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November 12, 2012
Workers Compensation insurers have long relied upon the theory that past results are the best indicator of future performance, and have utilized experience rating to increase or decrease an employer’s premium costs based on prior claims experience. As the underwriters’ actuaries would attest, frequency of claims is more indicative of a safe or unsafe workplace than severity, or cost, of those claims. NCCI’s experience rating formula had considered small, or frequency type claims, to be those under $5,000, otherwise known as the “split point”.
The National Council on Compensation Insurance (NCCI), the organization that essentially sets the rules for workers’ compensation rating in 34 states around the country — including Alaska, Montana, Idaho and Oregon — is changing those rules. This is making employers with poor loss histories cringe and those with safer workplaces jump for joy.
Split Point Increasing to $15,000 by 2015
The NCCI experience rating formula has been heavily weighted on the frequency of claims $5,000 in cost or less, and placed less burden on the employer for amounts over that $5,000 “split point”. For example, this system penalized an employer with five $5,000 claims to a greater extent than an employer with a single $25,000 claim despite the same total cost to the insurer. Due primarily to escalating claims costs driven by medical inflation, NCCI determined that the $5,000 cap in primary claim value no longer provided ample reward for safe employers, and insufficient incentive for those with less favorable experience to make meaningful investments in improving safety. As such, NCCI is gradually increasing the amount of each claim to be given full weight in the calculation of the experience modification to $10,000 in 2013, $13,500 in 2014, and $15,000 in the 2015 calculations.
What does this mean to you?
In simple terms, employers with good loss experience and current mod rates less than 1.0 will see lower rates and lower premiums and those with debt ratings over 1.0 may see their mod rate, and thus premiums, increase.
For those employers currently near 1.0, this change may have a significant impact on your business, as an experience modification over 1.0 may impact your ability to obtain work or become eligible for additional rating credits. Oregon, for example, offers additional rating credits to construction risks based upon the employer’s pay scale, but your mod must be below 1.0 to qualify.
Needless to say, if you operate outside of Washington State you may be seeing some changes to your premiums in the coming years. Contact Parker, Smith & Feek for assistance in determining how these changes may affect you, and what we can do to assist you in mitigating, or taking advantage of, these new rules.