NCCI EXPERIENCE RATING UPDATE
Fall 2012 – Original Publication Here : https://www.ncci.com/documents/exp_rating_update-2012.pdf
Experience Rating Plan Changes in 2013
NCCI’s Experience Rating Plan (Plan) has been in use since the 1940s. In its long history, the Plan formula has not changed very often. Although it is reviewed by NCCI every one to two years, the last time a formula change occurred was in 1998.
Although formula changes have been infrequent, the Plan has continued to achieve its desired result—to produce experience modifications that reflect the true relative experience of insureds in the Plan.
The current experience rating split point contained in the Plan ($5,000) has not changed in more than 20 years; however, the average cost of a claim has tripled since the last split point update. This means that less weight is being given to each employer’s actual experience. Over time, modifications have drifted closer to a unity (1.00) modification.
NCCI determined that an increase in the experience rating split point was needed to restore the equity of the Plan. After extensive research and analysis, NCCI submitted the following proposed changes to the Plan in July 2011 to state insurance departments where it is the licensed rating/advisory organization:
An increase to the primary/excess split point to an inflation-adjusted $15,000 over a three-year transition period and an increase to this amount thereafter on an annual basis using a countrywide inflation index as follows:
—Year One—initially increase the primary/excess split point to $10,000, to become effective concurrently with each state’s approved rate/loss cost filing on or after January 1, 2013.
—Year Two—increase the primary/ excess split point to $13,500, concurrently with each state’s approved rate/loss cost filing.
—Year Three (and annually thereafter, concurrent with each state’s approved rate/loss cost filing)— increase the primary/excess split point to the indexed value for $15,000. The index would estimate annual countrywide severity changes between the average loss date for experience rating modifications in the initial year of implementation and the effective year.
A revision to the maximum debit modification formula. The proposed formula:
—Implements a hard minimum of 1.10 rather than 1.00.
—More fully accounts for differences across states in claim severities.
To date, all NCCI states have approved changes to the Plan to become effective with their rate/loss cost filing on or after January 1, 2013 and subsequent rate/loss cost filings as stated above.
* *Note that Missouri has approved a four-year transition rather than a three-year transition.
Overall changes in experience modifications will be revenue-neutral. There will be changes for individual employer’s experience modifications, but the average experience modification across all employers will remain the same. In general, experience credits will become larger credits, and experience debits will become larger debits.
NCCI currently has the following educational resources to further explain these changes available on ncci.com:
• ABCs of Experience Rating (downloadable brochure)
• How to Understand Your Experience Rating Worksheet— Webinar on Demand
• Understanding the Filed Experience Rating Plan Changes—Item E-1402—Webinar on Demand (includes several hypothetical examples of how the split point change could impact employers)
• Introduction to Proposed Experience Rating Plan Changes—Item E-1402—Webinar on Demand
• FAQs on NCCI’s Experience Rating Plan Changes
What Affects the Mod?
Changes to NCCI’s Experience Rating Plan Manual for Workers Compensation and Employers Liability Insurance (Plan), currently under way, may prompt these questions:
• What affects the employer’s experience rating modification (mod)?
• Why did the mod change?
There are many factors that can affect the mod, but they generally fall into one of three categories:
1. Changes in the Employer’s Experience
2. Changes in the Average Benchmark Industry Experience
3. Changes in the Plan
1. Changes in the Employer’s Experience
Because employers are generally aware of their own claim experience, this is the most widely recognized cause of a change in an employer’s mod.
• A mod may increase if the employers incur new claims, especially costly claims
• A mod may decrease if the oldest year rolling off the experience rating period has relatively poor claim experience and is replaced with a new year with relatively good experience
In either scenario above, the impact on the mod will depend on the employer’s size, the number and sizes of claims, and other factors.
2. Changes in the Average Benchmark Industry Experience
Experience rating compares an employer’s experience to the industry’s average, or benchmark, experience. Each year, the benchmark itself can change, which can, in turn, change an employer’s mod. Changes in the industry’s benchmark happen because:
• The experience period changes each year. A three-year experience period is used for the industry benchmark that corresponds to the time period used in each employer’s mod. Each year, the oldest year rolls off and a new year’s information is added. In addition, the middle two years change as they mature.
• Claim frequency changes over time. In general, the industry has seen a decline in claim frequency over the past two decades. If an employer’s claim frequency has not declined along with the rest of the industry, its mod may increase even if its experience did not change.
• Average claim costs change over time. The average cost of a claim generally goes up over time. The increased costs, though, are partially offset by increases in payroll. These factors vary significantly by state and over time.
• The overall average statewide mod can change over time. The overall average mod, which averages all employers in a state, is not necessarily 1.00, and it changes slightly over time. These shifts can result from targeted changes, such as when the average statewide mod drifts too far from 1.00, or from unforeseen changes in claim frequency or average costs.
All of the factors above are reflected in updates to the experience rating values that are included in NCCI’s annual loss cost filing.
