New NCCI methodology will change premium calculations

Companies 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, companies with a handle on their claims will benefit from NCCI Holdings Inc.’s change in Experience Modifier methodology offering aggressive companies a way to be rewarded for doing the right thing.

The Boca Raton, Fla.-based National Council on Compensation Insurance helps 38 states set their workers comp rates. These experience modifier changes begin on Jan. 1, 2013 marking the first time in two decades the rating organization has updated their “split point” standard. Ostensibly this change has been designed to more accurately reflect individual company’ loss frequency and severity histories taking note that every NCCI state has approved this split-point change.

As a refresher, a Companies Experience Modifier directly affects the bottom line premium cost as underwriters rely on this Modifier to adjust premiums using credits or debits. This change by NCCI will assuredly have a “material” impact on company premiums for better or worse depending on how successful each company is with their loss prevention and/or cost containment processes. A company simply crossing their fingers hoping good things will happen or believing their carrier will look out for their best claim handling interest…is both naïve and a claim-cost disaster waiting to happen.

NCCI’s calculation change calls for increasing the rating split point from its current $5,000 to $10,000 in 2013. In 2014 it will increase to $13,500, and in 2015 it will move to $15,000. Additionally in future years, it will be indexed for claim-expense inflation, which will further drive up the charges all applicable to a modifier calculation. To further explain – a workers comp loss (claim) up to the split point is known as the “primary loss” reflecting claim frequency. The amount of loss above the split point is referred as the “excess loss” reflecting 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.

As they say “the devil is in the details” meaning on the surface this change appears to impact loss frequency over loss severity however the math will not work considering the goal of the somewhat clandestine triangulation based partnership between NCCI and the carriers who fund them, is to drive up insurer revenues to off set continually escalating (claim) medical costs, which are draining carrier profits. To raise carrier revenues using claim frequency as the expressed tactic why not simply adjust the weighting formula leaving the split point dollar amount at $5,000 as it has been for many years? Why even raise the split point dollar amounts directly affecting claim severity other than to drive up high dollar claims tracked in the traditional pay-back system where a claim remains subject to the modifier formula for the most distant of the past four years? The largest dollar increases in claim costs subject to this split point change will be lost time costly claims where medical costs continue to spiral out of control.

In summary, claim frequency will have a marginal impact on a Modifier as it always has; but raising much needed carrier revenue via the modifier system will come from the high dollar claims now enhanced by tripling the split point dollar levels over the next three years. Here the math works well by generating lower modifiers for those companies keeping their losses in check using effective pre-hire screening and post claim management strategies while decimating companies choosing to keep their head in the sand or crossing their fingers every day regarding a serious need to establish effective screening & hiring policies, aggressive post claim management systems, and simple yet effective safety policies. Will you be a winner or a loser in 2013?