The time is NOW for employers to understand rule changes on Experience Mods

One of the noteworthy events of 2011 for Workers’ Compensation, The National Council on Compensation Insurance’s (NCCI) proposal to change the Experience Rating formula, seems to be under most employers’ radar screen. While the new implementation schedule does not begin until January 2013 and many of the details are unknown, employers who understand the implications will be able to better manage their costs.

Currently in NCCI states, the first $5,000 of a loss is considered primary and the portion of the loss higher than $5,000 is considered excess. This is called the split point and is important because the primary losses are weighted at 100% in the experience rating formula driving it up quickly, whereas the excess loss only receives partial weight.

It has been over two decades since this $5,000 benchmark was established and during this time the average cost of claims has more than tripled. As a result, the plan gives less weight to each employer’s actual experience and according to NCCI, mods “have gravitated toward the all-risk average.”

NCCI’s proposal is to increase the split point over a three-year transition period, based on the state’s filing date:

• In 2013 increase the split point to $10,000

• In 2014, increase the split point to $13,500

• In 2015 and thereafter, increase the split point to the indexed value of $15,000 based on the average of cost of claims

The chart below from NCCI indicates the impact on different size claims:

The impact on an individual employer could be significant. Experience Mods are essentially a comparison of the employer’s losses compared with those of other employers in the same industry. Primary losses are the major cost driver in experience ratings. Under the current system, employers with several small claims under $5,000 will have a higher Mod than a company with one large loss. While frequency still trumps severity, the threshold for frequency is changing significantly. Employers with many claims exceeding $5,000 will feel the bite. If you were to plot Experience Mods today, the result would be a bell curve with a concentration around the 1.0 rating. The result of this change will be to stretch and flatten that curve.

While many of the details are yet to be flushed out, it is generally agreed that employers with higher than expected losses will pay more than under the current system. It is also possible that employers with lower than expected losses may see their Mods and premiums drop. The situation is compounded for employers with multi-state Mods. The change is being phased in, based on the state’s filing date; therefore, it is quite possible that split points will differ.

While controlling the Experience Mod has always meant reduced premiums over the long-term, it takes on even more importance now. This change in the system is dynamic, unlike the long-standing static split point of $5,000, the new split point will rise as losses rise.

Employers should assess their primary losses and costs of claims and take steps to reduce losses and improve hiring practices. Many employers must have a 1.0 Mod to bid on jobs; it’s critical they begin to look at the composition of their losses to ensure that they do not lose their bidding eligibility.

Carl Zeutzius has 20 years of experience helping businesses address their risk management needs.  He’s a Certified Work Comp Advisor and UNICO Group, Inc. is the only agency in the State with that Designation.

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