Test Question

Test question for those who claim to understand the experience modification factor.

I am absolutely amazed by the number of business people, insurance agents, and insurance brokers that claim to understand the workers’ compensation experience modification factor when they have basic knowledge at best. As a business person, how do you know who to believe? If the supposed “expert” doesn’t really understand the experience modification factor to the degree that they believe they do, can you trust them to assure that your experience modification factor is correct?


Here is one way to check basic knowledge. Consider asking, “What impact would changing payroll from a given classification code to a classification having a lower rate have on future premiums?”


Recently, I spoke at a seminar and asked this question. I even provided multiple choice answers.

  1. It would be a good financial decision
  2. It would be a bad financial decision
  3. I don’t know
  4. There isn’t sufficient information given to make the decision

Only one person in the audience had the correct answer even though many of the attendees were claims managers and insurance agents.

It is true that moving payroll from an existing classification to a lower risk classification will reduce current year premiums but it will also put upward pressure on (typically) three future modification factors. The upward pressure on the mods will in turn (typically) put upward pressure on three future premium years. The total cost impact can only be determined by performing an analysis that considers present and future impact of the change. This analysis will require assumptions concerning payroll and incurred losses for future years. Therefore, the answer is, “There isn’t sufficient information given to make the decision.”

The bottom line is – when you have a choice between classifications – don’t limit your analysis to the impact on the current year premium as most companies and agents do. Instead, include the impact on future premiums in your analysis. If your agent, broker, or employee doesn’t understand future impact of the change – you must get qualified help. If you don’t get qualified help, you risk making a costly financial decision.

Please feel free to contact us with any questions or concerns you may have at savings@synergeticsolutions.com or toll free at 800-758-2941.

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