VENTURA, Calif.--(BUSINESS WIRE)--Willard Scott, President of IntelliComp, a workers’ compensation and experience rated database at www.exmod.com, made the following commentary regarding the WCIRB’s proposed experience rating formula:
An integral part of the cost of workers’ compensation is the experience modification. It gives the employer the incentive to manage its cost through measurable loss control and claims management practices. The proposed experience rating formula developed by the Workers' Compensation Insurance Rating Bureau (WCIRB), effective 1/1/2017, will diminish the measurability of cost savings.
In 2012 the WCIRB introduced a new Primary Threshold (Split Point or Actual Primary Loss) of $7,000 for all claims in the experience rating formula. The proposed 2017 experience rating formula has 94 Primary Thresholds ranging from $4,500 to $75,000. The smallest experience rated employer will be issued a Primary Threshold of $4,500, the largest will be issued a Primary Threshold of $75,000, based on total expected losses within the experience period.
In 2012 the WCIRB introduced 2 new values, replacing the old W and B values, to the experience rating formula, Credibility Primary (Cp) and the Credibility Excess (Ce) values. From 2012 to 2016 the Credibility Excess (Ce) remained fairly consistent starting at zero for the smallest employers and gradually increasing to .78 for the largest employers. The proposed 2017 experience rating formula makes the Credibility Excess (Ce) value zero for virtually all experience rated employers, which will decrease the incentive for employers to be proactive in reducing claim costs.
Once a claim goes over the proposed 2017 Primary Threshold, any increase in the claim will not have an effect on the experience modification. More importantly, any decrease, down to the Primary Threshold, will not reduce future experience modifications.
Example: An employer’s 2017 Primary Threshold is $11,000 and a single claim’s Actual Loss (Paid + Reserves) is $30,000. If the claim is reduced to $15,000, there will be no decrease in future experience modifications. There will be no decrease in the future experience modification unless the claim is reduced below the Primary Threshold of $11,000.
The measurability of cost savings will be diminished and employers will have less incentive to reduce reserves that are over the Primary Threshold. Small to medium size employers will have much less incentive while large employers will have more incentive because the Primary Thresholds go up to $75,000.
Example: An employer is willing to provide temporary modified work for an injured worker knowing that any possible reduction in reserves will provide a measurable reduction in future experience modifications. However, if the claim will never fall below the Primary Threshold, there will be no reduction in future experience modifications which diminishes their incentive to provide temporary modified work for injured employees.
Exhibit A shows small and medium size experience rated employers and their experience modifications using the experience rating formula and rates from 2000 to 2017, each having 3 claims.
The small employer for 2017 shows no change in the experience modification in Ex Mod A and B (even though the losses were doubled in Ex Mod B) because the losses are greater than the Primary Threshold of $8,500. Between 2000 and 2016 the experience modification for Ex Mod B is always higher than Ex Mod A because there is a Credibility Excess (Ce) value greater than zero. The medium employer shows a slight increase in the experience modification because one of the losses was under the Primary Threshold of $29,000 and when that loss was doubled, it increased the experience modification. Between 2000 and 2016 the experience modification for Ex Mod B is much higher than Ex Mod A as compared to 2017.
The small employer’s Ex Mod A has 3 claims totaling $160,000, in Ex Mod B has 3 claims totaling $295,000 both produce an experience modification of 211%. However, if each claim had a loss of $8,500 (the Primary Threshold) totaling $25,000 the experience modification would still be 211%. This is the most troubling issue because an $8,500 claim would be considered small.
Exhibit B shows what the prior experience modifications would be for the small and medium employer if each claims amount is set at the Primary Threshold of $8,500 and $29,000, respectively. This shows small and medium size experience rated employers and their experience modifications using the experience rating formula and rates from 2013 to 2017, each having 3 claims. Both the small and medium employer’s claims are set at their Primary Threshold. This clearly shows a significant increase in the experience modification with the proposed 2017 experience rating formula. The small employer’s experience modification will increase 25.60% and the medium employer will increase 37.33%.
In conclusion, employers should always prevent losses through an injury and illness prevention program. When a claim does occur, employers need to work proactively to keep losses to a minimum. When losses decrease, but are above the Primary Threshold, employers should anticipate lower rates upon renewal, how will employers know? If California’s workers’ compensation rates are increasing, which usually occurs in a hard market, how will an employer know that their time and effort produced a measurable amount in cost saving. Or, if California’s workers’ compensation rates are decreasing, which usually occurs in a soft market, how will employers know that their time and effort has produced a measurable cost saving beyond the decrease in rates they may have normally received? When claims exceed the 2017 Primary Thresholds, where is the measurability of cost savings?
I believe that once employers begin to realize that if a claim will never fall below the Primary Threshold (the paid cost could have already exceeded the Primary Threshold), employers will have less incentive to work with the insurance company adjusters because there is no measurability of cost savings. Their incentive is diminished.
To view this report and the Exhibits, visit http://2017analysis.exmod.com.
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