Ep. 569 The Impact of Claim Frequency and Severity on a Landscape Company’s Experience MODs
Rancho Mesa's Alyssa Burley and Vice President of the Landscape and Tree Care Group, Drew Garcia, talk about the impact of claim frequency and severity on a landscape company’s experience modification rate.
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Director/Host: Alyssa Burley
Guest: Drew Garcia
Producer/Editor: Megan Lockhart
Music: "Home" by JHS Pedals, “Breaking News Intro” by nem0production
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Transcript
Alyssa Burley: You’re listening to Rancho Mesa’s StudioOne™ podcast, where each week we break down complex insurance and safety topics to help your business thrive. I’m your host, Alyssa Burley, and my guest is Drew Garcia, Vice President of the Landscape and Tree Care Group with Rancho Mesa. Today we’re going to talk about the impact of claim frequency and severity on a landscape company’s experience modification rate.
Drew, welcome to the show.
Drew Garcia: Alyssa, thanks for having me.
AB: Now you recently wrote an article where you covered the impacts of frequent worker’s compensation claims versus fewer, but more severe claims. But before we get into the different scenarios, will you explain the experience modification rate or, we’ll commonly refer to it as the “x-mod” and why it matters for a company’s worker’s compensation cost?
DG: Yes, absolutely. So, the experience mod is a benchmark that the insurance rating bureaus create and there’s multiple insurance rating bureaus throughout the United States. The largest one would be the NCCI. They oversee maybe close to 40 states. And then there’s going to be individual states that have their own rating bureau. Like in California we have the WCRIB. There the ones that oversee California for rating purposes. And they put together the experience mod and it’s based on historical loss information from all the different class codes that participate in work comp. And then there’s a number that each individual business is going to get and it comes out each year so it’s an annual thing and it’s based on your policy effective date. So generally, maybe three to four months before you renew your work comp policy, you’ll get your new experience mod worksheet for the coming year. And that number is either going to be above or below 1. So 1 would be unity and that has no impact on your workers comp premium. Anything below 1 would be a credit to your work comp policy and that means you had better loss experience than your industry peers. An experience mod above 1 would be a debit to your work comp policy and that would mean you had more adverse losses than your industry peers.
AB: Okay. So in your article, you provided two examples where the total claim costs were the same. But, the x-mod was significantly different. Can you explain the scenarios and why the claim frequency has a greater impact on the x-mod than the claim severity?
DG: One of the key pieces when I was looking at putting this information together was really actually creating like a case study almost where I could point to the information that I was putting into and experience a mod worksheet to ultimately better tell the story so that the landscape business has an idea as to, you know, does that one large claim impact my mod more than if I had, you know, the equivalent of that same loss information but made up of a bunch of, you know, smaller claims. and you know what I found was, and if you read the article, we're using kind of $3,000,000 as the baseline for payroll that we’re putting into the x-mod calculation. And then we’re summing an aggregate of $55,000 in claim costs. Now the two scenarios I played out would be equal on payroll, equal on aggregate claim cost, $55,000, but how we get to that $55,000 is the difference and that's what was kind of shocking when you look at the experience mod. So in one example, we had one $50,000 claim and one $5,000 claim. And that created an experience mod of 93. So still a credit mod. So we had one large claim at $50,000 and then a smaller claim at $5,000. The experience mod ended up being 93 in that scenario.
And then on the other side, same amount of claim data. But we had five, $10,000 claims. So we're at $50 ,000 there. And then another $5,000 claim. So we're at $55,000. And that mod ended up being 136. So that’s a difference of about 43% between those two numbers. And if you overlay that on your premium, so if you’re paying $100,000 in premium, you know $43,000 in costs there is pretty significant. And what it showed us was that the experience mod forgives more for severity, and then it's going to, not, you know, punish, but it's going to impact you more with frequency. And we're talking about frequency of claims that have some size to them. So $10,000 claim, we're still a pretty good size claim. And, you know, not saying frequency of the $300, $400 claim, that would have very little impact on the experience mod. But it would still be, you know, good for the business to see why am I having a lot of $300 claims? And then we could try to address not having those in the future. But when I’m talking about frequency, it’s really that we’re using $10,000 as the amount in these claim scenarios, those really impact the experience mod. And ultimately, created that big difference of 43% between the two options.
AB: Yeah, so what do you recommend companies do to manage this?
DG: A couple things that we do for our landscape customers within Rancho Mesa is you always have to be tracking information in order to better help you know set the standard for the future or help shape and create goals. So we have our quarterly KPI Dash Board that we review with our customers so they always know where their mod is and where its headed. And then we can talk about how frequency and severity is impacting their future projection. And ultimately that’s their opportunity to dive into the claims and then see where their trends are and then make corrections. And then through SafetyOne™, which is our risk management platform that we have within Rancho Mesa, plenty of opportunity for someone to better build out their behavior based safety program. So they can do tailgate topic training, they can do more of LMS style if they need to more formal training we can handle that within SafetyOne. And then a lot of just the observation and risk assessments that can be done within that platform really are going to help drive down frequency if you’re making that important to the business. And then those are going to be key characteristics that are going to hopefully reduce your experience mod or help control your experience mod.
AB: Yeah, absolutely. So Drew, if listeners have questions about managing their x-mod, what’s the best way to get in touch with you?
DG: They can email me. And its drewgarcia@ranchomesa.com.
AB: Alright well Drew, thanks for joining me in StudioOne.
DG: Thanks for having me.
AB: Thanks for tuning in to our latest episode produced by StudioOne™. If you enjoyed what you heard, please share this episode and subscribe. For more insights like this, visit us at RanchoMesa.com and subscribe to our weekly newsletter.