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Volume 1, Number 1
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ModTip:
Unexpected, But Good Results from Combining Workers Compensation
Mods
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Dear Insurance and Risk Management Professional,
NewSolutions is
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Specific Software Solutions is excited to be
launching NewSolutions, a free informational e-mail newsletter for insurance and risk
management professionals. We're not out to flood your inbox with e-mail... NewSolutions
will be published on an irregular basis, as we are inspired to share with you some tip
which may make your job easier, your profitability higher, or your understanding of
insurance and risk management issues more insightful.
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President, Specific Software Solutions
Today's NewSolution:
A ModTip!
Unexpected, But Good Results from Combining
Workers Compensation Mods
by Tim Coomer, President, Specific Software Solutions
This tip applies to states where the NCCI
experience rating formula is in use.
A ModMaster 2000 user recently asked the following question: I have two subsidiaries that
have a mod of 0.67 and 0.70. When I do a combined mod for these two subsidiaries, I get a
mod of 0.65. Why is the mod lower for the combined entity?
In simple terms, the larger the risk, the more credibility is placed on the actual loss
experience. In this case, the loss experience was good. As a result, when the two
subsidiaries were combined into a larger entity, more credibility was placed on the actual
loss experience and the mod decreased.
In more technical terms, the experience rating formula uses a value called the
"weighting value" (shown as W on the bureau sheet) in the calculation. This
value is small for risks with low expected losses and increases as expected losses
increase. In simplified terms, the mod calculation is a ratio of actual to expected
losses. The actual excess losses (defined below) that are used in this ratio are
determined by a formula. The formula uses the W value to determine how much of the actual
loss experience will go into the formula. In summary, for this example, the two smaller
individual mod calculations resulted in mods of 0.67 and 0.70. However, the combined mod
was lowered to 0.65 because of the increase in the weighting value that resulted in more
credibility being placed on the actual loss experience which was better than expected.
Technical Notes
Primary losses - the first $5,000 of each loss
Excess losses - all loss amounts over $5,000. For example, a loss in the amount $6,500
would divide into $5,000 primary and $1,500 excess.
The mod formula:
Mod = (APL + B + (W x AEL) + (1-W) x EEL) / (EPL + B + (W x EEL) + (1-W) x EEL)
Where....
APL = actual primary loss
B = ballast
W = weighting value
AEL = actual excess loss
EEL = expected excess loss
EPL = expected primary loss
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