Workers Compensation: Practical Tips for Dealing With NCCI s Split Point Rating Change November 2012 Lockton Companies A key factor in your workers compensation premium is your experience mod. The e-mod formula, developed by the National Council on Compensation Insurance, predicts how likely you are to have a loss in the future. It takes both frequency (the number of claims, although only the dollar amount of claims are used) and severity (claims above a certain dollar amount) of prior losses into account, with greater weight being given for frequency of claims rather than severity of claims. Insurance carriers use these experience mods to determine your workers compensation premium. Kim Brown Vice President Senior Claims Consultant 816.960.9248 kzbrown@lockton.com Larry Poague Assistant Vice President Senior Loss Control Consultant 816.960.9132 lpoague@lockton.com Susan Reese P&C Coverage Trainer Associate Development 816.960.9565 sreese@lockton.com NCCI has announced a change in the way experience mods are calculated beginning January 1, 2013. All NCCI states, and a few with independent bureaus, will be affected. The changes are: Increasing the split point amount from $5,000 to $15,000, beginning with $10,000 in 2013, $13,500 in 2014, and $15,000 in 2015; after that, the split point will be automatically increased to reflect current inflation adjustments. Adjusting the D-ratios so they are in line with the new split point. Changing the maximum modification formula so the maximum mod is never below 1.10. L O C K T O N C O M P A N I E S
The purpose of the split point is to separate the portion of each actual claim that reflects frequency, leaving the balance to reflect severity (with only a portion of the severity loss dollars being used in the formula). The current $5,000 split point is no longer actuarially effective in separating frequency from severity because the average cost of a workers compensation claim has tripled since the last split point change, which occurred more than 20 years ago. NCCI has implemented the split point change to more accurately divide losses between frequency and severity. The D-ratio is a factor that separates frequency from severity on the expected loss side; if the split point is being changed on the actual losses, the D-ratio has to be similarly adjusted for expected losses. What is the Impact of the Split Point Change? The distribution of differences between experience mods effective in 2012 and those effective in 2013, based solely on the split point and D-ratio changes, is estimated by NCCI as follows: Percentage of Risks Difference in Experience Mod 0% -.10 or more 8.1% -.10 to -.05 38.3% -.05 to -.02 35.8% -.02 to +.02 4.3% +.02 to +.05 6.5% +.05 to +.10 7.0% +.10 or more The largest amount of risks fall into the -.05 to +.02 range (74.1 percent). However, the percentage of risks with the potential for mods to increase by more than +.02 is 17.8 percent and this represents a significant exposure. There is no cap on how much an individual employer s experience mod can increase based on this change. Status of the Split Point Changes NCCI has published the new rates and D-ratios for about half of the states with effective dates of 01/01/13, and hopefully the rest will be published in the next few weeks. For states that have not yet been published and states accepting the change after 01/01/13, it is almost impossible to accurately determine what the effect of the split point/d-ratio changes will have for any particular company. Since the majority of states will accept the new filing in January, we should see the first 01/01/13 mods beginning in October of 2012 (NCCI usually promulgates mods about 3 to 4 months prior to inception). There may be a delay this year because of the new split point/d-ratios. 2
October 2012 Lockton Companies Split Point Changes Filings by State State NCCI State? Non-NCCI Monopolistic Split Point Filing New Rating Notes Effective Date Approved Data Published AL 03/01/13 AK 01/01/13 AZ 01/01/13 AR 07/01/13 CA CA accepted previously CO 01/01/13 CT 01/01/13 DC 11/01/13 DE FL 01/01/13 GA 03/01/13 HI 01/01/13 ID 01/01/13 IL 01/01/13 IN 01/01/13 Uses NCCI for ratemaking and most rules IA 01/01/13 KS 01/01/13 KY 10/01/13 LA 05/01/13 ME 01/01/13 MD 01/01/13 MA TBD Independent rating bureau that follows NCCI MI 01/01/13 Split point of $10,000 included. MN 01/01/13 MS 03/01/13 MO 01/01/13 Split point of $7,500 01/01/13, then $10,000 01/01/14, then $13,500 01/01/15. MT 07/01/13 NE 02/01/13 NV 03/01/13 NH 01/01/13 NJ NM 01/01/13 $10,000 split point included NY 10/01/13 Effective date is tentative subject to regulatory approval NC 04/01/13 ND OH OK 01/01/13 OR 01/01/13 PA RI 06/01/13 SC 07/01/13 SD 07/01/13 TN 03/01/13 T UT 12/01/13 VT 04/01/13 VA 04/01/13 WA WV 11/01/13 WI 10/01/13 Follows NCCI WY Published 12 states as of 10/23/12 Waiting for 1/1/13 rates to be published 9 states as of 10/23/12 Waiting for 3/1/13 rates to be published 5 states as of 10/23/12 Waiting for all other rates to be published 15 states as of 10/23/12 3
