If I didn’t know better, I’d say that the workers compensation bureaus are conspiring to keep those of us analyzing and communicating about mods very busy in 2012. In addition to the coming change in the NCCI split point, it seems likely that California’s bureau, the WCIRB, will be changing its experience rating calculation in 2012.
Those of you who do business in that state will undoubtedly remember that California also made changes to their experience rating plan in 2010. For the newest change, let’s get to the best news first: the change affects how the formula looks and how brokers and employers will communicate about the mod, but WCIRB documents indicate that it shouldn’t change individual mods themselves.
The proposed changes are part of the 2012 pure premium rate and regulatory filing which the Insurance Commissioner should accept, reject, or modify by early November. California rate changes have historically occurred on 1/1 of most years. The WCIRB states in an August 22nd letter to the Insurance Commissioner that they anticipate having their systems ready for 1/1 implementation of the new formula, but could propose a three month delay if any unforeseen problems arise.
If you’ve been involved with workers compensation experience mods for very long, you’ve probably explained the formula, as we often do, by saying “it looks complex, but it’s basically a comparison of actual to expected losses.”
Well, the WCIRB says its now time for that formula to look not-so-complex.
To that end, this change does away with ballast and weighting values in favor of credibility primary and credibility excess factors:
- Credibility primary factors (Cp) are used to weigh a risk’s actual primary losses, which are a measure of loss frequency. The larger a risk is (as measured by expected losses), the greater weight that is given to primary losses.
- Credibility excess factors (Ce) are used to weigh a risk’s actual excess losses, which are a measure of loss severity. Again, the larger a risk, the greater the weight. Notably, very small risks have such little predictive value in this area that Ce will actually be zero.
So, the mod formula which currently looks like this:
X-Mod = {Ap + (W x Ae) + [(1 – W) x Ee + B} / (E + B)
where Ap = Actual primary losses; Ae = Actual excess losses; E = Expected losses; Ee = Expected excess losses; B = Ballast and W = Weight (note that this formula is expressed in a slightly more reduced form than what we show in ModMaster)
will now look like this:
X-Mod = {[(Ap x Cp) + (Ep x (1 – Cp))] + [(Ae x Ce) + (Ee x (1 – Ce))]} / E
where all of the terms have been defined above, except for Ep = Expected primary losses.
There now! Isn’t that easier?
Sorry, I couldn’t resist teasing a bit. Actually, it is easier, because everything in green in the formula above is considered the credible primary loss and everything in blue is considered the credible excess loss, reducing the basic formula to
X-Mod = (Credible Primary Loss + Credible Excess Loss) / E
And that really will be easier for brokers and employers to talk about – starting with this simple formula and then working into more detail as the situation warrants.
We continue to monitor the approval of this change in California and are working to accommodate it in ModMaster. We’ll definitely discuss this subject again as more details become available. In the meantime, let me know your comments and questions, as always!
– Kory Wells, WorkCompEdge Blog Editor
© 2011 Zywave, Inc. All rights reserved. For reprint permission, contact the blog editor.