Workers Compensation Experience Modification Rate: The Split Point Threat August 15, 2014

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1 Workers Compensation Experience Modification Rate: The Split Point Threat August 15, 2014 John Sweeney Vice President Marsh & McLennan Agency LLC

2 Split Point Threat The purpose of the presentation is to communicate a change that will impact 40% of all businesses. The change will significantly and negatively impact 120,000 small businesses meeting the definition established by the Small Business Administration. At the conclusion of the presentation you will understand The purpose of NCCI s Workers Compensation Experience Modification Rate (EMR) and its Formula What the split point change will do to impact your EMR Implications if the EMR is negatively impacted Actions you can take to forecast, budget and manage results 1

3 Purpose What is the purpose of the EMR? Adjustment of annual Workers Compensation premium based on previous loss experience. Contemplates the past three FULL years of losses and audited payrolls (experience period). Measurement of the frequency of losses during the experience period. Comparative measurement by occupation NOT A MEASURE of RISK MANAGEMENT and SAFE WORKPLACE PRACTICES 2

4 Formula The Formula primarily used by NCCI is: A = weight factor G = ballast I = actual primary losses H = actual incurred losses F = actual excess losses (H I) E = expected primary losses D = expected incurred losses C = expected excess losses (D E) I+(Cx(1 (1 A) + G) + (A x F) E + (C x (1 A) + G) + (A X C) In the simplest of terms it is Actual Losses divided by Expected Losses Although statistical values vary by State, all States use the same methodology 3

5 Formula The formula is broken down into three categories: Primary Losses Actual Primary Losses (experience) Expected Primary Losses (determined by actuarial adjustment to payroll Stabilizing Values Weighting Factor and Ballast Mysterious and unpublished actuarial adjustment Ratable Excess Weighting factor multiplied by excess losses In the formula Actual Primary Losses are weighted about 2 times as much as Ratable Excess Losses. Primary Losses are FULLY WEIGHTED. What proportion of loss allocated to Actual Primary Losses is called the SPLIT POINT. 4

6 Split Point Split Point has not changed in over twenty years For the past twenty years the split point has been $5,000 Claim Costs have more than tripled in this period. The percentage of claim cost that goes into the formula as fully weighted is much smaller than 20 years ago. The conclusion is to change the Split Point to return the integrity of the EMR to that of 20 years ago. NCCI, and non-ncci Jurisdictions actuarially agree and have done the following: Beginning on or after January 1, 2013 a three year phase in of the change will occur increase from $5,000 to $10, increase from $10,000 to $13, increase from $13,500 to $15,000 5

7 Negative Impact If you have NO LOSSES in the Experience Period, you will NOT be impacted If you have had NO LOSSES GREATER THAN $5,000 in the Experience Period, you will NOT be impacted If you never have a loss or never have a loss greater than $5,000 in the future, you will NOT be impacted. If you have had losses greater than $5,000 or believe there is a possibility of future losses greater than $5,000, YOU WILL BE IMPACTED. 6

8 Negative Impact Consequences of an increase in EMR as a result in: Immediate Financial Impact as a result of increased Workers Compensation Premiums Continued Financial Impact for a minimum of 3 years as a result of increased Workers Compensation Premiums Uncompetitive do to higher direct costs. If modification moves over 1.00, potential loss of bidding eligibility with some customers Increased administrative activity to address situation adding to G&A costs Decreased attractiveness to insurance carriers in the Workers Compensation Insurance marketplace Requires a call for action What can you do? 7

9 Forecast, Budget and Manage FORECAST Loss data is captured 6 months before the Anniversary of the EMR rating (your Workers Compensation renewal date) - 7 Months before your EMR Anniversary conduct a claim review with your Insurance Professional and/or Insurance Carrier of all claims. - Focus on reserve levels appropriate? - Close or settle claims were possible. - Continue periodically in perpetuity. 6 Months before your EMR Anniversary ask your Insurance Professional to do a Test EMR. You and your Insurance Professional should audit the EMR Worksheet - On average 1 out of 5 calculations have some level of error. 8

10 Forecast, Budget and Manage BUDGET Using the test audit result - Include the result in your financial budget - Build added costs into the cost of services Consider the added costs of Loss Prevention and Claim Mitigation in your financial planning - Aggressively seek advice and counsel on means and methods Repeat the forecast phase annually or at critical operational milestones 9

11 Forecast, Budget and Manage MANAGE Evaluate and improve hiring practices Provide comprehensive job descriptions including physical demands Establish zero drug and alcohol tolerances Comprehensive new hire orientation with sign off on corporate safety, health and policies Adopt a mission of accident reduction and a overall mission of Zero Accidents Establish accountability for Safety at all levels Foster and reinforce a culture of safety at all levels in the organization Identify Safety Leaders and ensure proper training i Stay VIGILANT on losses and accidents Review, Measure and Forecast continually 10

12 Final Thoughts Bid Eligibility & Attractiveness of Workers Compensation to Carriers If you find your EMR is or will be greater than 1.00 then: - Prepare a portfolio of your Risk Management and Safety Protocols - Gather other Safety Metrics such as OSHA logs, Risk Control Letters from Carriers, etc - Describe your loss experience and demonstrate how it is a matter of circumstance, which is unrelated or out of your control - Provide calculations (EMR Tests) that show your EMR if loss(es) did not occur The EMR is not a pure measure of effective risk management and your safety program, but it has inappropriately grown to be a simplistic threshold BE ACTIVE with Associations, CO s, KO s and your customers to educate and win their understanding, hearts and minds. 11

13 Split Point Threat Questions? 12

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