The experience modification rate, or experience modifier, is usually shortened to MOD. Rating bureaus create MODs. They study a company’s 3-year average of WC claims – whether claims are higher or lower than normal - then adjust the rate accordingly.
Bureaus modify rates in the form of credits and debits just like a bank. They begin with an average, or neutral base, of 1.00. Let’s say Company A had a great total – a better than average claim history. But Company B didn’t do so well and had some big ticket claims and a lot of smaller ones; they get dinged and receive a debit.
Company A scores 0.95, which means it has a less than average claim history and as an applicant earned a 5% premium credit, which is 5% better than the 1.00 average. But with a bad claim history, Company B carried a MOD of 1.10. In that case, a 10-point debit is assessed and 10% is added to the premium.
Why are 3 years’ of claims is necessary? Broad experience is needed to calculate a MOD fairly. The MOD starts at 1.00. Without any claim data, for instance, in the case of a company that has operated for less than 3 years, no debit or credit is applied and the number stays flat at 1.00 – an average rating.
It's important for employers to understand that their MOD is a snapshot of their claims history from the past 3 years. Even if the last two years were great, if large claims (either dollar or volume) were filed three years earlier, the MOD can be affected drastically and insurance adjusters will quote much larger than expected premiums.
In the end the MOD determines whether your client can find affordable workers’ comp insurance on the “open market” or whether you need to consider a relationship with a PEO like Insured Solutions. Since a company's MOD is a snapshot of the last 3 years, one bad year can tip the scales.
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