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    Commercial Insurance Blog

    Geoffrey Gordon

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    Values - how we defined ours at Gordon Atlantic Insurance

    Posted by Geoffrey Gordon

    Mon, Dec 23, 2019 @ 04:00 PM

    Values guide actions that propel our lives. A strong, clearly defined set of values helps individuals and groups gain clarity in decisions and directions. As business visionary Simon Sinek says, it’s the “Why” that matters for companies. Why do we do what we do? Stated differently, “What do we value?”.

    I teach a class in Strategic Planning; the syllabus begins the planning with three foundational reference points. Values, Vision, and Mission. The starting point for a company’s exercise of self-identification is understanding its Values. Vision is an aspirational expression of these values, and Mission describes an execution strategy.  Thus, Values are the starting point of an organization’s “Why?”.

    We recently conducted our own valuation analysis, which we modeled from a “Discernment” program at my church that helps people in transition to identify new career paths.  Here's how it works: the support team needs to understand the candidate’s values before offering ideas or making recommendations.  So before meeting with the support group, the candidate ponders a list of top ‘values. (see our list at the bottom of this article). From a list of 50 values, the candidate must discard 35 to select the top 15, no easy task, requiring contemplation and reflection.   Once these top 15 have been identified, he or she must prioritize just the top ten, removing five. Then, once more, the list is culled to just the top five. These become the core values that most define the candidate.  It's a solid starting point.

    For our company discernment, three leaders went through this process.  Then we decided to get a pulse on the rest of our staff and invited everyone: take 50 values down to 15, to 10, to 5.  While this was a voluntary exercise, every employee participated. 

    GAI values wordl-1

    Because we’re nearly 20 people, we needed to weigh the values in a way that allowed for breadth of ideas, while recognizing leadership's influence. For  breadth, we included everyone's top ten values, but assigned a double value to their top five choices. Thus, if  “Integrity” was #2 and “Giving” was #7, integrity got twice the weight of giving.  To recognize that leadership drives strategic decisions in our company, we double-weighted three company leaders' results. Interestingly, most of our stated values were consistent between leadership and the other employees.  Evidently, we already have a culture that reflects management’s – and employees’ – core values.

    Here’s the result of our internal exercise, in order:

    Gordon Atlantic Insurance Top Values:

    • Family – We are a family-oriented business, for employees, and for customers.
    • Integrity – It is our brand, our reputation; who we are as people.
    • Excellence – We strive to become better, all the time. 
    • Leadership – in our fields of specialty, and in taking responsibility for our own lives.
    • Community – We stay closely connected to where we live and work.
    • Giving – We try to give something of ourselves to others.
    • Lifetime Learning – A value combining Growth and Education.

    A few observations about the data:

    •  Education and Growth; both had a strong presence on our list, so we combined and included under Lifetime Learning, a reasonable consolidation of these two.
    • Happiness, Health, and Independence also scored high, so we acknowledge these in internal discussions, remembering that these values are 'Top 5' important to several of us.
    • The process of removing many values we hold dearly to get from 50 to 15, is a valuable exercise in itself, especially at the margins, with those closest to the cut-off.

    This has become useful in much decision making:  We used to struggle with how to handle certain holidays, the day after Thanksgiving a typical example.  Recognizing how much we value family, the decision to close the day after Thanksgiving became easy, as this is a day when most of us can enjoy time with our families.  With Lifetime Learning a top value, we are quick to approve education expenses for all our employees, all year long.  Integrity keeps our brand strong, and helps us be more effective when negotiating with underwriters; because they trust us.  (Bonus: This one also helps us sleep at night.)

    We found that this exercise provides guidance for many decisions; it's different for every organization.  But it's a terrific process to develop self-awareness and clarity for any organization.

    Below is the list of 50 values we all used for starting this exercise:  

    Accomplishment Education Helpfulness Popularity
    Adventure Environment Honesty Privacy
    Care Ethics Humor Recognition
    Community Excellence Independence Respect
    Competence Faith Integrity Security
    Conviction Family Justice Solitude
    Courage Freedom Knowledge Spirituality
    Creativity Friendship Leadership Teamwork
    Decisiveness Fun Leisure Accountability
    Dependability Giving Lifetime Learning Variety
    Diligence Growth Loyalty Wealth
    Diversity Happiness Nurturing Work
      Health Order  


    Tags: community, values, leadership

    What is the ERM-14 form in Massachusetts?

