Changes to NCCI’s Primary-Excess Split Point-20121211 1605-1
December 11, 2012, 11:31 am New York Time – 23 mins
Title: NCCI Changes to the Primary Excess Split Point, December 2012
Webinar Speaker: Jennifer Reelitz, Q&A session with James B. Conant
“Back in 2011 NCCI began to announce changes to the experience rating plan. As early as the spring of 2011 we were hearing whispers of a change coming from NCCI. You can see this release as of August 2011. Again, they were saying that the change to the experience rating plan was occurring because during the last twenty years the average cost of a claim has tripled.
I’ve got a couple of essential questions that we want answered today. Number one, what is an experience rating split point? Again, when you hear ‘primary excess split point’, that’s a lot of words and we want to break it down for you. Number two, why is it changing? What exactly precipitated this change and of course, third, how is this change going to be rolled out? We know it is a three year transition plan, what exactly is that going to look like? Fourth, most importantly, how will this change affect my client? I know that that is the question on your mind. And that is the question that we’re going to endeavor to answer during these next few minutes together.
The first and most important question of course is what is the split point? The split point reflects frequency – primary and severity – excess losses. The split of actual incurred losses looks like this… The amount of the loss up to $5,000.00 is known as the primary loss which reflects frequency. The amount of the loss in excess of $5,000.00 is known as the excess loss which reflects severity. Under the split rating method, actual primary losses are given the full weight in the experience rating formula while actual excess losses only receive partial weight. In other words excess losses are discounted. An increase in primary losses means a greater amount of the loss will be given full weight in the formula. We know that this is not good news for clients that have large or severe losses.
Our second question, why is the split point changing? Again, the official stated reason from NCCI. ‘Since the last split point update occurred two decades ago, the average cost of a claim has tripled. Because of this, the portion of each claim that flows in to the experience rating formula at full value, the primary loss amount is much smaller than it was twenty years ago. The result is that the experience rating plan is giving less weight to each employer’s actual experience. Consequently the plan formula has become less responsive and individual risk experience modifications have gravitated towards the all-risk average over time’, of course the unity modifier. However, the unofficial reason we know is that essentially insurance carriers have been asking for this change. As of February 2012, Hartford Financial Services reported a 61% drop in net income largely due to losses in workers compensation. We know that this change is intended to be a ‘market correction’ for carriers who are losing revenue. We know that this is going to have an impact.
Our third question is, what is the transition plan, how will this change be rolled out? We know that the primary excess splint point is increasing from $5,000.00 to $15,000.00 in a tiered fashion over three years. In 2013 the splint point increases from $5,000.00 to $10,000.00. In 2014 the split point increases from $10,000.00 to $13,500.00. And in 2015, the split point increases from $13,500.00 to the full value of $15,000.00.
We know that this is being accepted state by state. Most states have approved this change as of January 1, 2013, but not all states. You can look here down the list alphabetically for your own state to see when the change has been accepted. And of course some have not approved it until late 2013. For example, Kentucky, October first; Louisiana, May first; Mississippi, March first; South Carolina, July first; Virginia, April first. So of course for you folks in theses state we are watching these changes, and making our mod reports accurate for the month that your state has approved these changes.
The bottom line to all of this is that over a three year period, the mod, the primary excess split point, the primary amount of losses included in the modifier will triple. The dollar for dollar value for claims will increase 300%. Again, we know the justification is that claims costs have tripled over the last twenty years, but again is the bottom line is that workers compensation will become more important than ever. This last point is a good thing for you. As a member agent with AcuComp, you are uniquely positioned to approach prospects as an expert in the area of workers compensation. Because of your relationship with AcuComp, you have a decisive advantage over the competition, because your agency is able to take a comp driven approach.
