Workers' compensation is one of the most variable spends that anemployer works with, but many business owners are not takingadvantage of opportunities to reduce their annual spend and may beoverpaying relative to their peers.

Most expenses are directly correlated to the specific benefitsthe business receives. If you have a bigger payroll, you usuallyhave more employees, and if you pay more rent, you can expect tohave bigger or nicer space. A higher spend on Workers' Compensationcoverage, however, is likely to leave you with the same coverage asyour competitors, who might be paying less.

One of the biggest drivers of increased spend in workers' compis the business' experience modification, but many businesses arenot using this tool to reduce their insurance spend.

Related: Top workers' comp carriers for 2016, as ranked byNAIC

What is an experience modification?

An experience modification (often called an x-mod) is a factorthat evaluates a specific business against every other business inthe state in the same class code. Essentially, this factor looks atyour historical loss history and payroll and determines whetheryour business performed better or worse than your peers. If yourbusiness performed better, by having either fewer losses, smallerlosses or both, you'll receive a credit modification factor. If youhave performed worse historically, you will receive a debitfactor.

These factors can make a big difference in the annual premium abusiness pays. For example:

Jane's x-mod is saving her $4,500 annually. If both Jane and Joeare working at the same 10% profit margin, Joe will have to producean additional $45,000 in revenue to recover his extra workers' compexpense. That's a lot of baking!

Related: Tips to reduce workers' comp claims inrestaurants

Here are some key factors that determine how the x-mod iscalculated:

• The formula requires capitations (payments) for largelosses. If you've had one really big claim, you will getdinged, but not that severely. If you've had several medium sizedclaims, however, this will make a big impact on your x-modcalculation. 
• The x-mod looks at years two through four.Underwriters don't look at your most current year, and they don'tlook at your fifth year out. If you have losses in the currentpolicy, you need to brace for impact, but you won't feel it rightaway. Additionally, those losses, once they're part of thecalculation, will stay with you for three years. 
• There are premium thresholds. If you are belowthe premium thresholds (in most states this means premium spend ofless than $5,000 annually), you won't receive an x-mod and acarrier will treat your modification as if it were 1.00.

Related: 3 ways to cut the cost of your Workers' Compinsurance

Managing the data that determines yourx-mod

1. Make sure your X-modworksheet is pulling the right data. The mod worksheetshould reflect your accurate payroll. If your payroll isunderstated, the losses in that term (the numerator) will applyless payroll (the denominator) and therefore inflate yourexperience modification. Also, check for clerical errors. If thereis an error, your carrier will make a correction.

2. Help your agent get theright data. Ask your agent for copies of your loss runs,and focus on the claims that are impacting your x-mod. Are all theclaims listed even yours? Do you see claims that are open but youknow have settled or returned to work? If they should be closedthis can greatly reduce how they affect the calculation. Do you seeclaims in which subrogation is involved? (Subrogation means thatanother party was responsible for the claim; the most obviousexample is a motor vehicle accident.) You should make sure that theclaim expenses shown on the loss run are 100% accurate andreflective of your business.

3. Getting employees back towork. Bringing an employee back to work can have amaterial impact on lowering a claim. Many smaller businesses don'tthoroughly explore options to bring employees back to work in amodified position. Bringing an employee back into the workforcesends a positive message, and you might be surprised at your otheremployees' willingness to help.

Related: Catastrophic injuries in the workplace: How to prevent the 'vortexof failure'

4. Getting started on the rightfoot. How do you treat your injured workers when they'reinjured? Do you let them know that you care about their well-beingand want to make sure that they receive the appropriate care? TheDNA of the claim is usually set within the first 24 hours. How thatinjured workers perceive the initial process, and theirexperiences, will go a long way to determining whether they aremotivated to return to work. Set a positive tone from thebeginning.

Related:Want to reduce lost time claims? It pays to benice.

5. Create a culture ofsafety. Businesses that have a culture of safety are easy to spot. Your employees can senseit too. Do you conduct safety meetings? When you do, are you justgoing through the motions, or are you demonstrating your commitmentto each employee? Your employees will appreciate working for acompany that cares about their safety, and in turn will work moresafely. 

6. Take advantage of emergingsafety trends. There are new and exciting techniques,tools and technology that can promote a safe work environment, andmore of these are created every day. Pay attention to trends andlook to adopt these. Remember that the X-mod is weighing youagainst your peers. If you're the only one that has not adapted,you will be challenged to keep your X-mod lower. 

Not sure that the technology or toolwill work? Try buying just one of them and pick an employee topilot it. The employee will appreciate the effort you're making,feel empowered, and give you valuable feedback.

Related: Nations Roof: Workers' comp reaches a new level

7. Tell your side of thestory. What do you do if your X-mod is high and you'regoing to get hit with a debit factor? The first thing to do is makesure that your agent is aware of the steps that you're taking toimprove your operation. By telling your story, in as detailed andconcrete a manner as possible, underwriters will see that you're arisk that they would like to quote on, and you may even get someschedule credits to offset the impact of the X-mod (in states thatallow them). No one can tell your story better than you can, somake sure it's understood.

Related: 4 ways to reduce Workers' Comp claims

Achieving a lower experience modification doesn't take a lot ofwork, but it does take consistent effort and attention. Taking thetime to work with your agent and ensure your x-mod has all thenecessary information can help to separate your company from yourpeers. The payoff can be considerable.

Related: How to create a culture of safety in yourworkplace

Matt Zender is vice president and Workers'Compensation Product Manager for AmTrust FinancialServices, one of the top three workers' compensationinsurers in the US. Contact him at [email protected]