There was a time during my 25-plus year career as an insurance agent, and in the early days of my work as a consultant and trainer to insurance agents, that I would assert, “Your Experience Modification is x, and I will help you lower it to y, and you will save this many dollars.” With few exceptions, I’ve found this statement is no longer correct. Yet, too many insurance agents, and some consultants and trainers, are unwilling to let go of an outdated era and method of worker’s comp insurance pricing.
Insurance agents who continue to cling to and spread this zombie idea may be ill-informed, which is understandable as contrary positions are still present in the marketplace. However, some agents and their consultants don’t want to know any different because they are familiar and comfortable with this type of sales approach, and employers are not aware of the changes to pricing models … yet. It’s long past time to put this specious sales approach to rest and move on to more effective and valuable ways of assisting employers and employees.
According to the workers’ compensation rating bureaus, the experience modification factor, which has been around since the early 1920s, is a “predictive indicator of future losses,” and serves as a “pricing tool for work comp insurance.” But with the use of big data, artificial intelligence, machine learning and cloud computing in underwriting, it should be no surprise that individual insurance companies are building their own and more sophisticated pricing models. Thus, they rely less, or not at all, on the rating bureaus’ experience mod factor.
In addition, data storage, which used to cost hundreds of thousands of dollars per gigabyte in the late 1970s and early 1980s, is less than a penny a gigabyte today. Practically free data storage and computer processing speed that has doubled every two years for the past 50 years has transformed the art and science of work comp underwriting.
It’s all about the data
As one data analyst told me, “Underwriters traditionally have used only 6 to 8 data points to underwrite and price a risk. We’re building predictive pricing models with 800 to 1,000 data points, which are pushed into their workstations with a just few keystrokes.” Some of smartest people from the most prestigious schools in the country are dedicating their professional lives to improving predictive models of insurance pricing. The experience mod is quickly becoming a Model T in a Tesla world.
Old ideas don’t die easily, however, and some are pushing back by asserting that the eroding influence of the experience mod on pricing is not occurring. You still read articles in trade journals and may even pay to attend a workshop, in person or online, where the experience mod is touted and explained as if nothing has changed. As Upton Sinclair said, ““It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Sinclair’s use of “salary,” can easily be replaced by “commissions” and” fees.”
It’s unlikely the experience mod will disappear from the workers’ comp policy’s declarations page anytime soon due to state regulations and inertia. But it doesn’t take much imagination, or mathematical acumen, to recognize how underwriters are able to determine the final premium, and reverse engineer that price by modifying the component rates with the use of loss cost multipliers and schedule rating.
Change is hard, especially, when you have a sales strategy that’s much easier to explain than the complexities and effect of data analytics. But agents would be wise to get in alignment with the dramatic changes occurring in workers’ comp underwriting and pricing, and stop saying, “I can lower your mod, which will lower your price.” If agents don’t pivot away from these and other outdated sales methods, they will likely lose credibility, and relevance.