Moore: X-Mod Projections Are a Budget Helper

Monday, December 19, 2022 | 0

I have been asked to provide numerous types of experience modification projections over the years. Why do them? Let us look at an example.

James Moore

One of the keys to budgeting for workers' comp is to find out what X-mod factor your company will face in the upcoming policy year.

A large private school system wanted to find out what its 2023-2025 workers' comp policy would look like after its Jan. 1, 2022 renewal. Now, that is thinking ahead.

As written about often on this website, the X-mod system lags six months behind to let the claims develop past the policy year. When forecasting beyond the next policy period, a number of things could happen including (a few examples):

• Higher payroll due to growth.
• Higher claim values (reserves).
• State law changes.
• Classification Code changes.

2023-24 projection complications

Six months of claims and policy changes/endorsements may occur. In the Jan. 1, 2023, policy year:

• Carrier reports claim values up to July 1, 2022, for the Jan. 1, 2023-2024 policy year.
• Six months of claims development has not yet occurred and has not been reported by the carriers.
• No predictive analytics package can estimate what the six months of claims development will be, as that is up to the employees’ medical and return-to-work statutes, and the adjuster’s reserve increase levels.

2024-25 projection complications

Six months of claims and policy changes/endorsements may occur. In the Jan. 1, 2024, policy year:

• Carrier reports claim values up to July 1, 2023, for the Jan. 1, 2024-2025 policy year.
• Eighteen months of claims development has not yet occurred and has not been reported by the carriers.
• Same predictive analytics conundrum.

2023-24 projection solution

This will not work in all cases. Using a mod projection tool (unnamed), the six-month gap was projected using a very long-tail, step-wise regression formula. I know that actuaries prefer loss triangles.

I went back 10 years and forecasted what a 10-year loss projection would look like. Yes, Excel has that package freebie if you add the statistical package.

I advanced the projections every six months and dropped off the prior six months. Wow, I had a ton of numbers.

The basis for the X-mod projections was performing a full loss run review for 10 years of claims. Luckily, the budget officer kept that data; the more numbers the better.

I projected a 1.285 or 1.29 X-mod. The National Council on Compensation Insurance promulgated a mod of 1.30 later that year.

2024-25 projection solution

I performed the same procedure for the 2024-2025 policy period. The private school’s CFO understood that 18 months of data needed to be added to the mod factor.

We agreed to review the mod factor projection next year. I provided a mod projection of 1.33 for the 2024-2025 policy year using the data at hand. That number will likely change during the next year.

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.