Posts Tagged ‘Experience modification’

Understanding “Expected Losses”

Thursday, January 10th, 2013

This is Part 5 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent; Part 2 A Basic Review of Claim Losses, the Building Blocks of Experience Rating; Part 3 Primary and Excess Losses: Big Changes Beginning in 2013, and Part 4 Dealing with Reserves: When Do Losses Really Count?
We finish this series of blog posts with a brief discussion of “Expected Losses” and “Expected Loss Rates.”
The entire experience rating process is driven by “expected losses,” the total losses insurance actuaries expect you to suffer. But what exactly are “expected losses” and where do they come from?
Expected losses are contained in the premium rates you pay for each classification of worker. Expected primary loss rates and expected excess loss rates (called the “D ratio”) are a percentage of the total rate.
For example:
Class rate – $5.00
Expected losses – about 50% of the rate – $2.50
Expected primary losses about 20% of total losses – $0.50
These percentages do vary somewhat, but will be close to the above estimates.
Thus, the calculation for expected losses for $500,000 in payroll for the above class would be:
Manual premium = $500,000 times $5.00 divided by 100 = $25,000
Expected losses = $25,000 times 50% = $12,500
Expected primary losses = $12,500 times 20% = $2,500
Note that even with half a million dollars in payroll, the expected primary losses are only $2,500. This amount would be exceeded by relatively small losses or one big loss.
One final note: under the new rating plan in PY 13, expected primary losses will increase by about 50%. Using the above example, the new rating plan raises primary rates as follows:
Expected primary losses = $12,500 times 30% = $3,750
In other words, primary losses will go up as the split point goes up, but not fast enough to help employers with significant losses.
Expected losses and expected loss rates have significance in workers comp program performance measurement. Here’s why. A good way to measure how well a company manages workers comp is to track how much it spends in losses per hundred dollars of payroll. Then, one can compare that number with the expected loss rate, which is a rate per hundred dollars of payroll. If losses per hundred are running higher than expected losses per hundred, one can readily see that a problem exists, which can be immediately addressed.
After 20 years of stability, the experience rating process is about to undergo significant changes. Educated employers will track these changes and make any needed adjustments to their workers comp cost control programs.

Dealing with Reserves: When Do Losses Really Count?

Monday, January 7th, 2013

This is Part 4 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent; Part 2 A Basic Review of Claim Losses, the Building Blocks of Experience Rating and Part 3 Primary and Excess Losses: Big Changes Beginning in 2013. Part 5 will be posted later this week.
Did you know that a well-managed program aimed at assuring a low experience modification can produce a significant competitive advantage? In the following section, we will show you why and how.
Previously, we discussed the disproportionate impact that frequency has on an employer’s workers’ compensation premiums. The first $5,000 – soon to be $10,000 and higher – of each claim (primary losses) is counted dollar for dollar in the calculation of the experience modification. Losses above the primary level are discounted substantially. Therefore, a lot of small claims can raise premiums faster than a single large claim. Once again, for an excellent overview of experience rating, we recommend the National Council on Compensation Insurance’s (NCCI) white paper.
When are the numbers actually crunched to determine an employer’s experience mod and, ultimately, the policy year premium? Do employers have to obsess about reserves throughout the policy year or is there an optimal time to review losses?
When it comes to determining the experience rating for the next policy year, there is only one day that really counts. About six months after the end of the policy year, the insurer will prepare and submit a summary of losses spanning the prior three years (called the “unit statistical report”) to NCCI or the appropriate state rating bureau. For employers with open claims in prior years, it is essential to make sure that the numbers contained in the unit stat report are accurate and reflect an up-to-date understanding of the status and strategy for closure of each open claim. If an employer does not have access to its loss run online, a program deficiency, in our view, then the agent or broker should be tasked with getting it.
When Should you Review Losses?
So when should employers review open claims? Large employers will be doing this pretty continuously, but employers at or below the mid-level of the middle market in premium size are different. Here’s a suggestion: If your company has more than a half dozen open claims, you should review the losses at least quarterly. Get a loss run. Schedule a conference call with your claims adjuster and discuss each open claim to make sure that you have a clear and effective strategy to achieve closure.
NOTE: If there are open claims, you should be working steadily throughout the year with your adjuster to return any injured employee to full or modified duty. If, due to the severity of the injury, return to work appears unlikely, you should work toward closure by settling the claim. In the world of insurance, “the only good claim is a closed claim.” A quarterly review process ensures that you have an appropriate focus on every open claim.
For employers with few open claims, quarterly reviews are usually not necessary, although being actively involved with your claim adjuster in the management of each open claim is essential. At a minimum, request a loss run three months after the end of the policy year. This gives you plenty of time to review the status of any open claims and take action toward resolution before the unit stat review is submitted. Three months into your new policy, you have fully three months to impact reserves on old claims prior to the submission of that all-important unit stat report. Once that report is submitted, the numbers can only be changed if there is a clerical error.
The Bottom Line
Educated employers and managers don’t spend every waking moment worrying about reserve levels for open claims. There is that one time of year, however, when a laser-like focus on open claims can be very helpful in controlling losses. Make note of your policy end date, move forward three months, and place an alert in your calendar to review your loss runs. You will be taking action just ahead of that one crucial moment when reserves really count.
Even more important than all of this is a vigorous, aggressive and continuous procedure to bring injured workers back to work as soon as possible following injury, if not to full duty, then at least to modified duty. Pursuing this goal is the surest way to keep the cost of losses at an absolute minimum and experience modification at its actuarially lowest level.
That’s a true competitive advantage!

