Archive for the ‘Insurance & Insurers’ Category

Too Much Sitting Plus Comorbidities = Big Trouble

Tuesday, May 15th, 2012

For those who seek risk conundrums, workers comp is fertile ground. From a micro perspective, the unfortunate Ronald Westerman, a paramedic for a California ambulance company, embodies many of the elements that result in sleepless nights for claims adjusters and actuaries: Westerman had an inordinately long commute (2.5 hours each way!), a sitting job with periodic lifting (inert patients and medical equipment), along with the comorbidities of hypertension, obesity and diabetes. In two years of ambulance work, Westerman gained 70 pounds, thereby compounding the co-morbidity issues.
In March 2009 Westerman returned home from a 36 hour shift and suffered a stroke. His doctor determined that the stroke was work related and that Westerman was permanently and totally disabled. He was 50 years old. While there was some dispute over the cause of the stroke, an independent medical evaluator surmised that it was caused by a blood clot moving through a hole in Westerman’s heart to his brain, otherwise known as in-situ thrombosis in his lower extremities – a direct result of too much sitting. (We blogged a compensable fatality from too much sitting here.)
At the appeals level, compensability centered on the performance of a shunt study – an invasive test – that would have determined whether the blood clot caused the stroke. Westerman was willing to undergo the test, but his wife refused to authorize it, due to his fragile health. If there was no hole near the heart, the entire theory of compensability would be disproven; the stroke would not have been work related.
Had the defense attempted to force the test issue, it would have given rise to yet another conundrum: was refusing an invasive test the equivalent of “unreasonable refusal to submit to medical treatment”? Indeed, does a diagnostic test, by itself, meet the definition of “treatment”? Fortunately for Westerman, the defense requested – but did not attempt to require – the shunt test.
Managing Comorbidities
Our esteemed colleague Joe Paduda, who blogs over at Managed Care Matters, provides the macro perspective, one which is unlikely to aid in the sleep patterns for actuaries. He reports on the impact of comorbidities on cost from the recent NCCI conference:

The work done by NCCI was enlightening. 4% of all claims (MO and LT) between 2000 – 09 had treatments, paid for by workers comp, for comorbidities, with hypertension the most common. These claims cost twice as much as those without comorbidities [emphasis added].

It is beyond doubt that comorbidities make work-related injuries more expensive. But what, if anything, can claims managers do about this? In the Westerman case, there is not much to be done, as the stroke resulted in a permanent total disability. But in other cases where there is a path to recovery and even return to work, adjusters should flag these claims for early, intensive intervention, including psychological counseling and support for weight loss and other life style adjustments. To be sure, this would increase the upfront costs, but these steps just might go a long way toward mitigating the ultimate cost of the claims.
As is so often the case in workers comp, it’s “pay me now” and “pay me later.” To which I can only say to my claims adjuster and actuary friends, “sweet dreams!”

