Relation Blog

Workers’ Compensation Bulletin: New Computation Rules in California for Experience Modifications Coming January 1, 2017

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For the first time since 2010, the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) is changing the formula for calculating experience modifications, effective January 1, 2017. This could impact your Workers’ Compensation premiums.

What is an Experience Modification?

Experience rating is a method that compares an employer to other companies in its industry class based on their historical claims experience. It is expressed as a percentage—called an experience modification factor, or “Ex Mod”—and utilizes past loss experience to help predict future losses. The Ex Mod is applied against premium and either penalizes a company (if its loss experience is worse than the industry average) or rewards it (if its loss experience is better than the industry average). Experience modifications create a powerful incentive for employers to prevent claims and control claims costs.

How is it Currently Calculated?

The experience modification rating process uses what is known as a split point of $7,000. An insured’s actual losses below $7,000 are considered primary and go into the formula at full value. Losses above the split point (to a maximum of $175,000) are considered excess losses and have less weight in the formula. Dividing losses into primary and excess components gives greater weight to loss frequency, which is typically more controllable by the employer, than to loss severity, which is typically caused by less predictable catastrophic claims. The current formula, in effect since 2010, is a one-size-fits-all approach for all employers regardless of company size.

How will it be Calculated Starting January 1, 2017?

WCIRB found that the pattern of claim frequency and severity in California has changed over time, and the single $7,000 fixed split point was “no longer producing optimal results.” On January 1, 2017 it will be implementing a variable split point methodology where, depending on the size of the employer, there will be 94 different primary loss split points between $7,000 and $75,000. Losses above an insured’s split point will no longer be used in the experience modification calculation. The overall effect of the change will be to give greater weight to claims frequency while claims severity, although still a factor, will be limited at no more than $75,000.

What is the Potential Impact?

The WCIRB states: “While the variable split point plan represents a fundamental change in the values used to calculate experience modifications, there is no expectation that experience modifications for California employers as a whole (emphasis added) will change.” However, each individual insured’s experience modification will be dependent not only on its losses, but also on its size. Under the new formula, insureds whose split points increase above the current $7,000 level will have a greater amount of their losses designated as primary and will be more negatively affected by frequency than severity.  This in turn could lead to an increase in their Ex Mod. On the positive side, the $75,000 excess cut off limits the impact of catastrophic losses which should especially benefit smaller employers.