Editor’s note: Don’t miss our newer articles on this topic :
- News Regarding the 2013 Split Point Change (from NCCI and Independent Bureau States) 2/8/2012
- New Report Estimates Mod Change Due to 2013 Split Point Value 11/16/2011
- NCCI Publishes FAQ on Split Point and Maximum Debit Mod Changes 8/8/2011
We’re getting a lot of calls and emails about our previous blog article, NCCI Changing Primary-Excess Split Point in Experience Rating Methodology. Everyone, of course, is wondering the same thing: How will workers comp mods be affected?
With the help of a recent NCCI presentation, “NCCI Experience Rating Plan Review,” at the Casualty Actuarial Society 2011 Spring Meeting, we’re now able to tell you a little more about what to expect regarding the split point increase and some other changes that NCCI is recommending. I want to note, however, that we do not consider the NCCI presentation an official announcement – we’re still anticipating that this fall. Update: NCCI Publishes FAQs on Split Point and Maximum Debit Mod Changes. The analysis below is still accurate in light of this additional information.
The Split Point Increase
As we’ve noted before, the primary-excess split point is changing over a three-year transition period from its current value of $5,000. The NCCI presentation suggests that the specific change levels may be approximately:
- 10,000 for the first year (2013),
- 13,500 for the second year,
- 15,000 for the third year, and
- the split point will be automatically indexed for claim cost inflation in the third year and future years.
The presentation shows that average claims costs have increased almost 250% since the last split point change in 1993. Then, the average work comp claim was over $3,400; in 2011, the average claim is estimated to be almost $8,800. It’s easy to see how total excess losses – the amount of each claim over the current split point value of $5,000 – would have become a greater and greater portion of total actual losses. “If the split point is not indexed for claim cost inflation,” the presentation says, “a greater proportion of losses fall into the excess category as time goes on.” But what does that mean in terms of the formula going forward?
I talked with Jeff Adcock, a Consulting Actuary with SIGMA Actuarial Consulting Group, about this. Jeff pointed out page 14, “Experience Rating Plan Split Point Review,” of the presentation and said:
The results [on page 14] are not surprising. As the split point is increased from $5,000 up to higher amounts, claim dollars shift from the excess layer to the primary layer. Because primary losses receive more weight (higher credibility) in the experience rating formula than excess losses, the plan becomes more responsive.
‘More responsive,’ Jeff explained, means that the company’s experience will be given more weight. Referring again to page 14, he pointed out:
The spread of the modification factors increases with each increase in the split point. Companies with credit mod factors – factors less than 1.00 – should expect to see even lower mod factors at higher split points. Likewise, companies with debit mod factors should expect to see even higher mod factors at higher split points. Again, the larger the current mod factor, the larger the expected increase under the new plan as well.
A Change to the Maximum Mod Formula
NCCI is also suggesting a change to the maximum mod formula. The purpose of this formula is to cap, or limit, any debit mod (a mod over 1.0) that exceeds a specific amount. The capped mod typically applies when expected losses are quite low in comparison to actual losses. Because the cap is determined by a formula related to expected losses and average claim cost (a number adjusted each year by NCCI), it is risk-specific. The presentation explains that NCCI is recommending a change because the current formula can produce a very low cap for small risks (generally 1,000 to 10,000 in expected losses, according to the NCCI graphs). This means:
- employers who are small risks and currently have a limited mod may see their mod increase
- other employers who are relatively larger risks and currently have a limited mod may see their mod decrease
To identify your clients who currently have a capped or limited mod, look for a note on the official bureau report, or as a footnote on the bureau-type or detailed reports in ModMaster, with words to the effect of “this mod has been adjusted in accordance with experience rating plan rules.”
How These Two Changes Will Affect the Mod
The first year impact of these two changes is shown on page 15, “Distribution of Differences Between Old and New Mod Values,” of the presentation. Here we summarize and graph the impact on risks that NCCI projects:
Your client demographics may differ from this risk profile, but on average this graph suggests that:
- Nearly half of your clients will see a mod decrease of 2 points or more.
- Over a third of your clients will experience a small mod change of -2 to +2 points. While that doesn’t sound like bad news, you want to be extremely careful about clients in contracting, roofing, and other professions who may have to have a mod of a certain value (like 1.0) to bid on a job.
- If your clients are average, 1 in 7 will experience a mod increase of 5 points or more.
- Don’t forget, as I mentioned in our first article on this topic, that minimum mods should drop as a result of the split point change.
All of these changes are a great opportunity to be conversing with your clients and prospects about the minimum mod, the controllable mod, the maximum mod (when it applies to them) and the possibility of a mod change.
The NCCI presentation also mentions some other possible forthcoming changes, but it appears that only the split point and maximum mod formula changes will be filed for approval by the states this year, in anticipation of a roll-out in 2013. Future changes, which NCCI indicates they may further discuss late in 2011, include:
- an increase to the eligibility threshold
- replacing weighting and ballast factors with primary and excess credibility factors (Zp and Ze)
- other minor changes to make the language of experience rating more accessible
As always, feel free to comment here or to email me at [email protected].
– Kory Wells, WorkCompEdge Blog Editor
Updates to this article since its first publication are noted in dark red.
© 2011 Zywave, Inc. All rights reserved. For reprint permission, contact the blog editor.