NCCI Experience Mod Changes: The (Ominous) Future is Now

Wednesday, May 9th, 2012

These are the calm days before the coming storm. For most employers, workers comp falls under the “business as usual” category. If a worker is injured, the standard protocols are followed: secure medical treatment; report the claim; if it’s convenient and not too difficult, bring the worker back on temporary modified duty. Sure, you will eventually pay for the losses in the form of higher premiums. But rates have been low for a long time. As for the experience mod, how high could it possibly go?
Pretty high! NCCI’s new rating plan will roll across the country throughout 2013, beginning in January in a handful of states and finishing up in Utah at the year’s end. Employers who pay attention to these things know that primary losses – the most expensive dollars in every claim – are doubling from the current cap of $5,000 to $10,000 in 2013, and eventually going up to $15,000 by 2015. It sounds a bit ominous, but it’s still way off in the future, right?
The future is now. Most employers are currently operating in policy year (PY) 2012, which began sometime between January 1 and today. The losses under this policy will not be included in the experience mod until PY 2014 and they will remain in the calculations through PY 2016. In other words, the increased primary losses in these calculations have already been incurred – not only for PY 12, but going back as far as PY 09. The future rating plan, in other words, is not only with us, it’s behind us!
What Should Be Done?
Employers who want to stay on top of their insurance costs need to ratchet up their loss control programs. The best injury is the one that never occurs. And for those moments when a safety program fails, employers need to enhance their post-injury management programs, which should include:
– Employee awareness on hazards and safety
– Supervisor training in immediate post-injury response
– A relationship with a quality occupational medical provider
– Prompt reporting of all injuries to the insurer
– An effective and aggressive temporary modified duty program
– Accident analysis to prevent recurrence
To be sure, these key elements are no different from what was needed under the current rating system. But the situation is about to change dramatically. With primary losses doubling and eventually tripling, the need to manage claims from day one has become much more important. Under the current system, the “heavy losses” end at $5,000. Going forward, the heavy losses push much deeper into each claim and will come back to haunt employers in future experience mods.
Waiting Periods: No Time for Waiting!
For employers in states managed directly by NCCI, there is an opportunity to reduce primary losses substantially. If injured employees can be brought back to work – in regular or modified jobs – before the end of the waiting period, the medical-only costs associated with the claim will be discounted by 70%. Waiting periods vary from state to state, with the shortest running for three days and the longest for seven. Once the waiting period is over, out-of-work employees are eligible for indemnity (lost wage) payments and the discount disappears.
So here is some free – and, if I must say so, extremely valuable – advice: do everything humanly possible to bring injured workers back to work before the end of the waiting period. Even if medical bills run to thousands of dollars, the total amount of these primary losses will be reduced by 70% – if, and only if, return to work occurs before indemnity kicks in.
This may not seem important today, but once the experience rating sheets for PY 2014 and beyond start to hit the your desk, you will see the wisdom of this preventive action. The experience rating changes may still be months away, but you are already operating under the new rules. For those who remain oblivious to what is already happening, the future may be dark and ominous indeed.

Virginia: Fixed Law in Need of Fixing

Wednesday, April 25th, 2012

We thought we had heard the last of the bizarre Virginia workers comp statute that denied benefits to workers who suffered brain injuries: under the old statute, if a worker survived an accident but was unable to testify about the incident, no benefits were to be paid. We blogged two cases where the injuries were clearly work related, but where the testimony of the worker was not available. The claims were denied.
Last year the legislature revised the statute to read in part:

In any claim for compensation where the employee is physically or mentally unable to testify as confirmed by competent medical evidence and where there is unrebutted prima facie evidence that indicates the injury was work-related, it should be presumed in the absence of a preponderance of evidence to the contrary that the injury was work related.

Reporter Dan Casey of the Roanoke News is on the case again: With the new statute’s protections in place, a roofer named Herman Blair fell from a ladder and suffered multiple skull fractures. He filed a claim for indemnity and $350K in medical benefits. When he appeared for his workers comp hearing, he had no memory of the incident, but he was able to state his name and talk about other aspects of his life. On the basis of his ability to talk, Deputy Commissioner Phillip Burchett ruled that the injury was not compensable. Despite testimony from a co-worker, who heard a noise and saw Blair fall, Blair’s ability to speak nullified the presumption in the revised statute. Burchett writes:

The only thing we can determine is that the claimant was on the roof some several feet above the ground and he fell; however, that in and of itself does not establish that the fall arose out of the employment.

Commissioner Burchett has set a very high standard, indeed. The man is on a roof installing tile. He gets onto a ladder to descend, and ends up on the ground. What does Burchett think he was doing – texting? surfing the net? In the commissioner’s interpretation, if Blair had ended up in a coma, he would have had a compensable claim. But because he was conscious and able to talk, the claim had to be denied. [Burchett’s nitpicking ruling can be found at WorkCompCentral, subscription required.]
The Fix is Not Quite In
There was an effort to amend the statute to include a presumption for workers able to testify about some things but not “about the circumstances of the accident,” but the usual suspects (business and insurance advocates) pushed back by saying that this might open the door to abuse, with workers deliberately falling silent on the circumstances of their injuries. This, of course, is reminiscent of the original fear that workers would fake brain injuries. Sigh.
At some point Virginia will get this right and Herman Blair, having suffered insult after injury, will eventually collect his benefits. This fiasco illustrates how hard it is to get the language of a statute just right. You fix one problem and another arises. The only thing lacking in all of this is common sense and a little dignity: it should not require a legislative committee to determine that Herman Blair was injured on the job and is entitled to the life-enhancing benefits of the workers comp system.