Experience Modification and Effective Risk Control Efforts Often companies will use the experience modifier as a measurement or benchmark of the success of their workers compensation program. However, this is a severely lagging indication of the current condition of their program. There are many factors that can affect the claims driving the modifier long after an incident has occurred. While the experience modifier should not be ignored, it should not be the sole measurement for success. Instead, place additional leading and lagging indicators in line to drive the long-term success along with experience modification analysis. Risk Control Efforts: 1. Review Employee Selection and Training Programs. Effective employee selection and training is a critical function for any successful company. Less experienced workers account for a disproportionately large portion of lost time claims, according to loss data reported to the U.S. Bureau of Labor Statistics, as interpreted by NCCI and carrier data. 2. Invest in Health Risk efforts. Overexertion and musculoskeletal disorders are some of the highest cost drivers. These injuries, when experienced with comorbidities, take longer to recover and on average are more costly. Additionally, many comorbidities may influence the initial cause of the claim. 3. Identify the drivers of Indemnity or Loss-Time Claims. These claims traditionally have a higher price and are calculated at a higher percentage for the experience modifier. Reductions will eventually result in a reduced modifier. Direct limited loss prevention efforts in these areas first to ensure the strongest results. 4. Monitor open claims until they are closed. Do not assume that your involvement in a claim is over after you report it. You will need to stay in contact with the adjuster to ensure the right things are happening to bring the claim to closure. Note that in some states, injured workers can be entitled to lifetime medical benefits related to their work injury. Know what is going on with your claims to be able to assist in getting claims closed as quickly as possible. Enlist your broker to help you bring claims to resolution. 4
October 2012 Lockton Companies 5. Ensure robust transitional duty programs are in place. A recent RIMS survey defined a successful transitional duty program as containing a few key elements: A. Written postinjury response plan with clear communication and expectations for all departments/locations. B. Control of communication between employee, employer and physician. Advise employees at time of hire that your company has a robust return-to-work program and every effort will be made to return them to work if they sustain a work injury. C. Program that focuses on returning a majority of employees back to work very quickly. D. Visits to medical offices used to establish a relationship with treating physicians. Medical offices should also be invited to visit the workplace. E. Ensure a positive relationship remains with the employee and ensure treatment is being followed. Advise the employee that he or she is to provide you with a disability/workability slip after every appointment. Immediately provide a copy of that report to the claim adjuster. F. Look at a human capital commitment to this process. It has been determined and proven that a claims cost consultant or a dedicated company person can greatly impact the results and success of these efforts. Some companies have simply found supervisor compliance with transitional duty increased when they agreed to pay transitional duty wages out of a workers compensation fund and, alternatively, charge employee wages to the home department if transitional duty was not accommodated. Departments that truly could not provide light duty could be paired with another department that has more flexibility so that accommodations could be provided. 6. Implement cost allocation program. The key is that, What gets measured, gets done! Employers with chargeback systems understand the need to bring accountability down to the facility level. Then, the facility distributes that accountability down even further. Localization ensures the personnel closest to the employee are brought into the loop. 5
10 KEY POINTS ABOUT EPERIENCE MODS 1. Frequency has much more weight in the experience rating formula than Severity. We can more accurately predict the number and gross value of claims a client is going to have based on its historical loss experience; the severity of individual claims is much less predictable and less statistically important because the ultimate size of any given claim is based on chance. The more claims a risk has, the more likely it is that some of those claims could develop into large losses. Only loss dollars are used in the e-mod formula claims with no payment, or even the number of claims a client has, do not matter. Only a small portion of large losses are even used in the e-mod formula. 2. NCCI (and most non-ncci states) use audited payroll and loss data provided by the carriers for every client for every policy year for ten years (longer for retrospectively rated policies), valued at six months prior to the inception of the next experience mod. It is most beneficial to review losses approximately three months after policy inception for the next year s renewal experience mod to see if any open claims can be closed or reduced before the six-month reporting time frame. 