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Volume 2, Number 2

The True Cost of a Loss

The Theory

The Calculation

An Example

Conclusion

How ModMaster Can Help

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Back to Our Library: Topics on Workers Compensation and Experience Rating

Master YOUR Mod - Go farther than this article takes you with understanding, analyzing and communicating the mod. Check out our popular booklet recently mentioned in Rough Notes magazine! Master Your Workers' Comp Modifier: Control Costs by Understanding Experience Rating

The True Cost of a Loss
by Tim Coomer, A.R.M

Introduction

Even with workers’ compensation insurance, a company eventually pays for a significant portion of each loss that occurs due to the increase in the mod that the loss generates. Determining the true cost of a loss will assist you in quantifying the potential benefit and savings that could result from a loss control program.

The Theory

When a loss occurs, it increases the total losses utilized in the experience rating formula to determine the mod for the company. This increases the mod and the premium paid by the company. The experience rating period typically covers a three year period. So, any given loss increases the premium by a measurable amount in each of the three years that the loss is in the experience rating period. This impact that a specific loss has on the mod can be calculated fairly easily.

The relationship between the amount of the loss and the total three year cost of the loss (due to increased premiums) depends on the size of the loss and the size of the organization.

A loss that is less than $5,000 is a primary loss. Primary losses are not impacted by the weighting value in the experience rating formula and thus have a larger impact on the mod and the ultimate premium paid. Losses greater than $5,000 are split into $5,000 in primary losses and the remainder in excess losses. Excess losses are weighted by the weighting value and thus impact the mod less than primary losses. However, as the size of an organization increases, the weighting value increases and thus the impact of the mod increases and the premium increases.

The Calculation

To determine the impact of a loss on the mod and the ultimate premium paid, you must subtract the primary and excess amount of the loss from the mod formula and recompute the mod. The resulting lower mod is then subtracted from the company’s mod to determine the impact on the mod of that specific loss. This impact can be multiplied by the basic premium for the current year and then by three (the number of years the loss is in the mod calculation) to estimate the ultimate cost of the loss. This calculation is performed by ModMaster and shown in the Specific Loss Report. In order to perform this calculation, you must enter an estimate of the manual premium on the Company Setup page.

An Example

XYZ Company had a loss in the amount of $20,000. They are interested in determining how much this loss contributed to their mod. To do this, start with the mod calculation provided for XYZ Company as shown below. Next, remove the $20,000 ($5,000 primary and $15,000 excess) from the calculation. The resulting new mod is 0.94. Therefore this loss impacted the mod by approximately 0.03 mod points. The one year cost of this loss equals the mod impact times the premium = 0.03 * $125,000 = $3,750. The estimated three year impact, the number of years that this loss is in the mod calculation, would = .03 * 125,000 * 3 = $11,250. This amount represents the increase in premiums paid by the company over a three year period.

Showing how much a specific loss contributes to the mod is a valuable tool in convincing employers that they pay for their losses in increased premiums and that loss control measures are therefore worth implementing.

ModMaster has over 30 reports and graphs which help you easily communicate such concepts as the true cost of a loss. Learn about our specific loss report and other popular reports by watching this video clip of ModMaster Sample Reports.