This time of year with so many renewals in January, one of the top three questions is “I don’t understand my experience modification.” It is a topic I have covered once or twice in the past, but a refresher course might be helpful. First, the Michigan Workers’ Compensation experience mod is an individual experience modification that is based on each company’s loss experience. Six months after every policy expires, Michigan Workers’ Compensation insurance carriers are required to submit payroll by class code and loss details for every policy that they write. This information is analyzed at a rating bureau, the Compensation Advisory Organization of Michigan (CAOM), and a single experience modification is published for every employer. A handful of exceptions exist such as large self-insured employers. But the vast number of employers have a standard Workers’ Compensation experience modification that is used by all carriers.

The next question that comes up is the employer says the year that just ended had no losses or very few losses, why did my experience modification go up? The experience modification is based on oldest three of the last four years. The current year that just ended for an employer is not included. Maybe this chart below will help clarify this. On the left side is the experience modification effective date of 1/1/18. The loss years that are used are 2016, 2015, and 2014. 2017 is skipped for one year. The next column shows the experience mod effective 1/1/19. The loss and payroll years that are included are 2015, 2016, and 2017. You can see the same trend on the column with the experience mod effective 1/1/20. This one year delay in using loss history creates much confusion.

Now, that we have covered the years that are used in the experience mod, let’s cover the loss part of the calculation. MTM reports each employer’s loss details six months after the policy expires. That includes paid losses and losses that are yet unpaid (reserved losses). An interesting point that is often overlooked is that the calculation on the experience mod penalizes frequency versus severity. As an example, if an employer had one $60,000 loss or three $20,000 losses, the three $20,000 losses will have a larger negative impact on the experience modification than the one $60,000 loss. This is because losses are divided by primary loss and excess loss. The excess loss is given much less weight than the primary loss. The idea behind weighting is that severity does not show a trend, frequency is a trend of unsafe work conditions. With this information, we now know that if we look at an employer’s loss record, we can tell that if they have multiple losses, they’re going to have a much higher experience modification than an employer that has one single equivalent value loss.

Another question on the experience modification that often comes up is I had no losses this last year, why did my experience modification go up? A little bit earlier I said that MTM reports both losses and payroll. If the payroll goes down on the most current reported year from the year that drops off then there is less payroll to dividend into the existing losses. One half of the equation is losses, the other half is payroll. If payroll goes up, then more losses are “allowed”, if payroll goes down, but losses stay the same then experience modification trends up even if one of the three years has no payroll.

Noting that our members just want the basics and how it can affect them, I probably should stop with this level. However, if any member wants to go deeper on this, I am ever so glad to do that and, in fact, enjoy explaining it to someone that has this strange interest. With that said, I wish a good winter, and that the mild weather continues, and that we stay above 10 degrees for the next month.