3. Once loss data has been reported to NCCI, NCCI will not revise an experience mod to incorporate recently reduced or closed claims. Simply having a loss close at a lower amount than was reserved will not affect the experience mod. Any changes to claims after the six-month reporting mark will not take effect until the next e-mod is promulgated the following year. The exceptions to this rule (when NCCI will reissue a mod): A. Because of revision of payroll or loss data due to a clerical error. B. A third party over recovery has been completed (note that the loss will be reduced by the amount of the recovery, less expenses incurred in obtaining the recovery. C. In a liability over case, no change is made in the loss valuation used in the calculation of the current experience modification. At the next valuation date, the calculation will include the settlement amount plus any allocated claim adjustment expense incurred in defending such claims. It is important to note that third party and liability over claims take many years to settle; it is likely that the experience period that includes these losses has already dropped off of the experience mod and will end up having no effect whatsoever. 4. Thirty percent of all Medicalonly claims (injury code 6) are used in the experience mod calculation based on the NCCI Experience Rating Adjustment rule (ERA); the other 70 percent of Medical-only claims is discarded. This rule applies in all NCCI states except AK, CO, GA, LA, MA, and OR (GA has accepted ERA effective 03/01/13). 5. About two-thirds of NCCI states are Gross reporting when it comes to small and large deductibles meaning that the whole claim amount gets reported to NCCI without regard to the deductible. The remaining states are Net reporting, meaning that only the claim amount over and above the deductible is reported to NCCI. This affects the experience mod by keeping full losses for an insured in the calculation, so the experience mod (for most states) is the same whether there is a deductible or not. 6. Important facts about the NCCI experience mod worksheet: A. The portion of the worksheet that contains each state for each policy year is split right down the middle the left-hand side applies to Expected losses, and the right-hand side 6
October 2012 Lockton Companies applies to Actual losses. B. NCCI shows actual loss dollars on the worksheet, even if the losses are limited by the NCCI Experience Rating Adjustment rule (ERA) or the State Accident Limitations. C. The totals of all the columns on both the expected side and the actual side include the NCCI Experience Rating Adjustment rule (ERA) and/or the State Accident Limitations. D. In the formula itself, the Primary section is about Frequency, and the Excess section is about Severity. Just comparing actual to expected losses in these two sections can give you a quick insight into whether Frequency or Severity claims are driving the mod. 7. Ballast value exists to move all mods closer to 1.00. The ballast value is the same large number added to the top (numerator) and bottom (denominator) of the experience mod formula, is based on expected losses, and gets larger as expected losses increase. It matters the most in small accounts, which wouldn t necessarily generate enough data on their own to form an accurate measure of their historical losses vs. their future losses to be credible. 8. It is possible to have NCCI calculate an experience mod if the client is self-insured or insured by a non-member carrier (for example, a competitive state fund). Form ERM-6 is used to report payroll and loss data for the experience period. This is useful if a client wants to know what its NCCI experience would be if it went back into the insurance market after having been self-insured. It is important to note that the experience mod worksheet will have a disclaimer on it that NCCI relied on clientsupplied data rather than carriersupplied data, so the experience mod itself has not been verified. In addition, an ERM-6 would have to be filed each year for non-carrier data until it falls outside the experience period. 9. Know what the minimum experience mod is for each account, each year. The minimum experience mod is what the mod would have been had there been no losses. This is what the client should be trying to attain. We can also identify the controllable mod, which is the difference between the current mod and the minimum mod; it represents the portion of the experience mod that the insured can change by decreasing their losses. Knowing these numbers may help your insured identify how much they could save by implementing or improving their loss control efforts. 10. Combination of entities is extremely important in experience rating. NCCI requires majority ownership (more than 50 percent) for entities to be combined into one experience mod. NCCI also requires that any changes in ownership be reported to NCCI via form ERM-14 within 90 days of the date of change. NCCI has the last word as to whether entities are to be combined or separated based on ownership percentage. In the event of a change in ownership, experience will be transferred to the purchasing entity and deleted from the selling entity. The goal of NCCI is to assure that all experience be used in an experience mod calculation, whether for an existing entity or a succeeding entity when combining or separating entities. It is very rare that experience of an entity is discarded which generally only happens when an entity goes out of business or a business is sold and the operations will not be continued. If there are changes or corrections to be made, prepare a test modifier to determine if the change is beneficial to the insured. If you have a question about your company s e-mod, please contact your Lockton account team. 7
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