In the workers’ compensation line of insurance, experience modifications are used to compare an individual insureds loss experience to their industry’s average. Two major benefits of experience rating are that it tailors premiums to individual insureds and provides an incentive for loss reduction.
A significant element of the experience rating calculation is known as the primary/excess split point (“split point”). The primary portion of the split point reflects loss frequency and the excess portion reflects severity. For 20+ years before 2013, NCCI (National Council on Compensation Insurance) held the split point at $5,000, since that last split point change, the average claim cost has tripled due to inflation, increased medical expenses and increased wages. Starting in 2013, the split point increased to $10,000, then to $13,500 in 2014 and to $15,000 (plus a possible inflation adjustment) in 2015. The changes became effective with each state’s approved loss cost/rate filing on or after January 1, 2013.
What does this mean for insureds and their premiums? The simplest explanation is that those with better than industry average loss experience will see their experience modification decrease (resulting in lower premiums); while those with worse than average loss experience will see their experience modification increase (resulting in higher premiums). These shifts in split points place more responsibility on insureds to control claims, meaning adequate and proactive loss control programs, safety programs and return-to-work programs will carry greater impact. Under the old $5,000 split point threshold, the experience rating formula had become less responsive due to the increase in average claim costs and the increase in split point sets to correct this.
What can be done for experience rated insureds? Workers’ compensation is seen as an outlier in the commercial insurance world. Depending on the market cycle, it may or may not be an attractive line for package carriers. However, there are many monoline workers compensation carriers that solely focus on providing industry-leading services to insureds by assisting with loss control programs, safety programs, drug-free programs, etc. So, before placing insured’s workers’ compensation coverage through package market, where some services may be lacking, I advise you to consider their particular needs and maybe a carrier specializing in workers’ compensation is a better option.
There are exceptions to some of the split point information provided above and it mainly applicable to insureds in states where NCCI is the licensed advisory organization. While Missouri is an NCCI licensed state, it approved a four-year split point transition program rather than the three years used by other states.