From the NCCI:
Effective in KY 10/1/2013
Big “I” Urgent Call for Action MemorandumNCCI Experience Rating Change Could Have a Huge Adverse Impact on Your Customers
Sometime between now and the end of next year (sooner, rather than later, for most states), you are likely to begin hearing from your customers about changes in their workers compensation premium. It isn’t clear yet whether some businesses and their agents will be bearing pitchforks and torches, but what is clear is that tens of thousands of employers can expect potentially significant increases in their workers compensation premiums based solely on a change NCCI is making to its experience rating plan. The purpose of this memorandum is to provide Big “I” member agencies with some advance background information and a “one-pager” member agents can give to their customers.
What are the potential implications of this increased mod? One or more of the following could occur:
• In order to cover the increased cost of workers compensation insurance, the contractor must increase its bids on various projects and, as a result, loses work.
• Many government entities and larger corporations will not contract with a business whose workers compensation experience mod is greater than 1.00 – 1.10, thus limiting the contractor’s ability to obtain work (see Addendum 3 for an explanation of why the mod should not be used for this purpose).
• Because of fewer jobs due to higher bids or restrictions on engaging entities with mods in excess of 1.xx, the contractor must lay off employees or curtail the subcontracting of work.
• Because of reduced revenues, the business is no longer viable and must shut its doors or go bankrupt (again with the loss of jobs, tax revenues, etc.).
• The business could decide to operate without insurance and might be inclined to issue fraudulent certificates of insurance to get work (the potential for uninsured injuries is obvious).
• If the business was considering selling or merging with another entity, the impact of a higher mod might result in the lower valuation of the business or the inability to find a buyer or merging company.
• Aside from the impact of the increased mod itself, the workers compensation insurer might nonrenew the account, resulting in the risk being moved into the assigned risk plan at a higher rate and an ARAP surcharge, not to mention possible loss of scheduled credits.
• In addition to scheduled credits, at least three states (CT, IL, OR) of thirteen states (AK, CT, FL, HI, IL, MD, MO, MT, NE, NM, OK, OR, VA ) in NCCI’s Contracting Classification Premium Adjustment Program (CCPAP) require participating employers to have a mod of 1.00 or less. The credits in this program can be substantial and could be lost by an employer whose mod exceeds 1.00 solely because of this rating change.
NCCI says that the impact of this change is “revenue neutral,” meaning that mods will increase and decrease in a manner that results in no overall additional premium impact for all insured entities. It is not clear whether this actuarial premise considers the potential premium impact of the migration of risks into assigned risk plans or nonstandard markets. Given our fragile and slowly recovering economy, re-population of the residual marketplace, along with the potential loss of jobs by an already imperiled construction industry, is not something that will be looked on favorably in the current political climate.
One of the problems with this filing is that there is NO individual employer cap on how much a mod may increase as a result of this change. The closest thing is a general maximum debit mod that is also being changed in this filing. According to NCCI, the change in the maximum debit mod formula “will increase the mod cap for small policies….” Given the lower credibility of the actual loss data of very small risks, one would think the maximum mod cap should be lower, not larger, for such risks.
In addition, “revenue neutral” in the aggregate is a hard pill to swallow if you are one of the tens of thousands of employers whose experience mod will increase by 0.10 or more solely because of this change. Imagine the impact if this change is coupled with an unexpected bad loss or two, a manual rate increase, loss of carrier and movement to the assigned risk plan, application of an ARAP surcharge, and/or loss of scheduled credits (and/or addition of scheduled debits). It is difficult to explain to such employers why this change is fair because it’s “revenue neutral.” It’s rather like pricing a can of green beans at a grocery store at 50 cents, then charging a lot of people only 10 cents and a few people $10 and saying it’s fair because it’s “revenue neutral” to the store. The “fairness” of this rating plan is not likely to be understood by those most adversely affected, keeping in mind that the entire experience rating scheme is not based on immutable physical laws of the universe, but rather on probabilistic actuarial formulas and theories.
