National Council on Compensation Insurance Changes Comp Formula

by Gwen Moritz  on Monday, Sep. 2, 2013 12:00 am  

James Daniel

Last month’s update in the way injured worker claims are rated is, depending on the source, “the biggest change for workers’ comp insurance in the last 32 years” or “not that big a change.”

Employers, however, won’t know which description applies to them until their next premium renewal, which for many won’t happen until Jan. 1, but Arkansas-specific data suggests that more businesses in the state will benefit than will be hurt.

Here’s what has happened:

On July 1, a change in the National Council on Compensation Insurance’s experience rating plan took effect, two years after it was proposed and following approval in 39 states, including Arkansas.

The change doubled, from $5,000 to $10,000, the amount of an injured worker’s claim that would count against a company when calculating that company’s workers’ compensation insurance premium. The NCCI calls that dollar figure the “split point” between “primary losses” that reflect the frequency of worker injuries and “excess losses” that indicate the severity of the injuries. The split point will go up to $13,500 in 2014 and to $15,000 plus inflation adjustments in 2015 and beyond.

Both primary and excess losses are included in the formula used to calculate a given employer’s risk, which is known as the experience modification. The formula compares each insured company’s claims to the average for its industry, represented by 1.0, and applies premiums or discounts based on whether the specific company’s “experience mod” is above or below 1.0.

Under the formula, primary losses up to the split point — that is, up to $5,000 until last month — are counted in full while excess losses are given less weight. And that has created the problem, according to the NCCI.

While tripling the split point over three years may seem radical, the NCCI says it is actually long overdue because the average cost of a workers’ comp claim has tripled in the decades since the split point was set at $5,000. As a result, bigger chunks of actual losses have been discounted when it came time to calculate premiums.

Bob Owens, executive vice president of Brown & Brown Insurance of Little Rock, told Arkansas Business that the increase in the split point was “the biggest change for workers’ comp insurance in the last 32 years.”

“If you are a company that has claims,” Owens said, “more of those claims are going to count against you … and increase the company’s workers’ comp premium.”

One client company’s experience mod jumped from 1.19 to 1.38, Owens said, so that company’s workers’ comp premium increased by 19 percent because of the change.

But the NCCI says the opposite is equally true: Companies that have few or generally smaller claims will see their “experience mod” decline because every penny of even relatively minor claims is no longer being counted against the company.

 

 

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