The Mod Factor: Understanding Your Workers’ Compensation

First in a series on workers’ compensation coverage

The Mod Factor. Sounds like a TV show from the 1970s, but it’s really a very important term in calculating and controlling your workers’ compensation costs.

The term “mod factor” is shorthand for “experience modification factor,” and it’s the number that is applied as either a credit or debit to your workers’ compensation premium. A mod factor greater than 1.0 is a debit mod, meaning that your losses are worse than expected and that a surcharge will be added to your premium. Conversely, a mod factor less than 1.0 means losses are better than anticipated, the result being a discounted premium.

Here are some of the most common questions about mod factors, and their answers:

Who calculates the mod factor? Most states use the National Council on Compensation Insurance (NCCI) to collect data and calculate the experience modification factor. The NCCI is a private corporation funded by member insurance companies.

How is a mod calculated? It’s a complex process, but what it boils down to is this: your company’s actual losses are compared to its expected losses by industry type across a stretch of time known as an experience rating period. Portions of the formula account for company size, unexpectedly large losses, loss frequency and severity.

What is the experience rating period? This is a span of time over which payroll and loss data are tabulated, typically a span of three years in order to minimize any one-year anomalies in loss experience. Those three years generally exclude the most recently completed year. So, for example, if your next anniversary rating date is January 1, 2019, the experience rating period would be for the 2015, 2016 and 2017 policy periods.

How can you control your mod? This, of course is the most important question of all. Besides the obvious answer of controlling accident protection to the greatest degree possible, here are a few things to know about controlling your mod factor:

  • Inaccurate data means an inaccurate mod factor. Make sure your reporting is always complete and correct.
  • Your mod factor is influenced less by large, occasional losses than by small, frequent ones. Safety programs, return-to-work programs and other prevention techniques can make a big difference.
  • Claims management programs can help, and all claims should be reported immediately.
  • Employees should be trained on their safety responsibilities, and supervisors should have set safety performance goals.
  • You should communicate with employees on a regular basis, formally and informally, on the importance of safety.

Look for more ideas on reducing your workers’ compensation costs in a future post in this series.

Questions about workers’ compensation and your mod factor? Contact Consolidated Insurance