Experience Modification Alert: The Rules are Changing

While some of the details have not yet been announced,

one thing is clear: employers with higher-than-expected losses

 are likely to pay more for insurance.

Workers' Comp Insider
By: Jon Coppelman
September 26, 2011

It's been over 20 years since NCCI changed the rules relating to the calculation of the experience modification factor. Given that experience modification determines the cost of insurance for all but self-insured employers, these changes require careful scrutiny. While some of the details have not yet been announced, one thing is clear: employers with higher-than-expected losses are likely to pay more for insurance. [NOTE: the Insider apologizes in advance for what is inevitably a rather technical discussion. For readers who would like additional background, check out our 2004 primer here.]

Under the current system, claim dollars - what's been paid and what's been set aside for future payment on each claim - fall into one of three categories:
- Primary losses: the first $5,000 of each claim. These losses carry the most weight and drive up the experience mod much quicker than the losses above $5,000.
- Excess losses: the losses above $5,000 within each claim. These are discounted in the calculation, with as little as 10 percent of the total included in the calculation (depending upon the size of the premium)
- State Rating Point: the cap on individual claim dollars beyond which the losses are excluded from the calculation; this varies from state to state, generally falling between $125,000 and $200,000.

NCCI is expanding primary losses from the current level of $5,000 up to 15,000. This change will take place over a three year period, with the ceiling rising to $10,000 in the first year, $13,500 in the second year and $15,000 in the third year.

Why does this matter? Primary losses are the major cost driver in experience rating. Primary losses are not discounted: they go into the formula dollar for dollar. As a result, employers with moderately large claims (between $5,000 and $25,000) are likely to see an increase in their experience mod.

Winners and Losers
NCCI actuaries are working under the requirement that total premiums within a state remain the same under the new system. In other words, when they apply the new rules, experience mods will go up or down for individual employers, but the total premium in the state will stay the same.

On an individual insured level, there will be winners and losers. Here is our advice to any employers with debit mods (above 1.0) in states managed by NCCI: follow these new NCCI developments carefully. [The easiest way to do this, of course, is to keep reading the Insider.]

Primary losses remain the biggest cost driver in the workers comp system and primary losses within individual claims are about to double and soon triple. The strategies for experience mod management that were effective with the primary loss ceiling at $5,000 may no longer apply. As the rules of the game change, savvy managers will change with them.

NCCI Update