The National Council on Compensation Insurers (NCCI) and most of the various states bureaus that govern the rules of workers compensation independently of NCCI have begun to implement a change in the rating methodology of the experience rating modifier in workers compensation policies. There are different implementation dates for different states, (New York has adopted this change effective 10/1/2013) but we’ll look at how this change is occurring and what it means to you.
First, let’s start with a discussion of what is the Experience Rating Modifier or ERM?
The ERM is a weighting system to assign a debit or credit to your workers compensation policy premium based on your specific loss experience compared to your peer group. Three prior years of loss experience and payrolls are taken into consideration, not including the most recent prior closed year to create this calculation. While the calculation is complex and requires specialized software to compute, the essence of the result is to reward employers with losses lower than expected for their peer group with a credit modifier, and conversely for employers with higher than expected losses of their peers a debit modifier is assigned to the premium.
Within the calculation each claim is segmented into two parts: The Primary Loss and The Excess Loss. Currently the point which splits each claim into these two parts is $5,000; this is commonly referred to as the “split point”. The purpose of the split point is to weight the primary loss dollars more heavily than the excess loss dollars in the formula, because smaller or more frequent losses are considered to indicate more hazardous conditions than the occasional large loss. Viewed from a different perspective, losses under the split point receive greater weight than the dollars above the split point. As an example an employer with five $5,000 claims in their experience rating formula will create a much higher modifier than a similar employer with one $25,000 loss over the same period of time.
The current split point of $5,000 has been in use for the past 20 years, during which time the average claim cost has gone from $2,500 to $9,000! At its current level, the split point is not performing as intended because the average costs of claims have inflated so dramatically. In an effort to rebalance the entire rating methodology the rating bureaus, led by NCCI are implementing changes to the split point by raising that threshold to $10,000 in 2013. In subsequent years that split point will move even higher.
How does this impact you?
Actuarial impact studies conducted by NCCI indicate that in very general terms, those employers currently with very good credit modifiers will likely see their mods improve. On the other side of the scale, those employers with poor modifiers will see their modifier deteriorate further. The breakdown looks like this: about half of employers will see a decrease in their modifiers, 30 percent of employers will see a slight change up or down, and about 20 percent will see a definite increase once the split point is implemented.
So, what do you do?
The first step is to determine where you are and how this change could potentially affect you. That will give you an idea of your costs for budget purposes as well as give you some direction for the future. We are able to forecast your modifier and the specific impact the split point will have on your premiums.
If you’ve had a debit modifier we can also illustrate what each claim is costing you in additional premium dollars, as well as isolate trends and causes of loss. From there we can help you implement the right risk control strategies to reduce claim frequency as well as severity to drive down both direct and indirect claim costs.
In the past we may have thought of a modifier of 1.00 as “good” and anything above it as “bad”. The reality is that a 1.00 modifier is like getting a “C” on a report card – it’s not really good, it’s not really bad, it’s just average. Do you want to be “average” or would you want your business to be above average? In today’s competitive environment you want to be well above average, don’t you? Well, we can help you get there with the right mix of diagnostics and risk control.
For more information on the new Workers Comp Split Point in New York, and how we can help you and your company reduce costs, please us in New City, NY.