New York: Busted Trusts and the Law of Small Numbers

Wednesday, April 18th, 2012

We have been following the fate of self insurance groups (SIGs) in New York, where the innocent pay for the sins of the guilty and where what is legal is by no means fair. We read in WorkCompCentral (subscription required) that an appeal to over-rule the onerous assessments imposed on the trusts who played by the rules, to cover the liabilities of trusts who did not, has been rejected by the U.S. Supreme Court. [The Insider is quoted at length in the article.] Had employers known just how expansive the risks of SIG participation were, they would likely have chosen to purchase conventional insurance.
The appellate court wrote that “a fair reading of [comp law] within the context of the related provisions and the legislative history, leads to the conclusion that group self insurers were intended to be included among those to be assessed to provide the funds to cover the defaults of all private self-insurers, including groups.”
The court went on to say that the liability of individual employers “is proportional to their role as self-insurers within the workers’ compensation system.”
The New York appellate court has expanded the concept of joint and several liability way beyond the members of a given trust, including not only all those who participate in self insurance groups, but virtually every self insurer in the state. There is no way a company can reasonably assess the scope of this risk. Why would anyone put their trust in trusts?
The Law of Small Numbers
The problem for the dwindling number of employers who participate in New York SIGs is the inverse of the law of large numbers: because their numbers are relatively small (compared to the total number of employers and comp premium in the state), they own a disproportionately large share of the open-ended liabilities generated by the failed trusts. Given the now-established legality of the assessments, and given the impossibility of verifying the viability of every self-insured risk, New York has basically eliminated self insurance as an option. That’s too bad, especially in the context of the state’s relatively high costs for comp.
Perhaps the state’s 800,000 employers could push for fundamental changes in the way workers compensation is managed: they could argue that the system is too complex and too costly for employers, even as the benefits for injured workers are way too low. As a group, they would have the law of large numbers in their favor, which is certainly more than can be said for the hapless remnants of the state’s self insurance groups.
NOTE: For access to the Insider’s numerous blogs in this issue, enter “New York trusts” in the search box.