And this is just the beginning. The potential impact above is based on an increase in the experience mod calculation split point from $5,000 to $10,000 in 2013. The filing increases the split point to $13,500 in 2014 and an “indexed” $15,000 in 2015. Beginning in 2015 and going forward, the split point will change annually based on an inflationary index. Currently, NCCI is predicting that, because of this indexing, the actual 2015 split point will be closer to $17,500 than the publicized and filed “indexed $15,000,” more than triple the current split point. According to NCCI, the average workers compensation claim cost as of 01/01/11 is $8,787.
To compound the problem for agents and their customers, the rating factors necessary to project what the new mod will be with certainty will not be available until late this summer for a few states and possibly September or October for most states. Employers will likely have completed their budgets long before they are aware of what their workers compensation premium will be. Until that rating information is filed and approved, NCCI will be making preliminary mods available based on actual loss data, but using factors (e.g., D-ratios) based on the current $5,000 split point.
Employers can access their experience rating worksheets at least two months prior to their rating effective date at www.ncci.com/worksheets by entering their Risk ID and a PIN number supplied by NCCI. Prior to publication of mods based on the new $10,000 split point, NCCI says that employers can ballpark their new mod by recalculating the mod using $10,000 instead of $5,000 as a split point and increasing the D-ratios on the worksheet by 50%. Use of an automated tool like Zywave’s ModMaster® software should simplify this process. In a Casualty Actuarial Society presentation, NCCI said that “If an employer has no losses, or no losses greater than $5K, [this filing] will reduce their mod…If an employer has a relatively large [number of] losses approaching or exceeding $10K, [this filing] will increase their mod.”
So, with this background, what can agents do? First of all, communicate this change to your customers ASAP. You can use our “one-pager” (see Addendum 2) to communicate this possible market disruption to your customers. Second, if you have insureds that have debit mods, they can get you a copy of their experience rating worksheets. If they are based on preliminary mods, you can use the “ballpark” method outlined above to project the mod following the split point change. Third, keep your state and national Big “I” associations aware of any marketplace problems, including very large mod increases that are attributable to this change, inability to bid on projects due to a mod greater than 1.00 (and the increase due to this filing), and any potential political repercussions of influential business owners who might seek a regulatory or legislative remedy.
If your customers experience problems with contract bids that hinge on the experience mod, Addendum 3 can be provided to the contracting party. This document explains, in detail, why using the workers compensation experience mod to pre-qualify contractors or other employers for work is not an intended or valid use of this insurance rating factor.
If you would like to learn more about workers compensation experience rating, we have a two-hour webinar that details everything you’d ever want to know about the current experience rating methodology and includes a comprehensive reference manual, dozens of real-life examples, including explanations of how to identify and correct worksheet errors, and FAQ documents of over 100 Q&As. For more information or to take the webinar, go to:
http://tinyurl.com/ExperienceRatingWebinar
If you have any questions, feel free to contact your state association or email Associate VP of Education & Research, Bill Wilson, at the national office at bill.wilson@iiaba.net.
Notice of Workers Compensation Experience Rating Change
The National Council on Compensation Insurance (NCCI) has filed a “split point” change in their workers compensation experience rating plan with state insurance departments that could have a significant impact on your business. This rating change could increase or decrease your experience rating mod as it is implemented over the next three years.
Note: Take a look at NCCI’s “The ABC’s of Experience Rating” which explains in not too technical terms the premise for the “split point”: http://www.ncci.com/media/pdf/abc_Exp_Rating.pdf
According to NCCI’s estimates, over 47,000 employers countrywide could find their experience mod increased by 0.10 points or more. Again, tens of thousands of employers should also find their mod decreased by varying amounts. To understand why this change is being made, NCCI provides these webcasts:
• http://tinyurl.com/NCCIwebcast1
• http://tinyurl.com/NCCIwebcast2
Because the experience mod is just one factor used in determining your final workers compensation premium, a change in your experience mod from, for example, 1.00 to 1.10 does not necessarily mean that your premium will increase by 10%. You can access your experience rating worksheets at least two months prior to your rating effective date at www.ncci.com/worksheets by entering your Risk ID and a PIN number supplied by NCCI. We will work with you to obtain this information and attempt to project how this change might impact your experience mod and your workers compensation premium.
