Workers Comp Budgeting Mistake Made with Experience Mods

A frequent workers comp budgeting mistake I see at least quarterly is when a low Workers Comp Experience Mod increases or decreases significantly.  Most of the time, the budgeting mistake comes from a lower Mod increases to what would be considered another lower Mod.

I have one of those situations sitting right in front of me.  Real-life examples are always the best source of a large percentage of articles in this blog.

This statement by me usually generates a large amount of debate when I bring up the subject of budgeting to match the Experience Mod movement.

Let us look at an example.  BTW, an Experience Mod below 1.0 is called a credit Mod.

Workers Comp Budgeting Mistake – going from .83 to .98 Example

When one looks at the Mods  .83 (2017 Experience Mod) to .98 (2018 Mod).

Sometimes we see these numbers subtracted (.98  –  .83).  The numbers look like the employer’s Experience is going to cause a 15% increase in the employer’s Mod.

Quick Division Of The Numbers

There are two ways to look at the Experience Mod increase.

• Subtract .98 – .83 = 15  then 15/.83 = 18% increase or
• .83/.98  = 16.4% increase

Wait, the numbers are different.  Which is one is correct?  Either way, one can see the numbers are more than 15% which comes from subtracting the numbers.   Comment below on which one you think is correct.

1. 15% – subtraction only
2. 18% – using .83 as base number
3. Dividing out the two numbers
4. This is a stupid article, why would I care?

If you picked #4 and you administrate a large workers comp budget, you may want to rethink the increase in the numbers.  Yes, it looks simple, but if you are multiplying $12.3 million like the one that I am working on now,  there can be a huge difference.

3% of $12.3 million = $369,000 workers comp budgeting mistake?

This is similar to the Marilyn Vos Savant riddle here.  She is the smartest person in the world.   The 1990 riddle caused so much debate among statisticians, actuaries, and even the CIA.  It is the 2 out of 3 debate.  It is called the Monty Hall problem from the old show “Let’s Make A Deal”.

I am going to put my answer to the question above in the next newsletter that we send out almost every week.   You can also see the same type of article that I wrote a few years ago on the same subject.

Workers Comp Budgeting Mistake – Loss Development Factors (LDFs)

If you are self-insured, then you should have a Loss Development Factor calculated each year.  If you do not, then obtain one ASAP.  A friend of mine that deals exclusively with self-insurance always reminds me to not leave out self-insureds. 

The same can be said for LDFs or Loss Development.  Whether you are self-insured or have a Workers Comp policy in place from a carrier, the same Workers Comp budgeting mistake can occur when comparing two LDFs.   The numbers read the same.

This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.

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