An Open Letter to North Dakota

Tuesday, January 31st, 2012

An open letter to the press, business community and people of North Dakota:
The authors of this letter are journalists, columnists, bloggers and content publishers for the workers’ compensation industry across the United States. We are a politically and professionally diverse group. We do not agree on everything, yet find ourselves of one opinion on a highly critical matter. We are competitors who are now colleagues for a common cause; to bring light to a serious injustice being committed within your state.
The prosecution of Charles (Sandy) Blunt was, in our view, an outrageous and almost farcical event. It is, in the final analysis, a travesty that has damaged the national view of your state, hampered the operation of a State agency, and ruined the life of a good man wholly undeserving of such results.
Sandy Blunt was Director of North Dakota’s Workforce Safety & Insurance from May of 2004 until December of 2007. He was, as you are likely aware, prosecuted by state authorities for “misspending government funds”. Specifically, he was charged and convicted on two counts:
During his almost 4 year tenure his agency spent approximately $11,000 on employee incentive items, including flowers, trinkets, balloons, decorations and beverages for Workforce Safety and Insurance employee meetings, and on gift certificates and cards in small denominations for restaurants, stores and movie theaters. Blunt personally approved some of these expenditures. Others were made by managers as part of daily operations under his watch. Not a dime went into an employee’s pocket, nor did Blunt personally benefit from any expenditure.
His agency paid $8,000 to an employee, David Spencer, for sick pay when he was not apparently sick, and it also failed to collect $7,000 from Spencer when he left prior to the end of his employment agreement. The $7000 was for moving expenses incurred that prosecutors felt Spencer owed the state. Blunt’s position was that the agency was not entitled to collect these funds, since Spencer’s departure was not voluntary.
All told, the state prosecuted Sandy Blunt, and he is now a convicted felon for “misspending” $26,000 of government money.
No one has ever alleged that Blunt personally benefited from any of these expenditures. Blunt was acting like other capable, ethical North Dakota executives ‐ in the best interest of customers and of the mission of his employer. In our industry it is considered a best practice to provide employees and supervisors with incentives. It is not frivolous, it’s necessary, and what every employer should do.
The first of these two charges would be, to many people, laughable if it were not for the damaging consequences associated with them. The notion that buying inexpensive incentive items for your employees could result in a felony conviction is simply stunning. This would not be elevated to a criminal status in most states in the nation. The fact that it is in North Dakota should have a chilling effect on businesses looking to move there.
The second and more serious charge, involving the sick pay and moving expenses of employee Spencer, has been fatally undermined by the revelation that the prosecutor in the matter, Cynthia Feland, withheld critical evidence from the defense – evidence that largely clears Blunt in this area. A disciplinary panel for the North Dakota Supreme Court has found on November 7, 2011 that:
“Cynthia M. Feland did not disclose to Michael Hoffman, defense attorney for Charles Blunt, the Wahl memo, and other documents which were evidence or information known to the prosecutor that tended to negate the guilt of the accused or mitigate the offense.”
Withholding of evidence by prosecutors is one of the most serious acts of prosecutorial misconduct in North Dakota and all other states. In recognition of this, the panel recommended Ms Feland’s license to practice law be suspended. We urge that you read the entire report of the panel, including the penalties the board recommended be imposed on Ms. Feland. For the report, go here.
Had the prosecutor not withheld evidence, in all likelihood the case would never have come to trial, and the reputation of Blunt and the WSI would be free of taint. The evidence in question shows that WSI’s auditor’s own findings backed Blunt’s position on payments related with Spencer. However, those findings were not made available to the defense, and the prosecutor was found to have allowed testimony to be given at the trial that directly conflicted with information she had. As we indicated, Feland, now a judge in your state, has been recommended for suspension and a fine over these findings.
Yet Sandy Blunt remains a convicted felon. His crime? Buying balloons, trinkets and $5 gift cards – for his employees, not for himself. For that, Blunt, who is married with two children, has had to spend half a decade, and untold thousands of dollars trying to clear his name.
Some of us have known Sandy for quite a while. Some have come to know him while learning of his situation. Others of us have never met Sandy, but recognize the tenuous nature of his treatment. Collectively we speak to thousands within our industry every day. Our opinions have been clear; this situation needs the light of truth shone brightly upon it. The time and resources expended prosecuting a man on such questionable grounds should be more closely examined, by the business community, workers compensation professionals and the media in North Dakota.
Sandy Blunt is a good and decent man. He deserves better. So, it would seem, do the people of North Dakota.
Peter Rousmaniere
Consultant & Writer
Working Immigrants
Robert Wilson
President & CEO
workerscompensation.com
Joseph Paduda
Principal, Health Strategy Assoc, LLC
Managed Care Matters
Rebecca Shafer
Lower Your WC Costs
Julie Ferguson
Consultant & Editor
Workers’ Comp Insider
David DePaolo
President & CEO
Work Comp Central
Henry Stern, LUTCF, CBC
InsureBlog
Tom Lynch
Founder & President
Lynch, Ryan & Associates, Inc.
Jon Coppelman
Senior Vice President
Lynch, Ryan & Associates, Inc.
Sandy Blunt related articles from these authors:
Blunting Political Vindictiveness
What’s wrong with Sandy Blunt
Is justice on the horizon in North Dakota?
Let Me Be Blunt: Sandy Got Screwed in North Dakota
The Square Wheels of Justice in the Peoples Republic of North Dakota