    Posted by Geoffrey Gordon

    Tue, Sep 03, 2019 @ 03:44 PM

    What is the ERM-14 form in Massachusetts?

    The ERM-14 form is a form required by the Massachusetts Workers Compensation Board whenever there is a change in an entity’s name, structure or ownership.   The form discloses owners of an entity, such as members of an LLC, major shareholders (5% voting interest) or partners.  It is used whenever there is a change in ownership, including a sale or transfer of assets.

    Download our fillable version of the ERM-14
    picture of ERM-14










    or download the form from the Commonwealth of MA here:


    Why does the Workers Comp Board make you disclose all this?

    Workers compensation insurance is one of the most sensitive lines of insurance to past experience.  Before this form was used, an owner of a company with a poor history of worker safety (and increasing workers compensation costs) could transfer assets of one company into another to start fresh, with no bad experience to increase those costs.  Particularly in higher risk industries, the difference in companies “experience modification factor” can have a significant impact on costs.  So transferring assets to another company to get a fresh start made sense, when this was legal.

    The purpose of the ERM-14 form is to keep track of significant shareholders movement from entity to entity.  An officer from a high workers compensation experience modification factor (the mod) now may bring that high mod to his or her new company. 

    How hard is it to fill out the form?

    That depends on the simplicity or complexity of ownership., but we won’t sugar-coat it.  It’s intrusive and looks for lots of entity structure details that may be tedious to find.   One thing we do know: if an officer / shareholder of a company with bad workers comp experience becomes an officer / shareholder of another company, the experience may follow from one entity to another.

    Aside from entity gymnastics, how else can a company reduce workers compensation costs?

    Workers comp is the most experience-sensitive line of insurance.  At Gordon Atlantic we can project the impact of claims, or no claims, on future workers comp costs, providing a compelling economic message for instilling a culture of safety.  We work closely with companies on industry specific risk reduction and safety programs.  A safe workplace is a competitive workplace, because lower workers comp costs mean lower labor costs relative you your peers, which translate to pricing advantages.


    Tags: ERM-14, ERM-14 MA, ERM, ERM14, ERM-14 MA workers comp, ERM14 MA entity change

    Hurricane Season Preparation Guide

    Posted by Geoffrey Gordon

    Thu, Sep 27, 2018 @ 10:19 AM

    A storm is coming. What to do?

    Natural disasters and extreme weather events bang our homes and community infrastructure so critical to our way of life. And they're going to continue to happen so being prepared by following a few simple steps can make a huge difference between being inconvenienced, or being overwhelmed. In this blog we will break down our suggestions with a timeline: before, during and after.

    So before anything else, make sure you have a...

    GO BAG

    Preparation for the unexpected begins with an escape plan. For natural disasters, part of that plan is a Survival Kit; a group of portable items packed and ready. It should contain the following:

    • Three days of canned or foil-sealed, non-perishable food
    • Can opener, either a standalone or even better, part of a utility tool such as a Leatherman.
    • First aid kit and manual
    • Portable radio and/or laptop or tablet
    • Flashlights and battery illumination
    • Extra (AA/AAA) batteries
    • Smart phone or tablet battery charger; good for a couple full charges
    • Bottled water in sealed plastic containers; 1 gallon/person for three days
    • Prescription medicines; at least a one week supply
    • Personal toiletry kit 
    • Sealed pet food for your pet(s)
    • Extra clothing and blankets
    • Cell phone, cash and credit/debit cards (best kept on your person)


    • For tropical storms, know the difference between a hurricane watch and a hurricane warning. A hurricane watch means that a hurricane may arrive in 24 to 36 hours (check your Go Bag).  A hurricane warning means that a hurricane will arrive even sooner, as in less than 24 hours.
    • Plan your evacuation route in advance of the storm. Expect heavy traffic. If your family is in different places, select a meeting place.
    • If near the shore, close storm shutters and board up windows.
    • Stock up on drinking water and several days of non-perishable foods.  Foods should be edible without heating (i.e. tuna fish, protein bars and nutritional supplements). 
    • Have a supply of batteries, flashlights, and a portable radio in good working condition
    • Check your fire extinguishers for location and pressure in case you need them during or after the storm.
    • Test your generator if you have one.
    • Review how to shut off utilities – water valve, gas main, and electrical panel - with qualified family members.
    • Secure all outdoor furniture or move inside
    • Fuel your car in case you must leave immediately.

