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By John Stahl, Esq.
A recent Risk & Insurance webinar entitled “Big Changes Coming in Workers’ Compensation Premiums” stresses that actively reducing your “Experience Modification Factor” (“mod”) today should reap disproportionately high reductions in workers’ compensation insurance premiums tomorrow. The corollary is that not taking that initiative likely will dramatically increase future premiums.
Presenters Jack Roberts, Contributing Editor for Risk & Insurance, Ed Priz, president of Advanced Insurance Management, and Susan Gordon, Head of Workers’ Compensation Underwriting for Zurich North America, address both impending changes regarding how the National Council on Compensation Insurance (NCCI) calculates the mod, which reflects an employer’s risk factors, and best practices for adapting to those changes. The trends of fewer workers’ compensation claims being filed but the severity of those claims increasing prompted the changes.
Scope of Mod Determination Changes
Roberts reports that a three-year process by the NCCI that will commence on January 1, 2013 will change how workers’ compensation insurance providers calculate the mod, which affects premium rates.
Anticipated impacts of the changes are that “employers with a strong risk management and loss control program may see lower Workers’ Compensation premium rates,” and that “employers without effective safety and loss prevention programs and who have had big losses may see their Workers’ Compensation rates and the cost of those premiums rise.”
Priz announces that the changes will affect states that use NCCI calculated mods. The policy of the non-NCCI state determines whether employers that operate both in states that use the NCCI system and others that do not use that system are subject to a rate-integration system that will result in “a single combined intrastate mod.”
Another caveat is that revamping the mod system will not affect NCCI state employers that are not experience-rated. The provided guidance is that “there are small employers typically who are not eligible for experience rating but most employers of any size are going to be affected by this change.”
The NCCI describes the game changer in determining an experience rating as “the split-point between primary losses and excess losses.” Priz explains further that the experience rating formula discounts a single claim’s severity. He provides the example of 5 separate claims for $20,000 each impacting an experience rating much more than a single $100,000 claim.
The split point is the threshold that the NCCI determines exists between primary and excess losses. The existing experience-rating formula sets the primary loss amount at the first $5,000 of any claim. Any per-claim amount over $5,000 is discounted in establishing an experience rating.
Priz provides the example of an employer with a 1.25 mod paying a .25 surcharge on its premium, and an employer with a .75 mod receiving a 25-percent credit toward its premium.
New Mod Calculation Method
The three-step process that is implementing the new mod determination system is:
1.∙Effective January 1, 2013, the primary loss threshold amount of each claim increases from $5,000 to $10,000.
2. Effective January 1, 2014, the primary loss threshold amount of each claim increases from $10,000 to $13,500.
3. Effective January 1, 2015, the primary loss threshold amount of each claim increases from $13,500 to $15,000.
Priz notes that the process described above provides for a post-2015 automatic inflation adjustment that will reflect both general and medical cost inflation. This adjustment ultimately will increase the split point above $15,000. The stated reasons for this entire initiative are that “so that a larger amount of each claim gets fully counted,” and because “the split point has not been changed over 20 years.”
Another expected benefit of the new system is that “as a general rule employers with low losses will experience a lower experience modifier than they would have gotten under the old formula; employers with higher losses will see higher modifiers than under the old formula.”
Suggestions for Reducing a Mod Under the New Formula
Gordon observes that “the experience modifier is a good indicator of how effective the company’s safety and claim management programs are.” She adds that “a mod of one represents the average risk for an average company in their industry,” and that “underwriters typically look to write those companies that perform better than average.”
One identified disadvantage of having a mod above one is commonly being “prohibited from bidding on new or renewal contracts” in your field.
Recommended strategies for achieving a desirable mod include:
The new system for calculating a mod reflects both the fact that medical inflation particularly has been high the last 20 years and the principle that an insurance premium should accurately reflect the extent of the insured risk.
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