National Council on Compensation Insurance Changes Comp Formula

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.

In the end, the change in the split point should be revenue neutral to insurance carriers, meaning every increased premium at one company will be offset by a decrease for another company that has had fewer or less expensive injuries.

“It’s not that big a change,” said Lori Lovgren, the NCCI’s division executive for state relations.

Owens’ example of an employer whose experience mod increased nearly 20 percent is extreme, according NCCI data. Typically, about 5.1 percent of companies see their mods go up by more than 15 percent due to the number and severity of claims they made. Increasing the split point from $5,000 to $10,000 was expected to result in mod increases of more than 15 percent in only 1.2 percent of employers nationwide. And while virtually no employers were expected to get mod reductions of more than 15 percent, significant decreases of more than 5 percent were expected in 11.5 percent of cases.

Data specifically drawn from 964 Arkansas employers suggested that big increases in experience modifications due to the change in the split point were more likely here, but still only 2.1 percent were expected to see mod increases of more than 15 percent.

Arkansas employers are also more likely to see sizable decreases in their experience mods; the Arkansas-specific sample showed that 15.6 percent would have decreases of between 5 and 15 percent. (See table below.) 

Experience Modification Changes Due to Split Point Change

Typical Annual Changes*Expected After Split Point Change*Observed in Arkansas**
Decrease >15% 4.5% 0% 0%
Decrease 5%-15% 8.5% 11.5% 15.6%
Plus or minus 5% 74.7% 75.4% 69.4%
Increase 5%-15% 7.2% 11.9% 12.9%
Increase >15% 5.1% 1.2% 2.1%
  100% 100% 100%

*In all NCCI states **Based on a sample of 964 experience modifications in Arkansas
Source: National Council on Compensation Insurance Note: The percentage change in experience modification is not the same as the change in actual premium paid by a specific  employer.

New Workers’ Comp Commission CEO

James Daniel will be elevated to CEO of the Arkansas Workers’ Compensation Commission on Tuesday, succeeding Alan McClain, who had been CEO since 2005.

McClain, who was director of the AWCC’s self-insurance division from 2000 until becoming CEO, was named last month as a new regional director for the Workers’ Compensation Research Institute in Cambridge, Mass., a nonprofit organization that researches workers’ compensation issues.

Daniel is currently assistant CEO of the AWCC, where he has worked since 1987. He was chairman of the commission until December 1996. Before joining the Workers’ Comp Commission, Daniel served on the Arkansas Public Service Commission and the Arkansas State Police Commission.

Senior Editor Mark Friedman contributed to this report.