Moore: Budgeting Mistake Made With X-Mods

Tuesday, May 31, 2022 | 0

A frequent workers' comp budgeting mistake I see at least quarterly is when a low experience modification increases or decreases significantly. Most of the time, the budgeting mistake comes when a lower mod increases to what would be considered another lower mod.

James Moore

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 usually generates a large amount of debate when I bring up the subject of budgeting to match the X-mod movement.

Let us look at an example. By the way, an X-mod below 1.0 is called a credit mod.

Look at the mods .83 (2017) to .98 (2018). Sometimes we see these numbers subtracted (.98 minus .83). The numbers look like the employer’s experience is going to cause a 15% increase in its mod.

There are two ways to look at the X-mod increase. Subtract .83 from .98; the difference is 15. Then divide 15 by .83 and yield an 18% increase, or .83 by .98  to get a 16.4% increase.

Wait, the numbers are different. Either way, one can see the numbers are more than 15%, which comes from subtraction. Which is one is correct? 

• 15% – subtraction only.
• 18% – using .83 as the base number.
• Divide out the two numbers.
• This is a stupid article. Why would I care?

If you picked the fourth one 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.

Does 3% of $12.3 million equal a $369,000 budgeting mistake?

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

Loss development factors

If you are self-insured, you should have an LDF calculated each year. If you do not, obtain one ASAP. A friend of mine who 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 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.