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NCCI Experience Mod Split Point Change

by Mark A. Frantz ARM,CIC, Sales Associate, The Harry A. Koch Company and
Scott D. Durbin, AAI, Vice President, The Harry A. Koch Company

Many articles have been written, webinars held, and educational sessions conducted concerning the upcoming changes to the NCCI experience mod formula in 2013. By now, word of this change is likely not news to many of you. However, the rational and real implications may still be a bit of a mystery for some. Hopefully this brief article might shed some light on the topic.

The most fundamental reason the NCCI is pushing up the maximum primary loss value from its current $5,000 to $10,000 in 2013 is quite simply because the formula was overdue for adjustment. The average cost of a workers compensation claim in 1993, the last time the cap was increased, was $3,400. That same claim in 2011 was $8,800, an increase of 250%. The key driver of this increase is medical inflation that at times has run into the double digits. By increasing the amount of primary loss flowing through the formula, the experience mod is being “adjusted” to reflect the increased cost of workers compensation losses.

The changes to the formula are not taking place in a vacuum, nor are they only taking place in 2013. Since the experience mod is a measure of an insured’s actual loss experience versus expected loss, the expected loss side of the equation had to be reconfigured as well. Actuarially this is done by raising the amount of expected primary losses in the mod formula. In addition, the NCCI will continue to raise the primary loss cap in successive years from $10,000 in 2013, to $13,500 in 2014, and then $15,000 the following year. In the year 2015 and after, the cap will also include an adjustment factor for inflation to capture that increased cost component mentioned earlier. As the primary cap rises each year, you can also expect an increase in the expected loss factors to keep the formula in balance. These changes are not impacting the provision for 70% reduction in value of medical only losses.

More importantly to all of this, is what does this mean to your experience mod? For the vast majority of companies the answer will be “very little.” Initial estimates by the NCCI show almost 80% of experience mods will see a change of 5 points or less. Over half of those changes are predicted to be a decrease! We are currently taking a close look at the mod worksheets we are receiving for our clients effective in 2013. Our initial analysis does support that the impact for insured’s with average to better than average mods are minimal. The real driver of the mod for those that are seeing a significant change really boils down to the same key factor as always; the three year loss experience and how did that picture change? Getting injured employees back to work, having sound risk management and safety controls, and working with providers that will pursue effective case management strategies are still the best methods to keeping your experience mod in check regardless of the “tweaks” taking place in how it will be calculated.