thousand, then your mod is 1.0. So pretty straightforward, pretty easy math there. I’m going to talk with you about a mistake that some companies make in regards to how they’re classified. So sometimes companies will maybe kind of try to pull the wool over the rating bureau, or just try to maybe sneak a little bit or say, oh, we are classified in this higher rated class code. We want to try to save, you know, 20 or 30 or 40%. And we’re going to try to maybe just call ourselves this lower rated class code. Okay, So great. So we’re going to save on our premium initially, but what I want to describe as what actually happens to the mod. So what happens to the mod and are you actually saving yourself money in that scenario?
And that’s kind of the question. So let’s walk through some of this numbers in this walk through some of this math. So if your actual losses are 100 thousand dollars and you reduce your class code by, let’s say 20% or 25% in your expected losses, now go down to 75,000. So your expected losses go from a hundred thousand to 75,000. You changed your class code down. So all the class code does is it sets an expectation for how many losses should occur. If you’re in a roofing contractor, your expected losses are a lot higher than if you’re an office building pretty straightforward, your expected losses for that particular class code have a rating for them. They actuaries figured it out. They say, well, we expect you to have this many losses. And that’s how the mod is generally it’s calculated. So if you’re in a lower rated class code, that means the amount of expected losses you’re having is decreased.
Actual Vs Expected Losses
Look at this number and I want you to just think for yourself, what is going to happen to your mod? If your expected losses are lowered. So what is going to happen to your modified, your expected losses are lowered. If you can, this relationship between actual and expected, you’re going to understand the mod. You don’t need to understand the whole formula, but you need to understand the actual versus expected idea. So what is going to happen to your mod If your expected losses are lower and your actual losses stay the same? what’s going to happen is your mod is going to go up.
So when you’re now doing your premium calculation, what you thought was going to save you 25% is actually going to come back in your mind. It’s just going to be taxed right back on the point, here are two things.
- To understand the relationship of the numbers of the actual versus expected in the mod calculation, that’s all the calculation is.
- Don’t do anything funky in regards to your class codes. Make sure it’s done right. Make sure your class codes are done accurately.
Setting up for Failure
The more that you can work with your broker, the more you can work with a professional that understands how to properly classify your employees is the better off you’re going to be. You want to be in the right class code because you want to have the right expectation here, as far as what’s going to happen for your losses. If you don’t, you are setting yourself up for failure and potentially shooting yourself right in the foot. Again, my name is Michael Stack. I’m the CEO of Amaxx. Remember your work today in worker’s compensation can have a dramatic impact on your company’s bottom line, but it will have a dramatic impact on someone’s life. So it’d be great.
Author Michael Stack, CEO Amaxx LLC. He is an expert in workers’ compensation cost containment systems and helps employers reduce their workers’ comp costs by 20% to 50%. He works as a consultant to large and mid-market clients, is a co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is the founder & lead trainer of Amaxx Workers’ Comp Training Center, which offers the Certified Master of Workers’ Compensation national designation.
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