    Inside your home, check that doors and windows are closed and locked. Outside your home be sure to bring in garbage cans, bicycles, furniture and grills.

    Stay tuned in to the news/weather stations so you are aware of updates, changes to evacuation plans, and any State of Emergency situations affecting your town.


    • Listen to the radio or TV while it lasts for important storm information and instructions.
    • On your smartphone or tablet, monitor weather intensity.  Our favorites for this area are and But be realistic about battery usage.
    • If you must evacuate, leave as soon as possible and alert someone outside of the storm area where you will be.
    • Keep windows and doors securely shut during the storm. Windows open to high winds can literally cause the roof to blow off.
    • If at home, stay inside and away from windows, skylights and glass doors. Do not go outside, even if the weather appears to have calmed. The "eye" of the storm can pass quickly, leaving you outside when strong winds resume.
    • While phones still work, check in with vulnerable neighbors or friends to keep them calm and assured.



    • Inspect your property for damage. Wear protective clothing and be cautious as debris may be scattered around the property.
    • If you have any claims to report, contact Gordon Atlantic by calling (781)-659-2262 or visit to report to your carrier directly.



    • Make any necessary temporary repairs to secure your property. Tarp over openings in roofs and windows.  Do it yourself if qualified, or hire a contractor if not. Here are some we've worked with:
    • In case water still manages to get into your house by means of wind or flood, move your rugs and drapes off the floor, as wet fabric can lead to mold growth.
    • When the weather dries out, open windows and doors and run fans to dry everything; if you have air conditioning or dehumidifiers AND power, run these also for additional drying. Water is the enemy whenever it penetrates the house.
    For more, visit our hurricane resources page including videos, checklists, and other resources, click here.

    By taking these precautions, you reduce your risk of injury and damage. An ounce of prevention is worth a pound of cure.


    Tags: storm prep checklist, hurricane prep

    What is Contractual Risk Transfer?

    Posted by Geoffrey Gordon

    Thu, Aug 30, 2018 @ 11:25 AM

    Contractual risk transfer is a business strategy designed to reduce the cost of risk by transferring certain risks to another entity's risk program. This transfer takes many forms, but is common when a hiring company engages a sub-contractor, or when one entity rents or leases property to another and wants the lessee, or renter, to be responsible while they have use and control of it. We'll address a few of the more common ones here.


    A common insurance requirement is the Additional Insured. A hiring company will often ask the subcontractor to name the hiring company as an additional insured, so if something goes wrong, the sub contractor's insurance program will take care of the claim. By off-loading these from the hiring company's risk program, they transfer the cost too.  (More here in our Additional Insured page)

    Landlords will often ask tenants to name them as additional insureds, so that if a guest of the tenant is injured, the tenant's insurance takes care of the claim. Again, the cost has been transferred.

    Another is "waiver of subrogation." Subrogation is the process whereby insurance companies go after each other based on who was ultimately responsible for a loss. A simple example is when my fleet insurance company pays a collision claim, then goes after the company of the driver that actually caused the accident. Agreeing to waiver of subrogation means that the subcontractor's insurance cannot go after a hiring contractor's insurance, even if they are responsible for whatever happened. If an electrician's employee is hurt at an unsafe contractor's work site, the claim still goes on the electrician's experience, not the responsible contractor's.  (More here in our Waiver of Subrogation page)

    Many B2B contracts include "hold harmless" and "agree to indemnify" language, which are corollaries to the insurance provisions described above. For deeper details on these legal terms, always consult an attorney. Gordon Atlantic networks broadly with other professionals, including construction attorneys, contract specialists, employment practices attorneys and litigators. If you need a specialist, we usually know a good one. Don't hesitate to ask if you need specialized help, and particularly on legal matters.

