Mod About You
In certain states, contractors can have a tough time bidding on new business - if their experience rating modification (mod) is greater than 1.00, they may be ineligible for jobs. Numerous articles published in recent years have discussed procurement offices’ misuse of mods. In Illinois, when our clients are at risk of being ineligible for a job due to their mod, we often provide letters addressed to the procurement office as to why this mod isn't an accurate reflection of the current safety culture of their company.
Regardless, the disclosure of mods continues as a requirement and relative measure of perceived safety practices by contractors bidding on projects. Why is this practice flawed? According to the National Council on Compensation Insurance (NCCI) chief actuary, Kathy Antonello, the following are a few reasons why the mod is still used improperly:
- An excellent risk gets misjudged. A contractor that is at the higher hazard end of a broadly defined construction classification could have a debit mod because of the nature of its business.
- Certain states allow mods to be calculated net of deductible recoveries. Other states do not. Contractors that choose to purchase a deductible policy in a net-reporting state will have lower mods and a competitive advantage. This is compared to identical employers in their own state that do not choose this option or those in other states that do not have this option. In other words, in net-deductible reporting states, a risk can “buy down the mod” by purchasing a deductible, which gives the illusion of better experience.
- Certain employers are not large enough to be experience-rated. Thus requiring a mod precludes them from bidding on a project.
- An employer that pays its employees lower wages than the class average, but has average loss experience, could have a debit mod. This is because lower wages generate lower payroll, which in turn generates lower expected losses in the mod formula.
Further proof that this practice should be changed: In 2016, Virginia was the first state to amend its Public Procurement Act to prohibit procurement officers from conditioning eligibility for a contract on a bidder’s mod. After this ruling the NCCI went on record to label this a positive move, believing that furthering the conversation on this subject will help clarify how mods should and should not be considered in the procurement process.
If your company finds itself suffering from a high mod it is important that your broker understands all the determining factors that are driving up this number outside of just losses and can articulate this to the procurement offices. While Virginia has taken the first step to eliminating the use of the mod when deciding who gets the job, it will likely take years before other states follow suit.
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