3. Changes in the Plan
Finally, changes to the Plan itself may impact an employer’s mod. Although these changes are relatively infrequent, NCCI continually monitors the performance of the Plan. The last change impacting experience rating was the filing to increase the current $5,000 primary/ excess split point.
For more details, there is a suite of experience rating Webinars on Demand—located on ncci.com— that cover the topics reviewed. The webinars can each be viewed in 30 minutes or less.
The Power of Preliminary Mods
Experience rating values—which are subject to regulatory approval—are updated annually through a rate or loss cost filing in each NCCI state. Key parts of this update include values that vary by state and classification representing the expected loss benchmarks to which employers will be compared. After NCCI has submitted its annual filing to state insurance departments, it may be several months before an approval is obtained.
At the same time, experience rating mods are typically issued months in advance of a policy effective date. If regulatory approval of the experience rating values is still pending, a preliminary mod will be issued. The preliminary mod uses the employer’s latest claims history, coupled with the currently approved experience rating values from the prior year. Once NCCI receives regulatory approval, final mods using the newly approved values are released.
1. Do preliminary mods provide a good estimate of the final mods?
2. Would using last year’s mod be a better alternative than our current calculation of preliminary mods?
To answer the first question, NCCI staff compared the final mods to the preliminary mods for 2009. The results are shown in Exhibit 1. Each point on the chart represents a policy’s preliminary mod (horizontal axis) and its final mod (vertical axis).
If the preliminary mod were exactly equal to the final mod, the result would be displayed on this exhibit as a point on a 45-degree diagonal line. Exhibit 1 displays a similar result, indicating that the preliminary mods are very close to the final mod values.
For insight into the second question, 2009 final mods were compared to the prior year’s mod from 2008. Those results are plotted in Exhibit 2, which demonstrates that the 2009 mods are in many cases considerably different from the 2008 mods.
The results of our review indicate that preliminary mods, as currently calculated, generally provide excellent estimates of the final mods and are significantly better than simply applying the prior year’s mod.
New Experience Rating Adjustment (ERA) Regulatory Approvals
NCCI has gained regulatory approval to apply ERA in three additional states in 2013. The newest states to adopt the national ERA rules are:
• Alaska—starting with experience modifications effective 1/1/13
• Georgia—starting with experience modifications effective 3/1/13
• Louisiana—starting with experience modifications effective 5/1/13
Item E-1339—ERA was filed nationally in 1997. ERA modifies the experience rating formula by using a 30% weighting factor for medical-only claims. This change reduces the impact of these claims on the experience rating modification factor. As a result, ERA is intended to decrease the financial incentive for employers to pay medical-only claims without reporting them to the carrier.
The experience rating values are adjusted to reflect the removal of 70% of medical-only claims. Because both the expected losses and the actual losses used in the experience rating formula are reduced proportionately, there is no significant impact on aggregate premium. The impact on individual risks will vary based on the amount of their medical-only losses and whether or not they have chosen a deductible.
ERA is applied in most states that participate in NCCI’s Experience Rating Plan Manual for Workers Compensation and Employers Liability Insurance (Plan) on an interstate basis. The following 34 states have approved the ERA item filing prior to 2012: Alabama, Arizona, Arkansas, Connecticut, District of Columbia, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Mississipi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Virginia, Vermont, West Virginia, and Wisconsin.
ERA does not apply in the following five states that participate in the Plan on an interstate basis: Colorado, Massachusetts, New York, Oregon, and Texas.
Refreshing Our Look for a Consistent, Authentic Image
The National Council on Compensation Insurance (NCCI) has served the workers compensation industry since 1923. We are proud of our history, but we are always looking to the future. From an image perspective, we strive to be relevant, fresh, consistent, and authentic. We are currently in the process of updating our corporate look and feel with an eye toward better reflecting these attributes.
Historically, NCCI has used several logos. Two of the most visible ones are affectionately known as the “football” or “bug” logo (below left) and the “swoosh” logo (below right).
Going forward, with few exceptions, you will see NCCI represented by the swoosh logo. This change will be gradual but it will embrace all of our materials and virtually everywhere NCCI has a corporate presence.
As these logo and design changes unfold, please be assured that we are the same NCCI. Our core philosophy, mission, values, corporate structure, services, and commitment to quality are unchanged. The essence of NCCI will remain the same in every way.
Changes to NCCI’s Primary-Excess Split Point-20121211 1605-1 ; Webinar Held on December 11, 2012, 11:31 am New York Time – 23 mins
View this Recent Webinar entitled “Changes to NCCI’s Primary-Excess Split Point”
National Insurance Application Systems, Inc. has only one mission – to create as many measurable differentiators as possible for our member agents – resulting in higher policy counts, profits, closing ratios and spectacular growth.
AcuComp® improves loss ratios an average of 30 percent and permanently lowers experience modifiers together with premiums an average of 27 percent over time.
National Insurance Application Systems, Inc.
5730 Corporate Way, Suite 230
West Palm Beach, FL 33407
Toll Free: 800-883-5600