    For our video on this topic, click below:



    Tags: waiver of subrogation, Additional Insured, subcontractors, contractor, independent contractor, contractual risk transfer

    New 2018 Massachusetts regulations for most commercial trucks

    Posted by Geoffrey Gordon

    Wed, Aug 29, 2018 @ 12:02 PM

    The Registry of Motor Vehicles has announced a new regulation {540 CMR 2.22(1)} that will affect MOST commercial vehicles, effective September 1, 2018… (but NOT including private passenger vehicles).  This is for trucks used in business:  Just about all of them.  There are two levels of new requirements, based on GVW:

    Vehicles over 2000 lbs GVW, carrying property, MUST

    Display the owner’s / company’s name on the truck, plainly visible, on both sides OR front and rear, in permanent letters that contrast sharply in color with the background on which the letters are placed, legible during daylight hours from a distance of 50 feet while the motor truck is stationary.  You really have to show your name clearly.

    Vehicles with 10,001 GVW or more; OR

    • are used in the transportation of hazardous materials in a quantity requiring placarding; OR
    • are designed to transport more than 15 passengers, including the driver, used in intrastate commerce in Massachusetts...

    Must obtain and display a United States Department of Transportation (USDOT) number. 


    "Display" means permanently marked with a USDOT number assigned in a manner conforming to the provisions of 49 CFR 390.21

    You can apply for a US DOT number here:  and Federal phone assistance is available from the Federal Motor Carrier Safety Administration (FMCSA) at 1-800-832-5660.

    Penalties for failing to comply with either of these new regs may result in fines and placing the vehicle "Out-of-Service".  We don't know if this really means they'll tow it, but act as if they can.  

    These regs apply even if your company is operating only intrastate, meaning you conduct business only within Massachusetts; also applies if you operate interstate, conducting business in other states.  For either, you must obtain your DOT number directly online.

    There are exceptions for farmers transporting their own produce, in state, and plenty of other details. 

    For other details,here is the MASS GOV link to the new regulation:



    Tags: fleet, regulation, MA vehicle regs

    What is a Waiver of Subrogation?

    Posted by Geoffrey Gordon

    Thu, Jun 07, 2018 @ 03:57 PM

    In one of our previous blogs, What is an Additional Insured?, we discussed additional insureds in contracting.   When subcontractors work for general contractors they need to show that they carry their own insurance so if something goes wrong, and sub’s insurance company will ultimately be paying first.   The GC will ask be an 'Additional Insured' to get coverage under the sub’s insurance program.   In addition, the general contractor will often require a 'Waiver of Subrogation' clause.  This waiver gives up rights of the subcontractor insurance program, so usually comes with a cost.  This is classic Contractual Risk Transfer at work.


    Often required by larger, mopre sophisticated contractors, the Waiver of Subrogation shifts costs on any event entirely to the subcontrtactor: regardless of fault.   Suppose an electrical subcontractor hired by a GC is hurt on a job site due to negligence of the hiring contractor.  Without a waiver in place, the worker's compensation company will demand reimbursement through the general contractor’s liability insurance in a process called Subrogation.  

    If a Waiver of Subrogation is in place, the electrician's insurer agrees NOT go after the GC's insurance, even if he's negligent, completely at fault.  The worker's compensation claim goes entirely on the electrician’s insurance history, increasing  the experience modification factor, and thus their future costs.   Nothing fair about that.

    But the general contractor has shifted that risk off his own program, onto the subcontractor's, in a tactic known broadly as contractual risk transfer.  Because your insurance company knows it can't recover against a responsible party, they commonly charge more when granted.   

    For a video on the topic that appears in BusinessTown, click to watch:.

    If you have a question regarding your own personal insurance circumstances, please call the Gordon Atlantic Insurance professionals toll free at 1-800-649-3252.  Prefer to type versus talk?  Use the form to the left of this blog for a return phone call or email.

    For other pertinent commercial insurance topics, check out our commercial insurance blog

    Geoff Gordon


    Tags: construction, commercial, insurance, Business, contractors, insurance waiver, waiver, subrogation, additional, insured, certificate

    What is an Additional Insured?

    Posted by Geoffrey Gordon

    Thu, Jun 07, 2018 @ 01:50 PM

    When subcontractors perform work for general contractors, they usually need to show the general contractor that they carry their own insurance.  The same principle is true with resellers of someone else's product and in other close business relationships.  In addition to expecting a Certificate of Insurance showing insurance, the contractor often asks to be named as an Additional Insured (AI) in order to be protected in case of an accident or other loss and potential claim. This is a common tactic of contractual risk transfer.

    An Additional Insured is a person or entity that enjoys the benefits of being insured under someone else's insurance policy, in addition to whoever purchased the policy (the Named Insured).

