7/17/2015 Experience Rating: Understanding the Basics Understanding the Basics 1. Purpose of experience rating 2. Formula characteristics and data 3. Line by Line Review What is experience rating? In a nutshell: It is a formula that generates a factor that modifies workers comp premium 1 7/17/2015 What is the purpose? • Comparative analysis • Used to modify premium • Based on individual past loss experience • Creates incentive to promote health and safety • To reduce number of losses • To encourage return‐to‐work Qualifications •Workers compensation policies only • Mandatory rating component if qualifies •Premium range qualifies account if: – Premium of at least $10,000 in 1 year –Average annual premium of at least $5,000 in last 2 or more years Rule XVII—Premium Incentive for Small Employers Premium Incentive for Small Employers <$5,000 premium •No lost time claims • 1 year: 10% credit • 2 years: 15% credit •1 lost time claim • No credit or debit •2 or more lost time claims • 10% debit 2 7/17/2015 Comparative Experience Compares individual account experience against expected losses within the industry Basic formula: Actual Losses (ABC Painters) = E‐Mod Expected Losses (All Painters) Basic E‐Mod Formula $50,000 (Actual losses) = 0.50 $100,000 (Expected losses) $50,000 (Actual losses) = 0.67 $75,000 (Expected losses) Formula Characteristics •Greater weight is given to frequency over severity •Single losses are capped at $15500 in the Actual Primary Losses • Smaller losses less than $2000 may be grouped together •Employers with expected loss of $100K or less are subject to capped emod •Experience for all entities with common majority ownership will be included 3 7/17/2015 NCCI Participating States • Applies in most jurisdictions, excluding •California •Delaware Michigan •New Jersey Pennsylvania •Does not apply in the Monopolistic States •In 2014, Texas joined the NCCI states Intrastate vs. Interstate •Intrastate • Includes experience for single state •Texas intrastate risk ID# begins with 42 •Interstate • Includes experience from more than one state •Risk ID# begins with a 9 Data Reporting •Unit Statistical Department •Stat Cards • Subsequent Reports •Up to 3 years 4 7/17/2015 Data Reported for Calculation • Payrolls by class codes • Claims under $2,000 (lumped as one) –Medical only claims –only 30% of the loss is included in experience rating • Claims over $2,000 (shown individually) •Employers liability claims shown separately Data Reporting Timeline 18 1st Report months 2nd 30 Report months 3rd Report 42 months Emod Revision Exceptions • Clerical error • Subrogation recovery was collected • Claim declared non‐compensable 5 7/17/2015 Policy Data Generally consists of 3 years of experience Ending 1 year prior to the effective date of the modifier Example: Rating Effective 1‐1‐15 1‐1‐13 to 1‐1‐14 1‐1‐12 to 1‐1‐13 1‐1‐11 to 1‐1‐12 • Maximum length = 3.75 years • Minimum length = 1 year Policy Data Rating Effective 1‐1‐12 Policy periods stay on 1‐1‐10 to 1‐1‐11 the modifier for up to 3 1‐1‐09 to 1‐1‐10 years. 1‐1‐08 to 1‐1‐09 As one year drops off another year is added. Rating Effective 1‐1‐13 1‐1‐11 to 1‐1‐12 1‐1‐10 to 1‐1‐11 1‐1‐09 to 1‐1‐10 Rating Effective 1‐1‐14 1‐1‐12 to 1‐1‐13 1‐1‐11 to 1‐1‐12 1‐1‐10 to 1‐1‐11 Types of Modifiers •Contingent Modifier • Missing Data • Preliminary Modifiers • Pending Rate change •Experience Modifier (final) • No adjustments expected 6 7/17/2015 Modifier Changes Emod decreases applied retroactively to effective date of the policy or anniversary rate date Modifier Changes Emod increases • Apply retroactively within first 60 days • Computed pro rata from endorsement date after first 60 days Exceptions to Emod Increase Rules do not apply if change is: • Resulting from reclassification of a risk • Resulting from changes in ownership 7 7/17/2015 Line by Line • See Experience Modifier Worksheet attached Risk Information 8 7/17/2015 Carrier Code Unique to each company. 9 7/17/2015 Payroll Information Payroll Information Payroll Information 10 7/17/2015 List of all class codes on the referenced policy. Any class coded followed by a “U” represents Longshore & Harbor Workers exposure. Expected Loss Rate (ELR) –The amount of losses expectdted per $100 of payroll. Discoun t RtiRatio (D‐Rti)Ratio) – DtDeterm ines the portion of losses that are expected to be primary losses (the first $15500 of every claim). This is a percentage. 11 7/17/2015 Payroll – Total payroll per class code as reported by the insurance company. Total Payroll Expected Losses –The dollar amount of the losses expected, based on the class code and payroll amount. Calculated by multiplying the ELR by the payroll/$100. 2.60 * $3,264,004/$100 = $84,864 12 7/17/2015 Expected Primary Losses Expected Primary Losses – The portion of the expected losses that are expected to be primary losses (the first $5,000 of each claim). Calculated by multiplying the expected losses by the D‐ Ratio. $84,864 * 36% = 30,551.04 Claim Data –Provides claim numbers for the losses reported by the insurance carrier. Individual claims of $2000 or less MAY be grouped together and the number of claims grouped is listed. In this example, 7 claims have been grouped together. 13 7/17/2015 Injury Code –An injury code is assigned to each claims based on the type of injury. Death (01) Permanent Total Disability (02) Major Permanent Partial Disability (03) Minor Permanent Partial Disability (04) Temporary Total or Temporary Partial Disability (05), Medical Only (06) Contract Medical or Hospital Allowance (07) Compromise Death—California Only (08) Permanent Partial Disability (09) O/F –Represents the status of the claims, either Open (O) or Final/Closed (F). The * is next to the group of medical only claims Actual Incurred Losses: This is the actual incurred amount of the claim and/or claims. Texas per Accident Limitation $230,500 Texas Multiple Accident Limitation $461,000 LHW per Accident Limitation $512,000 LHW Multiple per Accident Limit $1,024,000 EL Accident Limitation $ 55,000 14 7/17/2015 Actual Primary Losses ‐ For losses under $15,500, the entire amount is taken as the primary value. For losses in excess of $15,500, only the first $15,500 is primary. Actual Primary Losses Final Emod Factor 15 7/17/2015 Managing Experience Modifiers • Implement a loss control program •Review loss reserves regularly • Keep track of subrogation • Prepare a test modifier to estimate renewal premium • Prepare a test modifier to estimate renewal premium •Verify there are no clerical errors • Understand the effects of ownership changes ERM‐14 •Ownership change ‐ File an ERM‐14 (Confidential Request for Ownership Information) •Ruling made by NCCI to determine effect on Emod 16 7/17/2015 E‐mod Caps Expected Losses NCCI Max $ 5K 1.32 $ 10K 1.53 $ 15K 1.75 $ 20K 1.97 $ 50K 3.27 $100K 5.45 Conclusion •Experience Rating compares individual experience against industry • Frequency has greater impact than severity •Experience Modifier Worksheet provides valuable insight into the account • Managing the experience modifier pays Resources Texas Mutual Insurance www.texasmutual.com Texas Department of Insurance www.tdi.texas.gov/wc/index.html NCCI www. ncci. com/media/pdf/abc_ Exp_Rating .pdf 17 7/17/2015 Questions? Thank You! Check the Texas Mutual website to see a list of upcoming workshops and webinars for more information about workers’ compensation Texas Mutual Insurance Company 53 18.