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Dec 17, 2011

California Was First, Now the NCCI Will Follow

California often blazes the trail in leading the nation in change. While some may argue the change California blazes the path under is not necessarily beneficial to the other states that follow our lead, Workers Compensation cost increases often "Start Here and Are Raised Elsewhere".

In 2010, the Workers Compensation Insurance Rating Bureau (The WCIRB), established a new formula for determining a companies experience modification. Prior to 2010, California utilized a formula that pegged its valuation of small claims at $2,001. In other words, any claim under $2,001 counted on a dollar for dollar basis against the companies experience modification. The NCCI (National Council of Compensation Insurers) utilized a $5,000 valuation for the same type of claim. Claims in California above $2,001 were discounted based upon an insured's expected losses and the credibility of their information.

A small employer with expected losses under $100K has very little credibility in their data and the formula for calculating the ex mod is weighted as such. Weighting simply applies the concept that the law of large #'s can predict the likelihood of future events occurring at the same rate. Smaller pools of data are less predictable and therefore there is less credibility that the data will remain the same over time unless weighting occurs.

After analyzing the impact the $2,001 claim threshold was having on the predictability of determining future claim costs, the WCIRB determined that the predictability of the data was becoming less and less reliable, and something needed to be done to increase the small claims costs to keep them in touch with medical inflation.

In 1995 a small medical procedure cost substantially less than it does today for the same procedure, and with medical inflation trending at 14%, the $2,001 claim value was out of date, and its impact to the experience rating formula caused ex mods to be less reliable as a predictor of an insured's future claim costs.

In 2008 the NCCI, began a study to evaluate the affects their $5,000 "Split Point" was having on their experience rating system. The NCCI split point had not been changed in 20 years and as had been indicated by the WCIRB in their study, the NCCI had a very similar outcome. Hence at the end of 2010, the NCCI actuaries recommended the split point for NCCI risks ultimately be increased to $15,000!

While the implementation of this increase will most likely be implemented over time, the split point will increase in 2013 to $10,000 and over the next 3-5 years may be increased to as much as $15,000.

What affect will this have on pricing and bottom line impact where loss development has not changed and payrolls remain constant?

While accounts with mods under 80 percent will see decreases in their mods, accounts with mods above 100 percent will see increases in their mod from between 3.5% to nearly 30% for certain risks whose mods are over 169%.

If pricing levels for workers compensation coverage continue to increase in NCCI states as they have just begun to here in California, employers doing business outside California that have had poor workers compensation losses could see 50-60% increases in their overall workers compensation expenses beginning in year 2014 and beyond.

The price increases will certainly not come at a good time as employers will most likely be finishing up on their rebuilding process that came from the financial disasters of 2008 through 2011. Cries for legislative reform will certainly go out in states like Montana and Alsaka where Work Comp costs have traditionally been amongst the highest in the nation.

The next few years will provide very little certainty for many employers. Obama Care, workers compensation expenses, and Environmental Protection Agency issues will all most likely continue to contribute to decreased profits, and EBITDA.

What can you do now to avoid the future cost increases affiliated with the NCCI experience rating change?

  1. Understand the actual impact the change will have on your future experience modification
  2. Considering establishing a relationship with a consultant or subject matter expert that can help you understand what you can do to reduce reserves and future claim cost today and tomorrow.
  3. Evaluate the effectiveness of your existing program and measure its actual performance over the previous 10 years.
  4. Use experts in analytics to help you determine your future loss costs.
  5. Use analytical tools to help you evaluate your existing leadership team, the supervision team, and the impact your leaders are having on the employees/departments showing the greatest loss trends.
  6. Understand and measure the true cost lack of safety and leadership has currently on your bottom line.
  7. Improve the safety and overall working culture in areas where there is a clear need for a change in the working environment of your employees.
  8. Upgrade your leadership team when there is a need to do so.
Improving operational issues in areas such as workers compensation can contribute directly to the bottom line and productivity without having to grow top line growth to pay for the operational improvements. The time has come for safety to move up the priority ladder in operational performance, and for CEO's and CFO to become more educated on the bottom line impact that come from a safe working environment.

If I can help you improve your program, or you would like a free 1 hour review of your existing program, feel free to reach me at 661-332-0382, or via email at cbaird@sullicurt.com.