I want to show you examples, again, our fourth question, how will this change affect your clients? I’m going to endeavor to answer that question in the next three slides here. We took an actual real live example – an investment group whose 2012 mod is a 1.14. Now of course our ability to test this change in 2014 and 2015 is limited because rates have not yet been set for 2014 or 2015. What we did was, we did nothing accept change the amount of primary losses included. So in the first year, 2013, primary losses jumped from $5,000.00 to $10,000.00 and the mod goes from a 1.14 to a 1.25. And again the second year, changing nothing but the amount of primary losses included, not changing payroll or losses, and of course rates have not yet been set for 2014, the amount of primary losses increased to $13,500 causing the mod to increase to 1.32. In the final year 2015, the primary amount of losses has increased to $15,000.00 the mod winds up at a 1.35 from a 1.14.
Again, we don’t know exactly what’s going to happen, but we do know that this change will probably be something like what happened in California in January 2010. In January 2010 the state of California changed the split point. Primary losses included in the mod calculation increased from about $2000.00 to $7000.00, more than triple. This is exactly the same thing that is happening with NCCI, the tripling with the amount of primary losses. We know that for heavy loss industries such as transportation, construction, manufacturing, health care, this made an impact. For clients who already had bad mods, unfortunately their mods got worse.
Now for you all, if you want to demonstrate to the client whether or not this change will impact them, just show them their most recent mod worksheet. You can take a simple NCCI mod worksheet, and point out to them the actual incurred losses versus the actual primary losses helping them to understand that the first $5,000.00 of a loss is included as a primary and given full weight in the formula. You can go here to the right hand side and highlight any $5,000.00 amount. This will help the client understand that next year the amount included will not be $5,000.00 it will be $10,000.00. The good news for them is that you have partnered with an industry expert that has twenty years of experience helping insureds mitigate the effect of large losses on their modifier.
You all know that we are comp experts that we want to deliver to you and your clients comp driven results at unit stat which is midterm. You can take all of your clients a list of claims under audit, individual claims status reports that have been updated, a mod projection including the NCCI split point change. Any projection that we are doing for 2013 so long as it is in the month that your state has approved the changes will include the NCCI split point change along with some very slick new math modeling. It looks great and it is something that is very helpful when it comes to teaching your insureds about how their comp works. Then again at renewal, you can take them yet again a list of claims that are under audit and any new claims that have been added, the claims status reports on all open claims and of course celebrate any victories in terms of reserve reductions, the mod verification. Of course we check the mod to see if there are any errors, and all of the math models. You know that these are all available at Acucomp.com we want your clients to be receiving these and we want your agency to be using these.
You want to explain to your clients that AcuComp does two things to their mod. We look backward for any retrospective errors such as a clerical mistake like missing payroll. A subrogateable loss, where the carrier received recovery and your insured is owed recovery as well. Non-compensable or denied claims, where the carrier never had to pay on the claim but your client had to pay on the mod. In those three cases we are going to pursue revision on behalf of your client so that you can take a check back to a very happy insured. But folks, even more powerful than looking back for these errors such as clerical mistakes, subrogateable losses, and non-compensable claims; I would get used to saying those three things when talking to insureds. We look forward for reserve reductions and claims closures to help mitigate the impact of large losses on the modifier.
You want to explain to your clients very simply how a mod works. We know that a mod is the first three of the last four years of information with the most recent year, the lag year, excluded. That’s a good thing for your client. When a loss first happens, we don’t know how much it is going to wind up costing so it doesn’t hit their mod for almost 18 months. Now, the simplest version of a mod; a mod is total incurred losses over expected losses. It’s as easy as that. And we understand that reserves drive the modifier. If the expected losses are $100 dollars and you have $100 dollars of losses, you’ll have a mod of a 1.0. If you have double of what is expected for a company in your industry, your size, you will have a mod of 2.0. If you have half of what is expected for a company in your industry, you’ll have a mod of a .5. You want to explain to your clients that where AcuComp lives and breathes is in reducing open claim reserves; getting reserves reduced and claims closed in a timely fashion. Teach your clients about unit stat and their legal right to ask that reserves correlate to current claim information. With a nationwide track record of reducing reserves 30% on average over time, in a four year period that mod of a 1.0, could be a .7. That mod of a 2.0 could be a very welcome 1.4. And even that credit modified risk of a .5 could improve and become a credit mod of a .35. You want your clients to understand how their mod works and again, being with you, a partner of AcuComp is the best thing for them as the comp market changes.
