2013 NCCI Primary/Excess Split Point Rating Makes Big Changes to Workers Comensation
The NCCI, the National Council on Compensation Insurance, recently released their plan to change the Primary/Excess Split Point Rating System for Workers Compensation Insurance in the United States. This new system is slated to take effect January 2013 in most states, and is planned to be fully implemented over the next 3 years. Some states such as Massachusetts have an independent rating bureau that most likely will be implementing a similar system. This new system will change the way Experience Modifications Factors are calculated for every Workers Compensation Policy.
How It Works
In the process of experience rating, each loss is divided into a primary and excess portion, depending the the amount of the loss. Currently, the split point is $5,000. So for any one claim, the amount under $5,000 would be considered primary, and the remainder over $5,000 would be considered the excess portion. So using the current rates, a $20,000 loss would have a $5,000 primary loss, and $15,000 in excess loss. Any loss under the $5,000 split point would only be considered primary.
All primary losses are given full weight in the experience rating process, and excess losses are given a reduced factor. The rational for this type of rating is as follows… When an organization has a large primary loss history, it is usually the result of many small claims indicating a larger frequency of losses, which signifies an increased risk of future losses. One severe excess loss is not nessasrly equivalent to the same risk level for future losses, as the frequency of primairy losses.
For example, if a company has 1 large loss due to a non-frequent injury or accident, this will be given less weight dollar for dollar over the split point rating figure than a company that had 6 consecutive smaller losses. The frequency of the 6 losses is considered more of a risk factor for a major or castistrofic loss down the road. So the primary loss figures reflects the frequesncy of losses, and the excess loss figures reflects severity.
The New Plan would increase this split point gradually over 3 years from $5,000 to 15,000. Year 1 would be the largest increase to $10,000, year 2 would increase to $13.500, then year three would take it to the full $15,000.
Why Is This Change Being Made?
This change is being made to bring the rating system up to date with the crrent claim environment, to account for claims inflation. The last change that was made to this system was two decades ago. Since this change, the average cost per Workers Compensation insurance claim has tripled. So this has reduced the effectiveness of this type of split point rating. The system has move more toward an all-risk average, instead of reflecting the insureds actual claims experience.
So Will the Price of My Policy Go Up or Down?
That depends on your prior loss history. If you have small losses under the current $5,000 limit you may see a reduction in your experience rating. If you have losses that fall between the current $5,000 and the proposed $15,000 eventual limit, or above, you may see an increase. It is difficult to say without exact underwriting and rating figures.
If you have any questions regarding your current Workers Compensation Policy, or if you would like us to take a look at your insurance program, please visit our website www.downeyinsurance.com for details.