    As an example, say a General Contractor (GC) hires an electrician on a project they're doing, as a subcontractor.  The GC will require the electrician to name the GC as an 'Additional Insured' on his or her General Liability policy.  In the event of a claim that happens because of something the electrician did (or didn't do), the electrician’s insurance now includes the general contractor in its defense coverage, plus judgments.   If the electrician caused the damage, the GC keeps the loss off his or her own claims experience. lowering their overall cost of risk.  

    Continuing with the above scenario, when we are the electrician’s broker, we often discourage granting Additional Insured status to others since you're now sharing your limits with others.  Getting AI status is good, granting it to others, not so much.  That said, this kind of contractual risk transfer is normal business practice; the CG knows he can find a subcontractor who will grant AI status to anyone willing to hire them.

    Why should the electrician push back (if he can)?  Suppose there are two judgments for $600,000 after an incident and the electrician has a $1,000,000 policy; the electrician runs out of insurance when the claim reaches a million dollars...but the GC can still turn to his own policy.   Bear in mind, when we are insuring general contractors, we encourage them to get Additional Insured status from everyone who comes on a job site.  After all, each should be held responsible for their own work, and the general contractor wants to shift costs and exposure downstream whenever possible.

    For other commercial insurance topics relevant to your business practices, check out other topics on our commercial insurance blog.  If you have a specific question or concern, please call the Gordon Atlantic Insurance professionals toll free at 1-800-649-3252.  

    Geoff Gordon


    Tags: Certificate of Insurance, Additional Insured, insurance claim, general liability insurance, contractual risk transfer

    Workers Compensation Audit Compliance

    Posted by Geoffrey Gordon

    Fri, May 11, 2018 @ 12:19 PM

    Your Workers Compensation insurance renews and you receive the letter informing you it's time for the prior term's audit.  

    Initial premium is based on estimated payroll.  At the end of the year the company needs to determine actual payroll, including casual labor and uninsured subcontractors. If the actual is less than the estimate you get a refund.  If the actual is greater than the estimate, you owe the difference. 
    Business Man Pic
    When you purchase Workers Compensation insurance, part of the agreement is they may audit your payroll to be sure it's accurate.  It may be a phone audit, a self-audit, or a physical on-site audit, (physical is required in Massachusetts at least every three years).

    Should you refuse, it's rough: the carrier issues a high "estimate" with premium due. If you do not pay the estimated additional, your policy gets cancelled and the Department of Industrial Accidents may issue a Stop Work Order. You may also have an uninsured loss and then have to pay for medical expenses and lost wages out of pocket, plus be subject to a fine.  

    To prepare for the audit try to have:

    • Payroll records
    • Federal 941 Tax Returns (most recent four quarters)
    • 1099 Tax Forms 
    • Federal Tax Return including Profit & Loss section (1040 Schedule C, etc.)
    • General ledger or checkbook
    • Certificates of Insurance from subcontractors

    You will receive a Final Audit Report from the carrier.  If money is owed and you disagree you can file a dispute. The payment due date will be suspended until the dispute is settled.  

    Here's a chalkboard video that summarizes all this:



    To discuss your Workers Compensation coverage with a Gordon Atlantic Insurance professional, call us toll free at 1-800-649-3252.  Prefer to type versus talk?  Use the form at the top left of this blog for a return phone call or email.

    Geoff Gordon


    Tags: commercial, workers compensation, insurance, Business, insurance audit, audit

    Massachusetts Workers Compensation Rates Decrease 12.9%

    Posted by Geoffrey Gordon

    Mon, Apr 16, 2018 @ 05:42 PM

    The Massachusetts Commissioner of Insurance recently approved an average 12.9% decrease in Workers Compensation rates. This brings workers comp costs to among the lowest in the country, making the state more attractive for new and existing business ventures.

    There is value in understanding why this happens in Massachusetts.  In 1991, new governor Bill Weld learned that Massachusetts workers comp rates had increased 92% over the previous four years, with the insurance industry looking for another 45% increase his first year in office.  Costs were out of control, and employers were looking to other states to escape the spiraling labor expense surcharge.  With a strong employer mandate and a friendly legislature, the Workers Compensation Reform Act of 1991 was passed.  Since then, workers comp costs have decreased by over 60%, making Massachusetts one of the lowest cost states in the country.

