Understanding Gross vs. Net Reporting in Workers’ Compensation Experience Rating

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If your business purchases a workers’ compensation insurance policy, you’re likely familiar with the term “experience modification factor” or “experience mod.” This number is a reflection of your company’s safety record compared to that of your industry peers and directly influences your insurance premiums.  Did you know that in 13 states the way they use claims in the calculations varies from other states?  This is where gross vs net reporting affects the experience rating formula.

The experience mod is not just a number but a comparative metric that can be instrumental in managing your insurance costs effectively.  If you want to learn more about how the experience mod is calculated and affects your business, check out this article.

Gross vs. Net Experience Rating: Why It Matters

Workers’ compensation insurance is governed by state-specific regulations, which differ significantly across the United States. These regulations define whether a state uses a “gross” or “net” claims in the experience rating calculation.

Let’s explain:

– Gross Deductible Programs: Under this plan, both incurred indemnity and medical amounts are reported in full, with no deductible reimbursements.

– Net Deductible Programs: These programs report reduced values for incurred indemnity and medical amounts, adjusted by the current deductible. This reduction can affect your company’s reported claims and, consequently, its experience mod.

The distinction between the gross and net calculation is significant, especially if your business is large and has frequent claims. If you are in a net state, you may be able to use this to your company’s adavantage.

 

 State Jurisdictions

 

 

 The Impact of Net Experience Rating Explained

Let’s illustrate with an example involving two construction companies in a state that uses the net experience rating:

Here’s the key information.

  • They both have $2,500,000 in annual payroll.
  • They are located in
  • Expected losses is $275,500.
  • Over the last few years, they’ve had an identical loss history – eight
  • The manual premium before experience rating is $234,500

– Company A chooses a traditional, no-deductible policy, resulting in an experience mod of 1.12.  In the construction industry an experience mod over 1.0 may prevent this company from getting certain jobs.

– Company B opts for a policy with a $15,000 deductible per claim, lowering their reportable losses by $15,000 each claim and lowering the experience mod value to 0.99.

This strategic choice means that although Company B’s actual losses mirror Company A’s, their lower experience mod makes them perceived as a safer company and eligible to bid jobs because their experience mod is under 1.0

Key Takeaways and Final Thoughts

The strategic use of experience mods can lead to premium savings and competitive advantages when used properly.  It’s best to consult a trusted work comp professional if you are considerings leveraging a deductible in your business and have then perform an analysis for you.

For further information, please contact us.