I sure could use a “layman’s” explanation of these proposed changes to the exp. mod. formula? Even for those of us that work in the world of insurance, it can be complicated. Imagine trying to explain it to contractors of all types, small manufacturers and small business owners. Thanks.
Hi, Kevin – Experience rating can indeed be an intimidating topic. We should have a document about this change, suitable for passing on to employers, available with the new version of ModMaster later this year. We’re also studying the possibilities for adding some sort of function or report to help you analyze and communicate the 1st-year impact of the change to your clients.
I’m glad you asked!
Kory
Thaks Kory. The sooner the better! The looks I get from policy holders when ask about EMF!
I understood that this change be adopted on different dates, based on when individual states accept the NCCI changes. Is this correct and is there a schedule that shows when individual states are accepting NCCI’s changes?
Hi, Valerie – Yes, the change is expected to roll out on the state’s usual anniversary date for rating updates. For example, Alabama almost always updates on 3/1 of each year; Alaska usually updates on 1/1 of each year.
The dates are included in NCCI’s CIF-2011-14 circular, but you can also check to see when a state is normally updated by viewing the System Administration/Rating Data screen in ModMaster. This screen shows the most recent effective date for each state. With only a few exceptions, that same month in 2013 will be when the state is expected to pick up the change in split point. The only exceptions I see are Iowa and Missouri, which NCCI indicates will be updated 1/1/2013. ModMaster shows other months because both those states had special updates this year.
Note that independent bureaus such as MA, NY, etc. may or may not pick up this change.
Kory
A quick question regarding the statement:
“While that doesn’t sound like bad news, you want to be extremely careful about clients in contracting, roofing, and other professions who may have to have a mod of a certain value (like 1.0) to bid on a job.”
How are we supposed to “be careful about [these] clients”?
Unfortunately, since the mod is based on past claims and payrolls, there is nothing that the client, his broker or insurance carrier can do if the modifier suddenly goes over 1.00 simply due to this change.
Sure, we can lecture the client to redouble their safety efforts and hope their mod comes down in some future year, but that will not help their present predicament.
The only thing I can suggest is the NCCI or others promote the idea that corporate risk managers give some forebearance to contractors who find themselves suddenly disqualified due to a technical change that was beyond the client’s control.
Any other thoughts?
Hi, Mitch,
Thanks for your comments and good question. What I mean by being careful is that, especially for these clients, you may want to:
1. Make every effort possible to project the mod as accurately as you can. This would involve the steps I mention in the webinar at the end of the article for actually calculating how much of the losses are going to shift from excess to primary and what that impact would be on the mod. (Admittedly, this is only an estimate since there are a lot of moving parts, but in my mind it’s still worth the effort to have an idea of the impact. Does it help the client’s situation? No. Does it at least help them be more informed ahead of time? Yes.)
2. On a quarterly basis, and especially in the quarter before the evaluation date of the losses for experience rating purposes (6 months prior to the mod effective date), help the client work with the adjuster to get claims closed and or reserves adjusted downward, when appropriate. Reducing reserves absolutely could help the client’s situation!
3. Consider a payroll/premium audit to make sure that office employees, subcontractors, etc. are not being mis-classified, if you haven’t done that with this client.
Those are some ideas that immediately come to my mind. I certainly welcome others’ thoughts on this good question.
Kory
Agreed – those are all good actions – appealing reserves to the carriers, double-checking audits and projecting future mod trends – but we’re still going to have situations arise where “there is nothing that the client, his broker or insurance carrier can do if the modifier suddenly goes over 1.00 simply due to this change.”
I guess I could have underlined “simply” (but am not sure this page supports html in replies) or said “simply and solely” but we ARE going to have some unfortunate clients whose mods jump for NO other reason than this technical change.
For these clients, it will be like getting a speeding ticket for going 30 mph when the speed limit sign was reduced from 30 to 25 after you’d already passed by. It is always disconcerting for a client when pending rule changes affect situations that were OK up to that point. It is tough to find an acceptable explanation for those affected by the change.
Your analogy about the speed limit change might not quite hold with our precise actuarial friends, but for all practical purposes, I think it’s a good one, Mitch, unfortunate as it is. This reminds me of a related topic I’ve been meaning to blog about, so look for more on this soon. Thanks again for the dialog!
Kory
Yes, actuaries do tend to be purists and view a number like an experience mod as only a statistic.
We also know there are reasons other than just safety consciousness for a mod to be higher than average, in the same fashion that the best hospitals may have higher-than-average mortality rates due to the difficult nature of the cases they draw.
As such, corporate use of a 1.00 mod for cut-off of subcontractors eligibility can misuse the mod rating. However, the actuarial purists out there need to accept this reality. Their mod formula update may be well-reasoned fact in their world, but the change can have adverse implications for real businesses employing real workers.
Mitch, you sure called it! We just received our NCCI EMR calculation, effective 5/1/13. We had also received one in early December 2012 for the same effective date. No changes in data whatsoever, except for the increase in Primary to $10K, and our EMR went up from 1.0 to 1.06. This new method of calculation will prevent our company from bidding on new contracts, which may ultimately cause the death of a 78 year old company with over a thousand employees.
I’d say insurers will do very well with the premium increases they’ll experience; but then perhaps not, since there will be so many companies going out of business simply because of this change. Sadly, the effect it will have on insurance costs and non-eligibility issues for so many private and government contractors will only be measured long after the damage is done.