    When you compare the rise in health insurance for "off-the-job" costs, that is, medical insurance costs inflation, this decrease is especially remarkable.

    How has Massachusetts been so successful?

    Workers comp cost trends in MA v health trends

    The Reform Act of 1991 attacked the fraud that had crept into the system on multiple levels: employees getting paid without working; getting hurt intentionally to receive medical benefits without deductibles; employers under reporting or mis-classifying payroll; and medical providers colluding with attorneys to build false claims for criminal plaintiffs.  It had been a mess, so the new law established severe penalties for fraud at any level.  Accountability is indeed an important social contract.

    In addition, the law created a utilization review program to ensure medical treatment was appropriate.  This mandated more transparency and accountability in the major underlying costs: health care.

    What other trends caused the decrease this year?

    While most small businesses are not "experience rated" for health insurance, workers compensation is experience rated for any business with over $5,000 in premium. (Read our blog on how the "experience modification factor" is developed).  Experience matters!  Employers have a long term vested interest in keeping safe workplaces, including specific programs for getting workers back to work after they're hurt, even if just on light duty assignments.  A business with high loss experience simply cannot close its doors and open a new business to re-set the experience factor; ownership information is required for newly formed businesses to ensure high losses follow the owner, not just the company.  This is a system with long term accountability.

    This sounds like great news. Is there any downside?

    This is great news for every company paying workers comp premiums, but the market for insurance will change: every insurance carrier will review whether an account is profitable with nearly 13% less income.  Today Massachusetts enjoys a robust workers comp market, meaning most employers can get the insurance voluntarily, not through the "assigned risk" program.  With rates 12.9% lower, insurance companies will be more cautious in who they'll insure.  Unlike all other insurance, rates are set by the state, so companies generally don't compete on price. There are small variations on this -- some discounts are available for certain employers -- but base rates are still the same, based on classification.

    The problem arises if loss experience or other factors mean no carriers will accept a business voluntarily.  The rates in the assigned risk pool are the same, but case management (for claims) is paid to pool carriers for a fee.  Losses are aggregated and shared across the pool so an insurance company doesn't have its own skin in the game. When a carrier can spend a dollar on case management or loss control engineering to save two dollars on projected losses, it makes sense.  If those expenses will save only ten cents on the dollar because every carrier pools losses, they don't make economic sense.

    As with other kinds of insurance, resources dedicated to preventing and mitigating losses in front of an insurance program usually lowers the overall cost of risk most effectively. To keep your company more insulated from risk and keep the cost of risk low, contact a Gordon Atlantic professional today by calling toll free 800-649-3252.  Prefer to type versus talk?  Click below.


    HAVE A QUESTION?          


     Should you need some assistance in preparing for a Workers Compensation audit, click HERE for an informative video and/or a written preparation guide.


    Breaking down the Experience Modification Worksheet in MA Workers Compensation Insurance

    Posted by Geoffrey Gordon

    Wed, Jan 10, 2018 @ 12:50 PM

    If your workers compensation costs are a significant factor in your labor costs, you know how important your "experience modification factor" (your "mod") is.

    The workers comp experience mod is a multiplier in the calculation for how much you pay for workers compensation insurance, where 1.00 is the mean (the average).  Over 1.00 will charge you more, and under 1.00 will be less.  For example, if a 1.00 factor generates a $5,000 workers compensation cost, then a 1.10 will take you to $5,500.  Conversely a .90 factor gets you to $4,500, much better. This has a direct effect on your labor costs relative to your peers.

    How is the mod calculated?

    The workers comp experience mod calculation takes your loss experience and historical cost (premium) into consideration to calculate how much above or below the median your experience places your company.  High losses, you'll pay more; fewer, smaller losses, you'll pay less.

    The experience used for the calculation is ancient history for some, from four, three and two years ago.  Why so long back?  Because we don't know the final premium and loss experience - needed for the experience calculation - until after a policy year is over.  See the chart below for a 2018 renewal as an example:

    Experience modification worksheet experience

    The 2017 policy year experience does NOT count for 2018, since the year is not yet over when the renewal cost is calculated.  There is a one year gap for the most recent year, to allow the audit to occur and for any claims to close out (or not), then a three year look-back.  One conclusion we can immediately make from this chart is that the large claim ($79,110) that occurred in 2014 will not be on next year's calculation.  Meaning we can expect the factor to drop significantly next year as this big loss ages off.