Hurry Up and Wait: NCCI’s Slow Road to Big Changes in Experience Rating

Tuesday, November 15th, 2011

Back in September we blogged NCCI’s pending changes in experience rating plans. While initially proposed for this fall, the new implementation schedule (contained in NCCI Circular Letter E-1402) does not even begin until January 2013, at which time 18 states will kick off the program. The other 21 states will follow throughout the year, with Utah being the last, in December. We have more than a year to figure out the implications of raising primary losses from $5,000 first to $10,000 and eventually to $15,000 and even higher. The rules are going to change and, as is so often the case, there will be some winners and some losers.
Rating’s Black Box
In the course of retooling the black box that is experience modification, NCCI’s actuaries will set the numbers that determine exactly how the new plans will operate. To date, there has been no word on the D ratio – the percentage of total losses that are expected to fall below the primary split. This will be the key factor in analyzing the implications of the new rating plans.
No matter where this number is set, one thing is certain: employers with higher than expected losses will see their experience mods go up higher than under the current system; at the same time, employers with lower than expected losses may see their mods drop even lower than under the current rules. NCCI pledges that the new plans will be revenue neutral: overall premiums will remain the same. [Legislative approval in each state would be required if the new rating plans resulted in increased premiums.]
One important feature of the new system is its dynamic nature: unlike the current rating plan, where the primary loss split point remained at $5,000 for over 20 years, the split point going forward will rise as losses rise.
Educated Consumers
What does all this mean for experience-rated employers? It’s important to understand exactly how the new system will work. Sticker shock awaits those who ignore the implications of escalating primary losses. The Insider will do its best to alert employers to the details of the new calculations, along with a user-friendly walk-through of the entire experience rating process. No, it’s not our idea of fun, but with billions in insurance premium on the table, it will certainly be worth the effort. Stay tuned.

Obesity and Smoking: Pay to Play?

Thursday, November 3rd, 2011

We all know that people who smoke and/or are obese tend to have more medical problems, of greater duration, compared to people with healthier lifestyles. The higher medical costs associated with smoking and obesity translate into higher cost for insurance. As a result, it is no surprise that there is a strong trend among employers to charge more for the insurance premiums of workers who smoke or who are obese.
The Insurance Journal writes that the use of premium penalties is expected to climb in 2012 to almost 40 percent of large and mid-sized companies, up from 19 percent this year and only 8 percent in 2009. An Aon Hewitt survey released in June found that almost half of employers expect by 2016 to have programs that penalize workers “for not achieving specific health outcomes” such as lowering their weight, up from 10 percent in 2011. The premium surcharges usually come hand-in-hand with incentives to quit smoking and lose weight. Unfortunately, the carrot of incentives, by themselves, have not succeeded in lowering health costs. Hence the big stick.
Taxing the Poor?
As is often the case, lower paid workers bear the brunt of the higher costs. Obesity and smoking often – but not always – accompany lower income lifestyles. Low income workers already pay a larger proportion of their income for health insurance; now they will pay more for the consequences of their smoking (a formidably taxed bad habit) and obesity (the result of poor dietary habits). The working poor often live in neighborhoods with limited fresh foods and nothing much in the way of health clubs – which they can’t afford anyway.
There is evidence that the carrot and stick approach actually works. We have written about the Cleveland Clinic, which refuses to hire smokers or obese individuals and which fosters healthy lifestyles among its 40,000 employees. The clinic has seen medical costs grow by only 2 percent this year, far below the national average of 5 to 8 percent.
The Big “But…”
The move to force people into healthy lifestyles does raise a few interesting issues.
1. In cases where obesity or other unhealthy conditions are beyond the control of the individual (genetics, specific diseases, etc.), the higher premiums might be considered discriminatory, although there has been little such litigation to date.
2. Healthy lifestyles (including regular exercise) may well result in higher medical costs for maintaining well-tuned bodies: the ever-growing incidence of knee, hip and shoulder replacements among active people.
2. The goal is to reduce medical expenses, but the leverage exists only with the principal policy holder: there is no way to force other family members to abide by the lifestyle guidelines.
3. The imposition of wellness standards can lead to legitimate privacy issues: for example, holding employees accountable for behavior away from the job (smoking, drinking, eating).
If all goes as planned, medical costs will indeed come down and people will live longer and longer lives. As people with healthy lifestyles live longer, we will have succeeded in transferring costs from private insurers (who cover working people and their families) to social security (which covers retirees). That will require a hike in social security taxes, which the working poor, among others, can ill afford. It seems that every solution carries the seeds of new problems, just as every problem gives rise to new solutions. It is a privilege, of course, just to watch the entire process as it unfolds before us.