If you would like a 2013 projection on a 2012 mod that has recently come out, what you would need to send to us is the 2012 experience mod worksheet. Again this is only going to be relevant for your November-December policies if you want to project out, again, we can do a projection at unit stat, so sorry I misspoke, it is for your clients who are having their November-December Unit Stat dates, we can do a 2013 projection. We need unit stat valued loss runs, we need the payroll audits for 2009, 2010 and 2011 which of course is the policy term being added in 2013. Folks, the reason we want you to be prepared for the NCCI split point change again it is going to have an impact on the heavy loss industries were going to see mods go up. I can’t emphasize enough, this is an exciting time for you, the agent who has a comp driven approach. You have an advantage over your competition. I need you to know that, I need you to believe that, I need you to use what is happening in the comp market to get out and win new business. Again, workers compensation already becoming more important with the market hardening, this change is only going to cement and solidify that. Start educating your clients now. Talk to them about the changes that are coming. Go to our website. We have a ‘Links and Resources’ tab that has webinars, all kinds of things for you to watch. Of course NCCI has a lot of good information. We also recommend the Work Comp Edge blog so you can stay on top of what is happening in the comp market.
We don’t want to be like Chicken Little and tell you that the sky is falling, but we do want you to know that these changes are going to have an impact on your clients and you can use this change to win new business. If the incumbent agent has not told the prospect about the changes coming down from NCCI, the prospect may very well think, ‘Well, what else hasn’t he told me?’ So we know that this could be a wedge, a way to get in and talk about comp, and the changes. Right now I want to go into a question and answer session…
Q ‘I read online that the NCCI split point change would be ‘revenue neutral’. Is that true?’ Jay Conant will answer this question
A Jay, reading from NCCI’s website: ‘Overall, changes in experience modifications will be revenue neutral. There will be changes for individual employers experience modifications, but the average experience modifications across all employers will remain the same.’ Well guess what, if you continue down from that is probably where the incumbent is going to stop. If you’re armed with this, and you may want a copy of it, if you read further the rest of the story comes out. I don’t know if you’re all old enough to remember Paul Harvey, you will know this one. Here’s the rest of the story and here’s where the sin of omission is, when the incumbent doesn’t tell the whole story. The rest of the story is this. There are many factors, and again I’m reading from the article, it can affect the modifier, but they generally fall into one of three categories. One, changes in the employers experience, two, changes in the average bench mark industries experience and three, changes in the plan. Well guess what? Changes in the employers experience you’ve covered. AcuComp dampens all of that, and eliminates issues all relative to reserves not tying to claim file documents so the modifier is lowered on average over time roughly 30%. So bingo, you win on that one. Second, changes in the average benchmark industry average still as it says here the experience period changes each year. Of course it can be 36 months and it can be 45 months, it can be a lot of different months. But all their saying here is, well, guess what folks, initially in this very same article says everything is revenue neutral, well, it isn’t revenue neutral at all. Then it goes on to claims frequency can also affect things. Naturally average claim costs can change, which is why we’re having this webinar and that’s why we are having this discussion about split points. Overall statewide changes in the mod can change over time. They spend the entire page making one statement on one little paragraph, then they spend an entire page disclaiming that of course it’s going to change, so we saw that in California, so knowledge is power and those of you that have it will win, and the incumbent is buried, and they don’t have anything to come back on. You win.’
Q ‘the state of Michigan was not on our list. The state of Michigan has already implemented these changes and you can say that they are effective January 2013. So again we know that this change, even though it is said that will be revenue neutral will be know it will not be.’
Q ‘What role does the NCCI play in all of this?’
A Jay: ‘The NCCI is an insurance industry trade group formed in 1923; they simply are funded by the insurance industry. The role they play, they simply are a resource for calculating these various things but the insurance industry really controls them because the insurance industry created the NCCI and employed the NCCI so the role that they play is one of data collections, verifications and all that and calculations, but they actually have no power. Many of the people are under the impression that they do and many of the insureds think that they have tons of power but they don’t.’