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Originally published by Seacrest Partners

Overview

Employers be warned: big changes in workers compensation premiums are coming in 2013. This pending change has been a topic of discussion for months in the insurance community and most agree it is probably the most significant event in workers’ compensation in the last 20 years.

So what’s the big change and who will it impact? First, let’s define the change, then we’ll look at who it will impact.

Defining the Change

The National Council on Compensation Insurance (NCCI) is revising the formula to calculate experience modifiers, one of the key components in determining workers compensation premiums for most employers. Any employer with at least $10,000 in workers compensation premiums for one policy period or $5,000 for two consecutive policy periods qualifies for an experience modifer. Insurance companies use your experience “mod” as a benchmark to compare your claims experience to that of your industry.

Changing the Split Point

The upcoming formula change involves an increase in the primary loss limit, or “split point”, for each individual claim. One hundred percent of primary losses are used to calculate your experience mod while only a small percentage of the claim costs in excess of the primary amount are included in the calculation. Changing the split point can have a dramatic effect on some mods.

The current primary limit for each claim is $5,000; the new primary limit will be raised to $10,000 in 2013, $13,500 in 2014 and an estimated $17,500 in 2015. Beginning in 2015, the primary limit will be adjusted for claims inflation, retroactive to 2013. In short, your “split point” will more than triple within a three year period.

To put claims dollars in perspective, the average workers compensation claim cost is $8,787. As more claims expenses are included in your mod calculation, the more likely your experience mod will climb and the more you will pay for workers compensation coverage.

The experience mod formula continues to put more emphasis on frequency of claims rather than severity under the premise that re-occurring accidents can be minimized or prevented. Determining how the new formula will affect your company depends on your specific claims experience. Analysts are predicting debit mods (those over 1.0) to increase while credit mods (those under 1.0) will decrease. If many of your claims exceed $5,000, you should prepare for an increase in your mod.

Budgeting for 2013

From a budgeting standpoint, forecasting your 2013 workers compensation costs might be somewhat difficult as the 2013 mods in most states will not be published until sometime this fall.

You can access your experience rating worksheets 60 days prior to your rating effective date at www.ncci.com/worksheets. Your insurance broker can help you access this information and project how the new formula will impact your experience mod and future workers compensation premiums.

So what’s the big deal you may be wondering? A higher experience modifier can significantly change your company’s ability to obtain, or even renew, workers compensation coverage. Also, for those in the construction industry or those who contract services to government entities or large corporations, an experience modifier in excess of 1.0 may disqualify your company for future project opportunities. High mods are no laughing matter.

Unfortunately, there is not much you can do in the short term to have a positive impact on your new experience mod as the calculations are based on claims incurred during the 2011, 2010, and 2009 policy years (not 2012).

In the long-term; however, you can have a positive impact on your experience modifier by paying attention to some basic risk management principles:

  • Review your hiring policies to make sure you recruit the best possible employees for the position.
  • Work with your insurer to create a qualified physicians panel.
  • Study your claims trends to identify areas where safety procedures can be improved.
  • Conduct post-accident investigations to prevent/minimize re-occurrences.
  • Implement a return-to-work program for injured employees.
  • Work with adjusters to close claims as quickly as possible.

Talk with your insurance broker to find out how the new experience rating formula will impact your firm in 2013. Do the math and be prepared for changes in 2013.

The NCCI Experience Modification (E-mod) formula is being changed for the first time since 1992. This change will affect every account a bit differently. In a nutshell, the financial stakes for managing your E-mod have been tripled. Until now, the first $5,000 of each claim hurt you the most. It is quickly being transitioned to the first $15,000 of each claim will hurt at that same rate of an average penalty of $2.50 for each dollar of claim going into your formula up to the first $15,000. So, a $15,000 claim will increase your Worker’s Compensation costs by $37,500 over the 3 years it affects your mod.