Annals of Compensability: Of Heroes, Acts of God, and (No) Mercy

Monday, October 24th, 2011

When the category 5 hurricane hit Joplin, Missouri on May 22 this year, Mark Lindquist was perched on a mattress which covered his clients, three mentally disabled adults. Lindquist, a social worker for Community Support Services, was following the tornado protocol in a town where basements are virtually non-existent. Unfortunately, the protocol proved utterly ineffective in the wake of 200 mile per hour winds. Lindquist was plucked from his perch and hurled a block away. He was impaled on debris, with every rib broken, his shoulder destroyed and most of his teeth knocked out. He was put into a coma for about two months, nearly dying from Zyomycosis, a rare fungal infection that killed 5 other victims. And to top things off, his three clients perished in the storm.
Lindquist’s survival is well beyond the expectations of his doctors. His right arm remains in a sling, but he has use of the hand. An eye that was temporarily blinded has full sight. He moves slowly and has short-term memory loss, but is able to speak clearly.
A Hole in the Safety Net?
Lindquist assumed that workers comp insurance would cover his medical costs (a whopping $2.5 million), pay for his 12 daily meds and provide indemnity for his lost wages. (As a low wage worker, Linquist could not afford health insurance.) His assumption of coverage has proved naive. He certainly was “in the course and scope of employment.” However, under Missouri law, Acts of God are only covered by workers comp if work exposes the individual to unusual risk. If, on the other hand, there was no greater risk for Lindquist than that facing the general public at the time of the tornado, the injury is not compensable. Lindquist was working – heroically – but the work itself did not cause the injuries. His claim has been denied.
End of story? Not quite. Certainly a case can and will be made that by lying on top of a mattress, in that particular location, Lindquist was more exposed to harm than the general public. He will be able to show that had he not been working, he might have been able to drive his van out of harm’s way. Given the high profile of his claim, he is likely to prevail at some point in the process.
It’s worth noting that of 132 comp claims filed in the tornado’s aftermath, only 8 have been denied. It may have been an Act of God, but somewhere along the line there will be an act of mercy to help a courageous worker rebuild his shattered life from the ground up.
Thanks to Mark Walls and his Workers Comp Analysis Group for the heads up on this story.

Are Comp Rates Finally Trending Upward?

Monday, October 17th, 2011

For over a decade, workers comp insurers have watched profit margins erode, as rates in many states continue their precipitous fall. The mismatch between premiums collected and losses paid out has reached alarming levels, with a projected combined ratio of 121.5 percent for the current year. Even in the best of times for investments, making up 21 percent against losses would be daunting, and these are hardly the best times for money to make money.
The ever-reliable Roberto Ceniceros writes in Business Insurance that the long-awaited upward trend in rates for comp insurance appears to be underway. Among the 38 states directly administered by NCCI, there are requests for modest rate increases in 19; given that the insurance cycle runs from July to June, we can expect to see more states with rate increase requests over the next 9 months. The increases are by no means dramatic (and, some would argue, hardly adequate when measured against insurer losses). The rate increases proposed by NCCI all fall within single digits.
There are a number of reasons for higher insurance losses:
– payrolls are down due to the recession, resulting in lower premiums
– frequency is up – an ominous sign, given that frequency had been declining year after year
– severity continues to increase, as injured workers stay out of work longer and access more exotic treatments
– returning injured employees to their jobs is increasingly difficult in an economy where jobs are disappearing
Insurers Behaving Badly
When contemplating the problems of insurance companies, we must never lose sight of the tendency, as my colleague Tom Lynch puts it, of “insurers eating their young” – in other words, despite the losses, insurance companies persist in offering steep premium discounts, leading state regulators to conclude that they don’t really need rate reductions. Insurers continue to hope that their underwriters have a magic touch in finding the good risks and avoiding the bad. With margins as tight as they are, finding a profitable book of business becomes increasingly unlikely, no matter how skilled the underwriting.
A.M. Best projects the short term prospects for comp carriers to be “grim.” That is no overstatement. State regulators tend to be slow to respond to requests for higher comp rates. Employers are already struggling in a bad economy and regulators will do everything possible to keep comp costs as low as possible. While the long-term trend of lower rates may finally be nearing an end, the upturn is likely to fall short of what is needed. These are tough times for comp carriers, with no significant relief in sight.

