An Experience Modifier is a huge factor for Workers Compensation Insurance. In the last several years there have been some major changes on how the Experience Modifier is calculated.
If your not prepared, an NCCI increase of the primary-excess split point could raise your primary losses and negatively influence your Experience Mod.
There are 38 states that participate in the NCCI plan; all have approved the updated experience rating formula. While the majority of NCCI states will update their rate filings on January 1, 2013, not all will do so. A number of other states have rate filing effective dates later in the year, so depending on an employer’s state of operations, the potential impact may not be realized until after the initial effective date of the changes.
The most important change in the updated rating plan is the increase of the “split point” — the dollar threshold used by NCCI to divide individual losses into primary, or “frequency,” and excess, or “severity,” layers. The split point is currently $5,000 — a level it has been at for about 20 years. Filing E-1402 calls for the split point to increase in phases over the next three years to:
Additionally, NCCI is changing the maximum debit modification formula, capping the debit experience rating modification (mod) factors, which vary by state and size of employer. This change is not expected to have a significant impact on experience modification factors according to NCCI.
Despite its intention to update the split point with inflation factors over time, NCCI had not done so in approximately 20 years. Since that time, the average cost of a workers’ compensation claim has tripled. The formula is designed to respond to an employer’s actual loss experience, and should be indexed with actual cost drivers, such as increasing medical and indemnity workers’ compensation claim costs. An effect of not changing the split point — despite client costs continuing to rise — is that a much smaller portion of claims is allocated to the primary layer in the formula. This puts less weight on an employer’s actual loss experience and ultimately results in the formula being less responsive to an individual employer’s actual experience. Transitioning to higher split points will add credibility to the experience rating formula and will help maintain the effectiveness of NCCI’s experience rating plan.
Depending on how each organization’s actual loss history affects the calculation’s outcome, businesses will view the experience mod changes either positively or negatively. Some mod factors will yield larger credits for the employer and others will become larger debits. (Credit mods can reduce an employer’s workers’ compensation premium while debit mods can increase it.)
NCCI is phasing in the change over three years. This will help reduce any perceived negative impacts and give employers time to adjust.
Note that is common for experience mod factors to change by several percentage points annually due to factors unrelated to the split point. For example, every year NCCI updates the voluntary loss costs and rates by state, experience rating values, expected losses, and discount ratios. For employers that are eligible for experience rating, their actual loss experience is also updated annually, which could impact the experience mod factor calculation.
According to NCCI, after testing the impact of the upcoming changes to the split point, it was able to determine that credits and debits will increase as the formula becomes more responsive to an individual employer’s actual loss experience. Further, NCCI expects minimal negative impacts to most employers as a result of the split point change as 75% of all organizations’ modification factors will likely remain the same or even decline. However, the remaining 25% of companies likely will see their experience mod factors increase. Although the majority of the increases will be less than 10 percentage points, approximately 5% of employers may see their mod factors increase by more than 10 percentage points. Fewer than 1 in 200 mod factors are estimated to flip from a debit to a credit or from a credit to a debit. Further, NCCI found no industry bias in their testing, and has said the changes will not result in any major shifts in premium by state.
More information can be found on the NCCI Website: