This question is striking fear in the hearts (yes, we have them) of insurance agents and brokers across Texas.  In fact, “Explaining how a modifier is calculated” ranked #487 on the 2007 list of 500 things agents and brokers love about their business.  Of course, that does not apply to John Prince.  He loves explaining how a modifier is calculated.  Seriously.  You can reach him at 1-800-438-8346, but don’t call him unless you really want to know.

For the rest of us, an executive summary will do just fine.  Basically, your modifier is derived by comparing your losses with the state’s expected level of losses for other contractors with the same payroll classifications.  Your actual losses determine what the numerator will be (i.e., the number on the top of the frac-tion).  The expected losses (based on state-wide statistics) make up the denominator (i.e., the number on the bottom of the fraction).  If your losses run less than expected, your modifier will be less than one.  If your losses are greater than expected, the modifier will be more than one.

This is the reason many people look to the modifier as an indicator of whether you are a safe contractor.  That is probably not a good way to make that assessment for a variety of reasons, but it happens, for better or for worse.  We have a lot of customers with exceptionally low modifiers.  They are proud of them and they should be, but through no fault of their own, the modifiers are increasing.  Indeed, they have been increasing for the last few years.  It has nothing to do with increasing claims.  Indeed, in some cases, their claims experience has improved!

Instead, it is the denominator, the state’s expected losses, that has changed.  Expected loss rates are falling because claims experience overall in Texas has been better.  Even if your losses fall (i.e., the numerator), if the state’s expected losses (i.e., the denominator) fall by a larger percentage, your modifier will increase.

We can all applaud the reason for the change.  It means that Texas is a safer place to work and a better business environment.  The combination of improved safety (since 1996, the occupational injury rate per 100 employees has dropped from 6.3 to 3.7) and Texas tort reform has helped improve the state’s ex-pected loss rates by an average of nearly thirty percent over the last two years.

That is good news in the long run because it means better overall workers compensation rates even if in the short term your modifier has a bump up (perhaps for the second year in a row).  Plus, if you listen real close you can hear the sweet sound of weeping plaintiff attorneys looking for work in other states.

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