It’s hard not to feel a twinge of pain when reports show that over half of all employers overpay for workers’ compensation insurance by 15% to 50% due to unnecessary workers’ comp surcharges. It’s an enormous drain on employers’ bottom lines, often goes unnoticed (or improperly addressed) and is regularly swept under the rug by insurance companies at renewal time.
So where do surcharges come from? Right off the bat, workers’ comp surcharges arise when the Experience Modification Factor increases, often unnecessarily. This Experience Modification Factor, commonly known as an “e-mod” by insurance professionals, is used by insurance companies to adjust workers’ compensation premiums. Every company has an e-mod, unless they self-insure their workers’ comp insurance.
While commonly managed in the construction trades (because general contractors tend to frown upon hiring companies with a bad e-mod), e-mods on the whole go relatively unaddressed in other industries. But practicing good business should include knowing where your e-mod stands, as this all-important injury barometer has the single largest impact on your workers’ comp premium. Bottom line; what you don’t know, will hurt you.
It works like this: The e-mod is a numerical expression of a company's accident and injury record compared with the average for that particular employer’s industry. In other words, if your company is the leading manufacturer of widgets, then you get a score and are ranked among other companies that manufacture widgets.
The better your results are, the better your score and the less you pay for insurance. Conversely, worse results produce a higher score and more expensive insurance. The graph on the left shows the results of three similarly situated companies.
All three of these companies have:
• The same insurance company.
• The same payroll.
• The same types of employees.
• Perform the same work.
And yet all three companies pay vastly different workers’ comp premiums.
Company A has an e-mod of .75, which means it has implemented best-in-class work comp surcharge controls. The company pays $45,000 annually for workers’ comp insurance, and certainly much less than their direct competitors.
Company B has an e-mod of 1.00. which means this company has implemented some, yet not all, workers’ comp surcharge controls. As a result, this company pays $11,250 more than Company A, a 25% surcharge more than its direct competitor.
Company C has an e-mod of 1.25 meaning it is paying 25% more than Company B and a full 50% more than Company A. You can practically feel the pain.
The all-important question would be: which company would you be when compared against your competitors? Do you know your e-mod score and why it is that way? How long has your e-mod been inflated? These are all questions you should seek an answer to if you don’t know already. Stay in the dark and you are sure to bump into higher premiums.
If you now think you know all there is to know about e-mod mismanagement, let me throw yet another wrench into the works.
The data used to generate your score spans over a three-year period, and there are many “hands in the cookie jar” at the insurance-company level responsible for data that ends up being used to calculate your e-mod. Unfortunately, this information is regularly incorrect and rarely gets audited by insurance companies. The problem is the insurance companies do not do the calculation themselves; it is done by an outside organization.
All this being said, when was the last time you looked into whether or not the data used to calculate your e-mod was up-to-date and correct? If you’re not looking into this, don’t assume your insurance carrier or agent is doing this for you. Odds are you are getting an inflated score you do not deserve, which is not uncommon.
What can you do about it?
The best way to stay on top of things: don’t get lulled to sleep by an average e-mod score. You should know the lowest possible (lower is better) score available and continually strive for it. Driving your e-mod down to its minimum is the best way to slash your workers’ comp surcharges. But first you need know what your current e-mod score is and the status of your current surcharge, because if you don’t, the odds are that you are leaving significant dollars on the table. And it’s money you will never see again.