Then, if an increase is indicated, we will work with you and your workers compensation insurance company to minimize its impact on your business operations. For example, aside from any (or no) premium effect, this change could impact your working relationship with other organizations. To illustrate, some entities will not allow a contractor to bid on a project if its workers compensation experience mod exceeds a certain threshold. If you are faced with that situation, we can help you explain why this is an invalid and inappropriate application of your experience mod.
Again, as a Trusted Choice® insurance agency, we will do our very best to work diligently with you to minimize any adverse impact of this change on your operations. If you have any questions, please feel free to contact us.
Using the Workers Compensation Experience Mod as a Pre-Qualifier for Contract Bids and the Impact of NCCI’s New “Split Point” Experience Rating Change
Often an employer’s – especially a contractor’s – workers compensation experience mod is used as a pre-qualifier when bidding on a contract such as a construction project. The logic is that the experience mod is a reliable reflection of the employer’s loss prevention or safety record. Sometimes this is true but very often it isn’t even remotely applicable.
Experience modification is used to predict future losses by permitting the inclusion, depending on the credibility of the data, of part of an insured’s unique loss experience. In addition, experience rating provides an incentive for loss prevention…the workers compensation mod, for example, gives greater weight to loss frequency which is, to some extent, within the control of the employer (whereas loss severity is more dependent upon chance).
However, loss severity, again depending on the credibility of the employer’s data, may skew the mod from the standpoint of reflecting the value of the employer’s loss control program. This may be compounded by a new NCCI filing which changes the “split point” used for workers compensation experience rating that, by change in rating formula only, may cause tens of thousands of employers’ mods to jump significantly even though their loss experience has not deteriorated nor is it expected to deteriorate. (NCCI estimates that over 47,000 employers will experience a mod increase of 0.10 or more just in the first year of the three-year implementation of this “split point” filing, with over 100,000 risks experiencing lesser mod increases in the first year.)
So why should the experience mod not be used as a pre-qualifier for contract bidding? Here are at least eight reasons:
• Changes in experience rating methodology (like that cited above) can increase the mod dramatically without any change whatsoever in the employer’s loss experience.
• A mod may be artificially high because an insurer has over-reserved. The insurer may have established a $50,000 reserve for a claim that is ultimately settled for only $500 in medical costs. In the meantime, the experience mod will reflect loss experience of $50,000, not $500.
• Even where the loss experience used is based on paid claims, it may be offset later by subrogation recoveries that don’t show up until the mod is recalculated for the next policy period.
• The statistical reporting cut-off date for payroll and loss experience is six months prior to the policy renewal date. We have seen real-life examples of claims that have been settled just days after this cut-off, but the mod based on the reserve remains until the next subsequent policy renewal. In one case, this resulted in a mod of 1.36 rather than 1.12 with no change in loss experience or the employer’s safety plan or practices.
• The experience mod is based on loss data that is up to five years old and may not reflect the employer’s current loss control program or experience.
• A decline in payroll or a failure to increase expected loss factors due to NCCI’s inability to get a rate increase from regulators can increase the mod even if the employer’s actual loss experience is stable or improving.
• A multi-state employer may have a mod in excess of 1.00 because of operations in other states or divisions of the company. In one example, an employer with a mod in excess of 1.30 had an independently run operation in a state whose mod would be less than 1.00 if only its own experience was used.
• A business might purchase another business with a higher mod so that the composite mod exceeds 1.00, perhaps substantially. However, the operation bidding on a contract may have had a mod of less than 1.00 for many years.
The experience mod is not a valid consideration in determining a business’s qualification to bid on a contract because this rating factor’s size may have little or nothing to do with an employer’s safety record or loss control program. Therefore, hiring decisions that include the experience mod as a factor should be tempered with judgment that reflects the employer’s true attention to safety and loss control.
Document last updated on April 6, 2012
Copyright 2012 by Independent Insurance Agents & Brokers of America. All rights reserved.
