New Workers’ Compensation Formula


A key piece of the workers’ compensation formula has been reworked, but it only changes workers’ compensation premiums and not the rates charged for each classification code. According to Tony DiDanto, director and senior actuary at the National Council on Compensation Insurance, the change resulted in most insured’s seeing a slight decrease.  However, some of the largest insured’s will see significant increases. 

A factor in the formula used to calculate the experience modification issued by NCCI was changed. The experience modifier compares claim experiences of comparable employers.  When a company has good experience it gets a credit and when it has bad experience it gets charged a debit. 

The delineation between the primary and excess portions of a claim, which is known as the split point is where the experience modification formula was changed.  The split point is very important because the primary portion of a claim has the most impact on an experience modifier and not the excess portion.   According to actuaries, the amount of the primary loss is more predictive than the excess amount. 

The problem with the previous split point is that it was eroded by inflation.  The modifier no longer gave enough credit to good claims experience and didn’t penalize poor experience enough.  DiDonato said, “The plan was not being as predictive as it used to be in distinguishing between good and bad risks.”

The split point was increased to $10,000 for 2013 and will be increased to $13,500 in 2014.  In 2015 it will increase to approximately $17,000.  According to DiDonato, incorporating these adjustments into the rating formula improve the predictive power of the experience modifier. 

NCCI actuaries sampled 75,007 risks by calculating each rating system in 26 of the 38 states where the plan has been approved.  The samples reflected that a large majority, 62 percent, will see their premiums decrease less than five percent.  Eleven percent will see decreases between five and 10 percent.  In 4.5 percent of risks, there was no change in premium.  And less than one and four will see an increase in premium. 

Under the new system, the average modifier was 0.98 overall which was a two percent decrease.  Under the old system it was 0.97 a three percent decrease.  According to DiDonato, the vagaries in the states where the new system was approved account for the slight change in the average modifier.   The change has been approved by all the NCCI states. 

Source: www.insurancejournal.com

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