Insurance Commissioner Approves Changes to Experience Rating Plan for 2016 & 2017
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SAN DIEGO, October 16, 2015 — In September, Insurance Commissioner Dave Jones issued his decision with respect to all matters contained in the Workers’ Compensation Insurance Rating Bureau’s (WCIRB) regulatory finding. Included in this decision are revisions to the Experience Rating and Uniform Statistical Reporting plans beginning in 2016 and 2017. These plans are used to determine an employer’s experience modifier.
The current rating system will remain essentially unchanged for 2016; however, instead of using the advisory pure premium rate to determine eligibility, the bureau will now use expected loss rates. In theory, this will allow the WCIRB to begin issuing 2016 experience modifiers much sooner than previous years. While the change in eligibility requirements is applicable for smaller employers, the earlier issuance of experience modifiers will be beneficial for all employers for early premium estimates and budgeting.
The Experience Rating Plan changes for 2017 are fairly significant. Two key components for the determination of an experience modifier are the primary and excess losses which are based on an excess loss split point. The current split point is $7,000 for all employers, regardless of size. All claims valued at or below $7,000 are considered primary and fully included in the calculation. For claims with a total incurred value above $7,000, the first $7,000 is considered primary and the balance of that claim is considered excess. Only a portion of the excess amount is used in the calculation and that amount varies by employer size (amount of payroll).
The Experience Rating Plan for 2017 will replace the current split point from the fixed $7,000 to a variable split which is adjusted based on the size of the employer. The intent of the variable split point is to create a more equitable experience rating for smaller employers, improve accuracy and reduce extreme fluctuations related to “shock losses.” This plan is also intended to place even more emphasis on frequency over severity when calculating the experience modifier. Under the new plan, once the variable split point is set for an employer the entire amount of the primary losses and none of the excess will be used in the calculation. As an example, if an employer’s split point is set at $30,000 and the total incurred loss is $65,000, only $30,000 will be used in the calculation and the balance will be dismissed. This places an even stronger emphasis on claim frequency versus severity when calculating an employer’s experience modifier since a claim valued at $30,000 will have the same effect on the experience modifier as a claim valued at $100,000.
Since the split point allows for the elimination of excess losses, the WCIRB also reports the new plan will allow simplification of the formula in future years making it easier for employers to understand their experience modifier calculations. It is unclear how the split points will be determined but they can be as high as $75,000. The true impact of the variable split point will not be known until we see what those splits are based on the amount of payroll in 2017.
Also, as of January 1, 2017, the WCIRB will count losses against a zero payroll if employers do not submit to payroll audits. In the past, employers could potentially avoid the negative impact of their loss history on the experience modifier by refusing to submit to a payroll audit. The new Experience Rating Plan closes the door on this practice and those employers will now be subject to a debit mod by applying their losses to zero payroll. A zero payroll requires zero in losses to avoid a fairly significant debit mod.
The WCIRB is planning seminars and webinars throughout 2016 to further educate employers and insurance professionals.
For questions, please contact your Barney & Barney representative.
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