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Employers in California could have a financial incentive to improve workplace safety when a proposed revamp of the state's experience rating formula for workers compensation claims is introduced.
California on Jan. 1, 2017, will move from a fixed $7,000 split point for comp claims to a variable split point that changes based on a company's size, according to the Workers' Compensation Insurance Rating Bureau.
The change will affect the roughly 120,000 employers in the state that are eligible for experience rating. Companies that self-insure their workers comp risks, for example, will not be affected by the proposed change.
Split points are the cut-off point between primary losses, which reflect frequency, and excess losses, which reflect severity. It's used to calculate experience modifcations, or ex-mods, which are premium rating tools based on the claims experience of employers in similar industries. Split points in several states, including New York, have increased over the past year, but California is the first large state to consider a variable split point.
If the split point is $15,000 and a worker has a $20,000 claim, only $5,000 of that claim is recognized as an excess loss. Every dollar up to the split point, however, is considered a primary loss, which counts more toward an employer's ex-mod.
Most of the 34 states that use the National Council on Compensation Insurance Inc. to set workers comp rates saw split points increase this year to $16,000 from $15,500 in 2015.
Upon reviewing the California split point, which was last adjusted in 2010, “it became clear that one size doesn't necessarily fit for all employers,” a spokesman for Oakland, California-based WCIRB said. “For smaller employers, a lower split point is more appropriate and reduces volatility. And for very large employers, higher split points are appropriate.”
An ex-mod is designed to be a predictor of future losses, but many employers think of it as “a punishment for past sins,” said Kevin Ring, lead workers comp analyst for the Institute of WorkComp Professionals, a firm that educates insurance agents so they can better serve employers, in Asheville, North Carolina. “Having a variable split is the most equitable way to accurately predict the future experience of an employer,” since excess losses can vary due to factors outside of an employer's control.
For example, an employer with 10 $5,000 claims will have a higher ex-mod than an identical employer with one $50,000 claim, Mr. Ring said. So, if only one or two workers sustain injuries, an employer's ex-mod won't “spike in an extreme way, which is a very serious problem that exists in pretty much every jurisdiction,” he added. A variable split point would help prevent an employer with one $50,000 freak accident claim from having the same ex-mod as the potentially less safe employer that had 10 $5,000 claims.
In theory, experience rating plans that place more weight on claim frequency than claim severity are “more productive as far as getting employers focused on safety,” said John R. Pedrick, vice president of actuarial services for the Pennsylvania and Delaware Compensation Rating Bureaus in Philadelphia.
Delaware utilizes about 190 different split points — ranging from $29,100 to $530,000 — to calculate ex-mods, Mr. Pedrick said, adding that that he'll be analyzing the performance of the state's plan over the next few years to determine whether changes are needed.
California's workers comp market has been “very volatile,” said Christopher Flatt, managing director and leader of Marsh L.L.C.'s Workers' Compensation Center of Excellence in New York. If a claim was “valued at $7,000 four or five years ago, it's not going to be the same now — it likely would be a lot more,” Mr. Flatt added.
“Getting the rate structure fairer across all employers, and more equitable, tends to increase (an employer's) desire to want to pay attention to what's going on in claims,” Mr. Pedrick said. “Most employers do pay attention, but now they have a financial incentive to keep costs under control and ultimately reduce the number of accidents.”
Sources agree the new formula will likely lead California employers to invest more in safety programs, or at least look into reducing their losses.
Employers will be able to see how the new formula might affect their ex-mods when WCIRB releases its experience modification calculator in late June.
The tool will be particularly important for vendors or contractors, said Pam Ferrandino, New York-based executive vice president and casualty practice leader at Willis Towers Watson P.L.C.
“People want vendors or contractors on their premises that have great safety records,” Ms. Ferrandino said, adding that some employers might appear to be less safe as a result of the change, “and it could effect their operations.”
If a test calculation shows an employer's revised 2017 ex-mod will be above 1.0, they'll want to “actively try to close and settle comp claims if they can,” Ms. Ferrandino said.
Moving forward, employers could see their ex-mods rise significantly, “not necessarily because their injury experience has gotten worse, but because their payroll increases and (their) split point goes up,” Mr. Ring said. “But if they're talking about (90) split points, maybe the jumps won't be so big.”
While less volatility for smaller employers is a good thing, “we just want to make sure there's not an overcorrection that penalizes larger employers,” Ms. Ferrandino said.
More large employers could look to self insure as a result, “but what we wouldn't want to do is create a larger burden for the middle market employers that are in the guaranteed cost rate environment,” she said, noting that such a concern is premature.