Biggest Change to Workers Compensation Pricing in 20 Years

Posted in: Commercial Insurance

The way workers’ compensation is priced is about to change dramatically. This is the largest sweeping change in the National Council on Compensation Insurance (NCCI)’s Experience Modification Rate (EMR) or often referred to as MOD rate formula to occur in 20 years. Beginning January 1, 2013, in the 36 NCCI states, businesses experiencing worker’s compensation claims should expect to see significant changes in their individual experience rate driven by their past workers’ compensation claims. Even states not participating in NCCI on a direct basis are implementing changes that mirror many of the NCCI’s. READ: Employers who have incurred higher losses in the past will pay more in the future.

Worker’s Compensation Overview

The purpose for workers’ compensation insurance is to cover an employee who is injured on the job. Workers’ compensation is no-fault, meaning employees cannot sue their employers while receiving benefits. Traditionally, workers’ compensation pays for medical expenses, rehab expenses, and lost wage expenses, should the worker be injured or become ill because of his or her job.

Some form of workers’ compensation is required in all 50 states, and 36 of these states work with NCCI. See the below NCCI state map for those states that are NCCI states (in blue) and visit the NCCI website for more detailed information.

Source: NCCI

The NCCI is changing the method used to aggregate data in the 36 NCCI states. This data will be used to influence the Experience Modification Rate (EMR) or MOD rate — the percentage that illustrates where an employer is situated on an expected loss vs. actual loss scale.

The base MOD rate starts at 1.00, meaning that losses are “as expected” for that particular industry. If a company’s losses are higher than expected, the company’s claims experience is worse than expected, and consequently, its MOD rate will be greater than 1.00 and the company’s premiums will be increased. If a company’s losses fall below expected, its claims experience is better than was anticipated, and as such, its MOD rate will be less than 1.00 and its premiums will be credited.

Companies with safety programs in place, low-injury records, and risk management practices will benefit from the change. In contrast, companies with higher-than-expected losses will pay higher premiums.

An employer’s MOD rate calculations consider both frequency and severity. Smaller claims reflect an employer’s frequency while larger claims reflect severity. Since even the safest employer can have a single severe employee injury, the MOD calculations discount larger claims.

Under the old methodology, claims that were larger than $5,000 were discounted on the amount that exceeded the $5,000 threshold (set point).  Under the new method, in 2013, a claim will need to exceed $10,000 before it is discounted.  The claims threshold (set point) will continue to increase over the next three years until it reaches $15,000; future years will be automatically indexed for inflation.

In practical terms, this means that more of an employer’s claim costs will go into their MOD rate calculations and this will increase their experience rate modification factor and by extension, their worker’s compensation premium.

Impact on Employers

The change in the Experience Modification set point is coming at a time when overall worker’s compensation rates are increasing. The latest reports show that December 2012’s worker’s compensation rates are up 8% over the same time period in 2011. So regardless of your business type or size, you will be impacted by worker’s compensation premium changes to some degree.

Many mid to large size employers will see a significant change in their MOD rate. Studies indicate that more than 60 percent of employers will undergo some fluctuation. We are recommending that all employers review how their individual claims history will impact their MOD rate, so that they know what to expect next year.

Because contracting businesses frequently provide their EMR history as a part of the bid process, it is imperative that they know what to expect when their next experience modification rate is promulgated. For contractors that face a MOD rate increase past 1.00, not only will they face increased premium costs, they may lose out on bid opportunities because of their increased experience MOD rate.

Focus on Risk Management

While you cannot change your claims history, making loss control a priority and minimizing future claim frequency and severity will help your company begin to minimize the impact of these MOD rate changes.

  • Understand where your greatest and most frequent losses occur at your company and build risk management programs that directly address these common losses.
  • Report all claims to your insurance carrier immediately – studies show that late reported claims have higher costs than claims that are reported immediately and managed by a worker’s compensation insurance company.
  • Develop a return to work program for injured employees.
  • Investigate every accident and understand the factors that contributed to the accident.
  • Make certain that your employee training includes safety and communicate often with employees about the importance of safety.
  • Understand that your experience rate includes your claims from the last four years—be aware of your company’s past payroll and loss profile.
  • Make certain that payroll is correctly classified when it is reported to your insurance carrier.

Addressing these issues will help control workers’ compensation costs as well as other related costs.  Smart business owners can prepare for these changes by working with an agent who can help focus on a culture of safety. A good insurance agent can help provide proper training, issue a safety analysis, and ultimately help control your losses.

Click here to view a list of the 36 NCCI states and their effective dates to enact these workers’ compensation changes. And learn more about the impact of EMR/MOD rate and what you can do about it in the side presentation below: Your Experience Modification Factor, Why is this Important for You?. Please don’t hesitate to contact me directly with any questions at bmarx@psafinancial.com.