Those of you who verify or analyze workers compensation experience mods in California may have already noticed a new little note on the WCIRB experience rating worksheet. For mods effective 1/1/2011 and later, this new note, just below the experience modifier box in the lower right hand corner of the form, says:
LOSS-FREE RATING
followed by a number, for example: LOSS-FREE RATING 84%
What is this loss-free mod? And what do you do with it? In the following discussion, this new terminology applies to California, but the concept applies to all states that utilize experience rating (which is all but North Dakota, Ohio, Washington, and Wyoming).
The loss-free rating is the value the experience mod would be if there were NO LOSSES in the experience period. This is the very same concept we refer to as the “minimum mod” in our educational materials and ModMaster reports. It is simply the experience mod calculated using the risk’s expected losses, credibility factors (known as ballast “B”, and weighting “W” factors in NCCI states) and then substituting zeroes for actual losses in the formula.
A very important thing to remember about the loss-free rating is that it varies from year to year and from employer to employer. In other words, there is no general lowest rating that employers can refer to – the loss-free rating must be calculated for each risk. Employers should also be aware that their loss-free rating may change from year to year as there are changes in their payroll values, their payroll codes (indicating the type of work their company does), and the expected loss rates and other rating data published by the appropriate bureau (WCIRB, NCCI, etc.).
The loss-free rating shows the employer how low their mod could be…but its real power is when you associate the mod with premium. Let’s face it, how moving is the following conversation?
Broker to client: Your experience mod was 104% (or 1.04). Your loss-free rating was 84% (or 0.84). So you could save 1.04 – 0.84 = 0.20 points on your mod if you had no losses.
Client (perhaps does not say this aloud): So?
Now let’s consider this conversation instead:
Broker: Your estimated manual premium is $150,000. Since your mod is 1.04, you will be paying approximately 1.04 times $150,000 = $156,000 for your workers comp premium this year. But let’s look at what would happen if you had no losses. Your loss-free rating of 0.84 times your manual premium of 150,000 = $126,000. So if you had no losses, you would’ve paid $30,000 less in premium this year.
Client (with great interest): How do I get rid of these losses?
Of course this is condensed example, but we all know money talks. So, no matter what you call it – loss-free rating or minimum mod – find out what that number is, then use that number to determine how it relates to premium savings. It’s sure to open up a dialog with your clients and prospects.
– Kory Wells, WorkCompEdge Blog Editor
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