Between November 1, 2023, and August 1, 2024, the National Council on Compensation Insurance (NCCI) will be rolling out a new method for calculating experience ratings (ERs, sometimes referred to as EMRs) in the 36 states where it acts as the rating and statistical organization that sets Workers' Compensation insurance rates.
Because the ER directly impacts your Workers' Compensation rates, two of these modifications relating to the "split point" and state per claim accident limitation (SAL) could directly affect your ER and thus your Workers' Compensation costs. Additionally, the NCCI is modifying some of its statistical tools used primarily to validate its ER calculations, but it's unclear whether and to what extent those modifications may affect rates.
How the NCCI sets experience ratings
NCCI rate setting for each employer begins with a manual rating that groups employers based on their industry classifications. The rating is based on normal conditions for workers in each industry classification.
However, each employer has different safety and loss prevention programs. The NCCI attempts to tailor rates through the ER for each employer based on that employer's historical experience, generally over three years, to smooth trend lines. Under this methodology, an ER of 1.00 means that an employer pays for Workers' Compensation insurance based on the industry average for the workers it employs. Employers with an ER less than 1.00 pay a discounted rate, and those with an ER greater than 1.00 pay more for their insurance.
Split points
Because the cost of a specific accident may depend on the individual characteristics of the injured worker (e.g., age), the NCCI has found that the frequency of claims has more predictive value than the severity of those claims for predicting future losses. Accordingly, the NCCI developed a split point: losses below or at the split point are considered primary losses and above the split point are considered excess losses. For example, if the split point were $18,500, a claim of $15,000 would be a primary loss; for a $30,000 claim, the first $18,500 would be a primary loss and the remaining $11,500 would be an excess loss.
Because NCCI gives more weight to loss frequency than severity, an employer with five $10,000 losses would receive a higher rating than an employer with one $50,000 loss, even though the total losses for each employer are $50,000.
State per claim accident limitations
Even though the current formula gives more weight to loss frequency, the ER cannot ignore the size of the losses. A really large loss, however, could give a distorted picture of the actual risks, so NCCI developed a SAL, which caps the amount of a loss factored into the ER.
NCCI methodology changes
State-by-state split points
The current system uses a nationwide split point of $18,500.1 Costs can vary widely between states, so nation-wide split points can cause an inequitable determination of primary and excess losses across states. Under the new methodology, NCCI will establish state-specific split points equal to about 40% of the average cost of lost-time claims in each state.2 These split points will be updated each year to reflect changes over time.
Under the new methodology, split points will vary significantly between states. For example, the split point in Oregon is expected to be about $9,500, while it will be around $38,000 in Louisiana.2 Accordingly, the number of claims qualifying as excess claims will rise in Oregon and fall in Louisiana. The overall impact on premiums paid should be neutral, but some businesses will have their premiums increase while others will have them decrease.
State per claim accident limitations
Currently, NCCI calculates the SAL as 25 times the average cost of each case within a state. Accordingly, if the average cost of a case in your state is $10,000, the SAL would be $250,000.1 Under that scenario, if your company had a $300,000 claim, NCCI would calculate your ER based on the $250,000 SAL instead of the actual cost of the loss.
Under the new methodology, the limit will be based on the 95th percentile of lost claims for that state. This change is predicted to reduce the loss limitations by more than 50% in most states. In the preceding example, the SAL could be reduced from $250,000 to $125,000, and the $300,000 loss would be adjusted to $125,000 to determine your ER.
For those employers enrolled in the US Longshoreman and Harbor Workers' Compensation program, the per-claim accident limitations will also be based on the 95th percentile of lost claims.
Action items
These changes add new complexity for multi-state employers, who will be subject to state-specific split points and new SAL. As these changes take hold, we can help you understand how the impact modifications in each state can affect your Workers' Compensation premiums, identify errors in the calculations and plan for how these changes will affect your costs.
