Modified Ex-Mods Penalize Poor Risks

Business Insurance – Roberto Ceniceros

July 16, 2012

Employers with poor loss histories will pay even more for their workers comp coverage starting next year as most states change the way premiums are calculated. But policyholders with proven risk management practices and safety programs that reduce workplace injuries will benefit from NCCI Holdings Inc.'s change in the methodology determining an individual employer's experience modification factor, experts say. The Boca Raton, Fla.-based National Council on Compensation Insurance helps 38 states set their workers comp rates. The ex-mod changes begin with Jan. 1, 2013, policy purchases or renewals. It marks the first time in two decades that the rating organization has updated the “split point” used in its experience rating plan to more accurately reflect individual employer loss frequency and severity. An employer's ex-mod factor has a significant affect on employer expenses because underwriters rely on them to adjust premiums with credits or debits. Every NCCI state has approved the split-point adjustment, said Peter Burton, NCCI's senior division executive for state relations. NCCI's change could have a “material” impact on individual employers' premiums, said Pamela F. Ferrandino, casualty practice leader, placement for Willis North America Inc. in New York. “What we will see this do is really reward companies that have worked hard to improve and maintain their loss profile,” Ms. Ferrandino said. “Those risks that really have better-than-average experience benefit from being better than average.” But employers “with bad experience are going to see a higher apportionment of debits” added to their pricing, while those with a good loss history will see more credits, said Bill Carney, vp and chief underwriting officer at Accident Fund Holdings Inc. in Lansing, Mich. “So it really underscores the need for employers to invest in loss control, invest in safety, invest in their people and have a very strong return-to-work program,” Mr. Carney said. “That is regardless of (employer) premium size.”But midsize employers with guaranteed-cost insurance policies will see a greater impact from the split-point change than will larger employers, Ms. Ferrandino said. That is because larger employers are more likely to employ risk managers and safety personnel, and they tend to maintain large deductibles, sources said. But even larger employers will have to beef up their pre-loss safety programs and solidify their post-loss practices, such as modified-duty return-to-work programs to get the best insurance pricing, Mr. Carney said. “If they were doing a good job before, they need to do an even better job now if they are having problems with their loss experience,” Mr. Carney said. “If you are a large employer and (already) have a high-debit mod, you are probably going to have a higher debit mod after these changes. ”There are other implications as well. Large construction project owners, for example, often choose contractors based in part on the builder's ex-mod, which likely will change. And NCCI's ex-mod change comes amid firming pricing for workers compensation coverage, which could accelerate some employers' shift from guaranteed-cost programs to buying loss-sensitive policies in order to pay lower premiums up front, sources say. NCCI's ex-mod change calls for increasing the experience rating split point from its current $5,000 to $10,000 in 2013. It will increase to $13,500 in 2014 and to $15,000 in 2015. In future years, it will be indexed for claim-expense inflation. A workers comp loss up to the split point is known as the “primary loss” and reflects frequency of such claims, according to NCCI documents. The amount of loss above the split point is referred as the “excess loss” and reflects severity.“Under this split-rating method, actual primary losses are given full weight in the experience rating formula while actual excess losses only receive partial weight,” according to NCCI. The biggest impact, therefore, will be on pricing, particularly for employers experiencing high-frequency, low-severity workers comp claims in the states where NCCI helps determine rates, said Richard Pankhurst, a director in the insurance advisory practice at PricewaterhouseCoopers L.L.P. in Austin, Texas.Mr. Burton agreed. “It is a plan that is heavily leveraged on frequency of loss vs. severity of loss because those are the types of injuries that get controlled by employers through their safety programs,” he said. Yet employers should not lose sight of mitigating high-severity losses, Mr. Pankhurst advised. The split-point change is needed because the average claim cost has increased threefold since the last update, rendering the current experience rating plan less sensitive to reflecting an individual employer's risk experience, NCCI said. For insurers, the impact will be revenue-neutral because they will collect more premium from employers with greater losses and less from those with fewer losses, said Insurance Information Institute Inc. President Robert Hartwig. But insurers will benefit as accounts will have greater incentive to improve their loss experience, making them more profitable, Mr. Hartwig said. Employees also will benefit from workplaces that now have a greater incentive to reduce injuries, he added.

As I wrote in a previous blog, the new NCCI experience rating split point change will increase premiums for employers with debit experience mods. Safety programs will help employers reduce premiums in the long run.  However, in many cases, results are hard to measure. Furthermore, as I have repeatedly pointed out, safety programs will not help with the effects of the 2013, 2014, and 2015 split point change.  This is further explained on the experience rating split point change page on our website.  On the other hand, workers compensation premium recovery is the only solution that offers immediate results that will impact the 2013, 2014, and 2015 experience mods. The best part about workers compensation refunds is that there are no out of pocket expenses with our no-recovery no-fee program.