Workers Compensation: NCCI Changes Primary-Excess Split Point for 2013
The National Council on Compensation Insurance recently announced a plan to change the experience rating formula for Workers compensation insurance. The primary-excess split point will be increased over a three year transition period. The first stage of the change will take effect on January 1, 2013.
What is it?
In the experience rating process, each loss is divided into primary and excess portions. Right now, the first $5,000 of every claim is allocated as a primary loss. Everything above $5,000 is considered an excess loss. So, for a claim of $20,000, $5,000 would be the primary loss and the remaining $15,000 would be considered excess losses.
The NCCI’s changes raise the split point from $5,000 to $15,000. Under the new guidelines, a $20,000 claim would have a primary loss of 15,000 and excess loss of $5,000. The last change was two decades ago; since then, the cost per workers comp claim has tripled, reducing the effectiveness of the current rating system. The goal is to improve the experience rating plan to more accurately fit the current claims environment and account for claim inflation.
Why does it matter?
This change is significant because underwriters rely on mod-factors as one of the components to determine a client’s premium. Primary losses are given full weight in the experience rating process; excess losses are evaluated at a reduced factor.
The basis for this is described as “severity follows frequency.” Primary losses are an indicator of frequency. An organization that experiences a repeated pattern of losses (higher frequency) is more likely to experience a severe loss in the future. The frequency of claims is weighted more than the severity. This is why primary losses affect the mod calculation more than excess losses do.
Here’s what it means for you.
How this change affects you depends on your prior loss history. If most of your losses are under $5,000, you are likely to see a decrease in your mod. If they exceed $5,000, you should prepare for an increase in your mod.