Safety in focus as comp pricing tools changeReprints
Without improved safety practices, updates in the calculation of workers compensation experience modification factors could raise workers comp premiums for employers in Texas, which has seen a notable jump in the split-point calculations for workers comp.
“The impact on their experience mod in the state of Texas really can be substantial,” said Pam Ferrandino, New York-based executive vice president and casualty practice leader at Willis Towers Watson P.L.C.
As split points increase nationwide, experts say employers can mitigate the potential for higher workers comp costs by implementing safety programs that hold down comp claim losses.
“Improving workplace safety will ultimately work its way into the experience mod,” said Steve Math, senior vice president of underwriting and field operations with Texas Mutual Insurance Co. in Austin, Texas. “It would behoove employers ... to really devote financial and management resources toward those improvements sooner rather than later.”
The National Council on Compensation Insurance Inc. has updated its split point — one of the factors used in ex-mod calculations — incrementally over the past few years. Most of the 34 states that use Boca Raton, Florida-based NCCI to set workers comp rates saw their split point raised in 2012 from $5,000, the standard for two decades, to $10,000 in 2013, $13,500 in 2014, $15,500 in 2015 and $16,000 as of Jan. 1.
“Because there had been claim escalation and the average cost of claims had gone up over a number of years without the split point increasing, it was not an appropriate cut off for that frequency point,” Christine Williams, New York-based managing director in Marsh L.L.C.'s Workers' Compensation Center of Excellence, said of why the split point increased.
Rather than simply setting the split point, NCCI began raising it based on claim-expense inflation in 2016. The split point rate is $16,000 as of Jan. 1.
Workers comp claim losses less than the split point are known as “primary losses” and reflect the frequency of an employer's workers comp claims, according to NCCI documents. Claim losses that exceed the split point are referred as “excess losses,” which reflect claim severity.
Primary losses are factored more heavily than excess losses into an employer's experience rating formula, according to NCCI. So, raising the split point could increase the number of workers comp claims considered primary losses.
In turn, employers whose primary losses increase could see their ex-mod increase, which would ultimately drive a hike in workers comp premiums.
Jeff Eddinger, senior division executive at NCCI, said the split point is meant to even out fluctuations in an employer's loss history that could result from a small number of severe claims.
“It's saying that 100 $10,000 claims are worse than one $1 million claim, because a $1 million claim just might have been a freak accident,” Mr. Eddinger said. “But if you have 100 $10,000 claims, something's going on in the business where safety is a factor.”
NCCI took over ratemaking in July for Texas, which previously had its workers comp rates set by the Texas Department of Insurance.
While the insurance department had used a split point of $5,000, Texas employers saw a jump to NCCI's higher split point for workers comp policies renewed on or after July 1.
Mr. Math of Texas Mutual said the split point jump has not hurt employers that tend to have claim losses under $5,000, such as companies where a significant number of employees work in offices.
Texas employers that have frequent workers comp claims with losses of more than $5,000 are more likely to see an increase in their ex-mods and workers comp premiums, Mr. Math said.
He notes that Texas is the only state that allows employers to negotiate their ex-mods with workers comp insurers, allowing policyholders to mitigate some of the potential cost increases from higher split points or ex-mods. However, Mr. Math said such negotiations for Texas employers will cease in 2018 under NCCI rules.
Split point changes also are expected to affect employers in New York, where workers comp rates are set by the New York Compensation Insurance Rating Bureau. New York's split point was raised to $15,000 from $10,000 as of Oct. 1, according to bureau filings posted online.
Experts agree that employers can reduce potential cost increases from changing split points by keeping their workers comp claims costs as low as possible.
“Any increase in the split point just reinforces the need for best-in-class safety, cost control, claims management practices and risk management,” Marsh's Ms. Williams said.
“It's really about getting ahead and identifying what are the large losses that are going to have the biggest impact on your experience mod, then really working with their broker, their TPA or their carrier to get those claims closed at a lower cost,” said Ms. Ferrandino of Willis Towers Watson.