Experience Modification Alert: NCCI Changing the Rules

Monday, September 26th, 2011

It’s been over 20 years since NCCI changed the rules relating to the calculation of the experience modification factor. Given that experience modification determines the cost of insurance for all but self-insured employers, these changes require careful scrutiny. While some of the details have not yet been announced, one thing is clear: employers with higher-than-expected losses are likely to pay more for insurance. [NOTE: the Insider apologizes in advance for what is inevitably a rather technical discussion. For readers who would like additional background, check out our 2004 primer here.]
Under the current system, claim dollars – what’s been paid and what’s been set aside for future payment on each claim – fall into one of three categories:
Primary losses: the first $5,000 of each claim. These losses carry the most weight and drive up the experience mod much quicker than the losses above $5,000.
Excess losses: the losses above $5,000 within each claim. These are discounted in the calculation, with as little as 10 percent of the total included in the calculation (depending upon the size of the premium)
State Rating Point: the cap on individual claim dollars beyond which the losses are excluded from the calculation; this varies from state to state, generally falling between $125,000 and $200,000.
NCCI is expanding primary losses from the current level of $5,000 up to 15,000. This change will take place over a three year period, with the ceiling rising to $10,000 in the first year, $13,500 in the second year and $15,000 in the third year.
Why does this matter? Primary losses are the major cost driver in experience rating. Primary losses are not discounted: they go into the formula dollar for dollar. As a result, employers with moderately large claims (between $5,000 and $25,000) are likely to see an increase in their experience mod.
Expected Losses
Employers who have analyzed their premiums carefully understand that experience rating is essentially a comparison: the individual employer’s losses are compared to the losses for other employers performing similar work. The actual comparison is contained in the rates paid for insurance.

For example, in your state the rate for carpenters might be $10.00 per $100.00 of payroll. The total expected losses within this rate might be $5.00 per $100 of payroll. The expected primary losses (called the D Ratio) might be 20 percent of total losses: in this case, $1.00 per $100 of payroll.

As NCCI increases the ceiling for primary losses from $5,000 to $15,000, they must also increase expected primary losses. Unfortunately, they have thus far provided no information on how much expected primary losses (the D ratio) will increase. This number will determine just how much more employers with higher-than-expected losses will pay for insurance. Conversely, the revised D ratio will also determine how much of a discount will be given to employers with lower-than-expected losses. As with our changing climate, the fluctuations under the new system will be greater than in the past.
Given the trend toward very large (catastrophic) claims, it would not be surprising to see the state rating points also increase: for example, instead of capping individual claims at $200,000, the limit might be closer to $300,000. (To date, NCCI has been silent on this matter.)
Winners and Losers
NCCI actuaries are working under the requirement that total premiums within a state remain the same under the new system. In other words, when they apply the new rules, experience mods will go up or down for individual employers, but the total premium in the state will stay the same.
On an individual insured level, there will be winners and losers. Here is our advice to any employers with debit mods (above 1.0) in states managed by NCCI: follow these new NCCI developments carefully. [The easiest way to do this, of course, is to keep reading the Insider.] Primary losses remain the biggest cost driver in the workers comp system and primary losses within individual claims are about to double and soon triple. The strategies for experience mod management that were effective with the primary loss ceiling at $5,000 may no longer apply. As the rules of the game change, savvy managers will change with them.