Correction: the below article has been alerted from an earlier version to clarify several issues related to experience modification use.

HOUSTON — The use of experience rating modifications by state procurement offices on judging an employer’s safety program is a common practice that is not an effective measure for relative safety, as a contractor at the riskier end of a broadly defined class code can be misjudged, according to a top workers compensation expert.

It can also provide a competitive advantage to larger companies in states that allow net of deductible experience rating, when losses net of deductible recoveries are allowed to enter the experience rating formula, said Kathy Antonello, chief actuary for the Boca Raton, Florida-based National Council on Compensation Insurance.

Ms. Antonello served as the keynote speaker Monday at the 38th annual International Risk Management Institute Construction Risk Conference in Houston and gave attendees a healthy prognosis for the workers comp industry and an overview of challenges in the construction industry.  

Overall, the data for 2017 shows a combined ratio for private workers comp insurers of 89% — the lowest in NCCI’s historical data, according to Ms. Antonello’s report. “It was the only line of business in the (property/casualty) business that saw a decrease,” she said. Included in her highlights is a 6% decline in claim frequency from 2016 to 2017, in line with the ongoing trend of decreases year over year, she added.

Absent some larger macroeconomic force or wholesale benefit increase, “we do not think this trend is going to stop,” she said of the decline in frequency — attributed in part to greater emphasis on safety programs — which she said is resulting a healthy industry outlook.

What might not change without “a grassroots effort” is the common practice in some states whose procurement offices used experience rating modifications, or E-mod, to weigh whether a contractor has an effective safety program — an issue that pits companies with the “same” risk levels against each other, with one deemed safer by state regulators because of a small change in the calculation, Ms. Antonello said.

E-mods are calculated as a ratio of actual-to-expected losses, Ms. Antonello explained, adding that simple differences in the data, such as greater payroll figures, can alter the result. The figures are either greater than 1.0, indicating an employer’s manual premium should be increased, or less than 1.0, indicating an employer’s manual premium should be decreased. However, the figure is not a complete picture of safety, she said.

She compared two companies side by side and the figures that go into calculating an E-mod, which insurers use to calculate premium but have caught on among regulators in some states as an easy way to gauge a company’s safety model.

The companies in her example had the same actual losses and premium, yet different payroll and expected losses — one the result of the other. The company with the larger payroll and thus larger expected losses had an E-mod of less than 1.0 when the companies performed the same tasks and handled the same risks, she said. “They are the same company,” she added.

Meanwhile, contractors in some states that are bidding on new business might be ineligible for a contract if their E-mod is greater than 1.0, she said, adding that looking at an experience rating modification is an oversimplification of how to examine a company’s safety culture.

Another problem with E-mod is that subcontractors who perform tasks that hold greater risks usually have a higher E-mod when compared with contractors performing safer jobs under a broadly defined construction class code, she said.  

In 2016, Virginia lawmakers voted to prohibit a procurement office from conditioning eligibility for a construction contract on a bidder’s E-mod, according to Ms. Antonello, who cautioned that NCCI is not a lobbying firm but said that E-mod is not an effective measure for relative safety.

NCCI reports now include a footnote on a calculated E-mod to inform those reading the reports that the product should not be used for safety scoring, she said.

Chiming in during a question-and-answer session following Ms. Antonello’s presentation, IRMI President and CEO Jack Gibson said state regulators want to look at safety and that “the experience mod seems to be an easier way to do it.”

Yet, “it takes a lot more homework to evaluate a safety program,” he added. “It’s going to take a deeper dive in to the safety practices of the subcontractor.”