    What is the difference between Actual Incurred and Actual Primary losses?

    "Actual Incurred" includes the losses paid, plus expected future payments (known as reserves), plus insurance company expenses.  "Actual Primary" losses are limited to the first $5,000* of each claim.  In the example above, we know that in 2014 there was one big claim, limited to $5,000 'primary', plus two other small claims for a combined total of $5,653.

    (* Primary losses are capped at $5,000 in Massachusetts. Most states follow a national model – NCCI – which include primary losses up to $16,500.)

    What are Expected Losses?

    "Expected losses" are the average losses in a given class code. If a company had losses that were the same as expected losses, they would end up with a 1.00 factor.  These expected numbers derive from published tables at the Workers Compensation Bureau.  These are important because they make up part of the denominator – the bottom half of a fraction – in calculating the experience modification factor.

    How does the fraction unfold?

    For those who jump into the math behind an experience worksheet, the printed section below will look familiar.  This is how the math works.  It may look intimidating with all the letters and numbers, but can be boiled down to a few simple components.

    Experience modification worksheet mod calaculation formula.png

    Each of the components is broken down further in the color coded image below.  To simplify, bear in mind that the second and fourth formulas are numbers over themselves, or mathematically, 1.  Because the formula adds these, rather than multiplies them, they still matter.  But they matter less and are not numbers that we control.  Focus instead on the first and third calculations, B/D and (E x G) / (F x G).

    Insurance pricing has two fundamental elements: frequency and severity. The first formula measures frequency, by adding up all the "primary losses"; the third measures severity, aggregating "excess losses", duly discounted (in this case by 93%).  The other components to the fraction only moderate the effects of these two (which matter).

    Experience modification worksheet mod calaculation.png

    The first formula includes your "Actual Primary Losses," all those under $5,000, relative to your industry's average (the "Expected Primary"). If your actual losses are higher than your peers, your factor will trend higher. If you're lower, your factor will follow.  Lower is better, because lower relative costs improve your position against competitors.  This is the 'frequency' part of the insurance calculus: three $2,000 claims have a greater impact on this ratio than one $12,000 claim, which will be capped at $5,000 (primary).

    The second portion is ballast (H/H): just as ballast rights a ship buffeted by strong winds, ballast in this calculation is intended to steady the fraction from one-off severe claims.  Ballast is a published number related to your "Expected Losses" - a measure of your size - for you and your peers in an industry.  

    The third piece, the other important element, "Actual Excess Losses" over "Expected Excess" measures the Excess losses relative to the industry average, discounted by a statistical weighting moderator, in this case, to 7% (weighting is also a published number, and also derived from Expected Losses).  Losses over the $5,000 primary limit are discounted 93% (1 - .07 = .93).  That's the good news. The bad news is that large claims, even when heavily discounted, can still have a major effect. In the example above, Excess losses ( E ) were $73,457 from one huge claim.  7% of $73,457 is still $5,142, more than another "primary" maximum loss.  Remember too that each of these count for three years.

    Of note, these large paid claims often include "lost time", aka "indemnity," in addition to medical care, meaning continued wages paid by workers compensation insurance to an injured employee.  This is why "return to work" policies can be so important to businesses that can re-deploy injured workers into light duty work.  Minimizing the impact of infrequent severe losses through formal "return to work" programs eases its (3 year) impact on your future labor costs.

    The final element in the fraction is another number over itself:  Expected Excess over Expected Excess, both of which are industry averages, independent of a company's experience.  This has a stabilizing effect and cannot be influenced by our or your company's efforts.

    The experience worksheet may seem unimportant where losses are infrequent and below peers.  Everyone likes a lower factor, and attention to this calculation lacks urgency when all is well.  Ultimately, effective worker safety programs will help to keep losses low and the calculation will reflect those efforts over time.

    For a closer look at your experience and how you can improve it, how the All Risk Adjustment Program (the ARAP Factor) is an accelerant on these calculations, or to discuss any other aspect of your workers compensation program, contact the risk and insurance professionals at Gordon Atlantic Insurance by calling toll free (800) 649-3252.  Prefer to type instead of talk?  Click below!




    Tags: experience mod, experience modification factor, mod, workers comp experience calculation

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