Reworked Workers’ Compensation Formula Lowers Premiums

A reworking of a key piece of the workers’ compensation rating formula isn’t changing rates overall but is changing premiums for most insureds, according to experts.

Tony DiDonato, director and senior actuary at the National Council on Compensation Insurance, said the change, which took effect Jan. 1, 2013, results in a slight decrease for most insureds. But balancing out those many decreases will be some significant increases, often among the largest insureds, he said before the Casualty Actuarial Society’s (CAS) recent Ratemaking and Product Management Seminar.

The change involves the experience mod, the credit or debit that insureds receive for their own claims experience. The mod compares an insured’s claim experience to that of comparable employers. If experience is good, the insured gets a credit – a discount. If not, the insured receives a debit.

What’s changing is the delineation between the primary and excess portions of a claim, known as the split point. For the past two decades, the split point has been $5,000. This value is important because the primary portion of each claim has a much larger impact on an employer’s mod than does the excess portion. Actuaries believe that the primary loss amount is more predictive than the excess amount.

But inflation has both eroded the primary/excess split point and hurt its predictive power. These days, the mod doesn’t give enough credit to good experience and doesn’t penalize poor experience enough, according to actuaries at the CAS event.

“The plan was not being as predictive as it used to be” in distinguishing between good and bad risks, DiDonato said.

The change raises the split point – to $10,000 in 2013, to $13,500 in 2014, and to an estimated $17,000 in 2015. These adjustments, incorporated into the entire rating formula, improve the experience mod’s predictive power, according to DiDonato.

In 26 of the 38 states where the plan has been approved, NCCI actuaries sampled 75,007 risks, calculating the experience mod under each system. The NCCI’s sample showed that the vast majority – 62 percent – would see their rates fall less than 5 percent. Another 11 percent realized decreases between 5 percent and 10 percent. Rates were unchanged for 4.5 percent of risks. Less than one-in-four would see a rate increase.

Overall, the average mod was 0.98 – a 2 percent discount – under the old system and 0.97 – a 3 percent discount – under the new system. DiDonato attributed the slight change to vagaries in the states where the new system had been approved.