What Does the Future Hold for Workers Compensation Experience Modification Factors?

/// Guest post by contributor Nate Oland, Federated Insurance

Starting in 2013, thousands of employers all over the country could see their workers compensation experience modification factor increase due to a significant change in the way the experience mod is calculated. On the other hand, the National Council on Compensation Insurance (NCCI) argues that many employers could actually see a decrease in their experience modification factor.

How do we make sense of this? Many different factors are used to calculate a company’s workers compensation experience modification factor, including a number of which are out of a business owner’s control. If you have been frustrated with this calculation in the past, then now is the time to start to better manage this very important risk factor that directly affects your insurance premiums.

How does it affect you? Let’s explore the major change to the experience mod calculation by defining the term “split point.” In examining your Experience Rating Worksheet, you may have noticed that individual claims appear to be capped at $5,000 (far right column of the report). NCCI considers the first $5,000 of the loss to be the primary amount, and the portion of the loss greater than $5,000 the excess amount. The primary amount (first $5,000) fully factors into the experience rating formula, with the excess amount being “discounted.”

The current split point ($5,000) will begin increasing in 2013; specific dates vary by state. The scheduled changes are as follows:

2013: The split point will be initially increased to $10,000
2014: The split point will be increased to $13,500
2015: The split point will be increased to $15,000 plus two years of inflation adjustment

Basically, the split point changes increase the impact of claims greater than $5,000 on your experience mod factor. Conversely, employers with few or no claims greater than $5,000 will generally see a reduction in their experience mod factor, which essentially rewards companies that more effectively prevent and manage their claims.

Why change now? NCCI is making this change because it’s been 20 years since the last split point update.¹ Data has shown that the average cost of a claim has tripled in that time. This has led to experience modification factors reflecting less of an individual firm’s actual experience. 

What can you do to reduce your experience modification factor? You can’t change your past claims and their effect on your experience modification factor; however, there are a couple of ways you can reduce the negative impact of this change going forward:

• In many states, medical only claims are discounted by 70%*, compared to claims that include lost time (wages). With the increase in split points, that 70% reduction is that much more important. Fully committing and implementing a light duty/return-to-work program can help keep the claim contained to medical only costs.

• When is your loss data reported? The data used to calculate your experience modification is sent by the insurer to the rating bureau six months before the insurance renewal date. Three years of data are used to calculate the experience modification, beginning four years prior and not including the current year. For example, an employer with a policy that renewed on January 1, 2012, will generally have an experience modification factor that uses the loss experience for policies that were effective 1/1/08–1/1/09, 1/1/09–1/1/10, and 1/1/10–1/1/11.

Call your insurance carrier and request a claims history report seven to eight months before your policy expires. Review the report for open claims and to confirm current information before the data is reported to NCCI. Often, small open claims can be reserved at a higher amount with nothing paid. The reserve amount is reported to NCCI until the claim is closed. Reserves count against your experience modification factor even if nothing has been paid.

Times are changing. Don’t get caught off guard! Now more than ever, it is time to focus on risk management, claims prevention, and claims management so your business can remain competitive and thrive. Whether you are a current client of Federated Insurance or not, contact your local marketing representative to tap into his or her knowledge of the Workers Compensation Experience Modification.

*Medical Only discount not available in all states.

¹NCCI does not administer the Experience Rating plans in California, Delaware, Michigan, New Jersey, and Pennsylvania. These states provide their own bureau to administer the Experience Rating Plan. The split point changes discussed above may not apply.

In Minnesota, New York, Texas, and Wisconsin, NCCI Experience Rating Plan applies only when the rating also includes an NCCI state.

In monopolistic states (North Dakota, Ohio, Washington, and Wyoming), a state agency administers the plans and rates.

{Guest Post} Guest post provided by Nate Oland, Federated Insurance. For more than a century, Federated Insurance Companies has provided peace of mind to business owners through valued insurance protection. Learn more about Federated Insurance.

The opinions and advice given by guest post contributors are not necessarily those of NATSO Inc. The posts should not be considered legal advice. Qualified professionals should be sought regarding advice and questions specific to your circumstances.

This article is intended to provide general information and recommendations regarding risk prevention only. There is no guarantee that this information will result in reduced losses, lower premiums, or lower experience modification factors. The content provided is accurate as of June 2012 and is subject to change. This information may be subject to regulations and restrictions in your state and should not be considered legal advice. Qualified counsel should be sought regarding questions specific to your circumstances and applicable state laws. © 2012 Federated Mutual Insurance Company.