In part one of our blog post series “The Consequences of Intentionally Manipulating Workers’ Compensation Premiums” we focused on an example of an employer intentionally manipulating the system, and how it backfired. In part two we focused on the formulas used to develop premium. In this third and final part of our blog post series we discuss the best practices to reduce the Experience Modification Factor that will result in lower workers’ compensation premiums.
Part Three - How Can an Employer Reduce Their Experience Modification Factor?
There are consequences when employers attempt to manipulate the system in place for workers’ compensation premiums. When employers try to manipulate by moving payroll from class codes with higher rates into class codes with lower rates, they create a situation where not enough premium has been developed to cover losses. This causes an exaggerated Experience Modification Factor and increased workers’ compensation premiums that can last for several years.
Best Practices for Reducing Your Experience Modification Factor
Rather than manipulating the system with an exaggerated Experience Modification Factor and face the risk of increased workers’ compensation premiums that can last for several years, invest in safety programs to eliminate work safety losses. Frequent losses are heavily weighted in the Experience Modification factor calculation, and a focus on reducing or eliminating frequent losses will pay off in the long run.
Reviewing how your Experience Modification factor is calculated on an annual basis is a common practice. Although these calculations are correct most of the time, mistakes do happen. Common mistakes include:
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Incomplete, inaccurate or outdated data provided to the statistical rating bureau
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Incorrect payroll data
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Incomplete payroll data - missing data for a year or portions of a year
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Claims with incorrect amounts
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Claims that belong to another employer
If a mistake is discovered, your Experience Modification Factor can be recalculated.
Conclusion
An employer should recognize that the formulas developed by the insurance industry are designed to make sure that if an employer decides to manipulate the system, the system is designed to penalize the employer with costly long tail claims not usually recognized or anticipated by the employer.
A better strategy is to invest in reducing or eliminating work related losses that will reduce premium costs in the long run.
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