Primary and Excess Losses: Big Changes Beginning in 2013

Wednesday, January 2nd, 2013

This is Part 3 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent and Part 2 A Basic Review of Claim Losses, the Building Blocks of Experience Rating
Parts 4 and 5 will be posted next week.

Previously, we offered a basic review of workers comp claim losses, the building blocks of experience rating. Now it’s time to go deeper.
As we’ve seen, workers comp claims are made up of what has been paid and what has been “reserved” for future payments throughout the life of the claim. The “total incurred amount” projects total indemnity payments (lost wages), medical bills and expenses estimated to be paid for any given claim. From 1990 through 2012, the first $5,000 (called the “split point”) of the “total incurred” amount of each claim is considered “primary,” and all of it counts in the experience rating calculation. Any amount above $5,000 is considered “excess” loss, and is discounted in the experience rating calculation by at least 70%. Moreover, any amount above a state-specific rating point (ranging from about $125,000 to as high as $250,000) is excluded from the calculation; it does not count at all in the calculation of your experience rating.
Primary losses going up!
For the first time in 20 years, the Primary Loss split point is about to change. Beginning in Policy Year 2013 (PY 2013), primary losses will increase from the first $5,000 of each claim to the first $10,000. In subsequent years, primary losses will continue to rise, reaching $15,000 by PY 15.
So what does this mean? Experience rating places more emphasis on the frequency of injuries than on the severity. Given the increasing severity of claims over the past decade, NCCI has decided to make experience rating more sensitive to severity.
Under the current rating system, only the first $5,000 of each claim is primary; this means that one big claim will have a limited impact on the experience mod: the first $5,000 enters the calculation dollar for dollar, but all the losses above $5,000 will be sharply discounted.
The new rating system has been adopted by all NCCI states for 2013, and it will become effective concurrently with each state’s approved rate/loss cost filing on or after 1 January 2013. NCCI has published a chart detailing the split point changes effective dates for each state (PDF).
Under the new system, the first $10,000 of each claim will be primary and, as in the current (and soon to be old) system, all primary losses will enter the experience rating calculation dollar for dollar. For employers with individual losses above $5,000, the experience mod is likely to run higher than under the current rating system. (And keep in mind that the primary loss split point will continue to rise to the level of $15,000 by 2015.)
Here is a simple comparison of the current and pending rating systems in action:
Employer 1:
1 claim at $20,000 / Current Primary = $5,000 / Pending Primary = $10,000
Employer 2:
2 claims at $5,000 / Current Primary = $10,000 / Pending Primary = $10,000
Under the current system, all other things being equal, Employer 1 would have a lower experience mod than Employer 2 for two reasons, even though total losses are $10,000 greater than Employer 2’s total losses. First, Employer 1 has $5,000 less in primary losses. Second, Employer 1’s excess loss of $15,000 would be discounted by 70% to $4,500 in the calculation making total calculable losses of $9,500, compared to Employer 2’s total calculable losses of $10,000.
Under the new rating system, Employer 1 would be the one with the higher mod, because its primary losses would be equal to Employer 1’s, but Employer 1 would also have $3,000 of excess losses included in the calculation (10,000 – [10,000 x 70%]).
The split point change will lead to some interesting, as yet unaddressed, developments. For example, consider a loss that happened in PY 2010 to a driver for ABC Limo. The loss would first appear in ABC Limo’s Mod calculation for 2012. Let’s say its total incurred value at that time was $15,000. In 2012, before the split point changes, $5,000 would be primary and $10,000 excess. Fast forward to the Mod calculation for 2013, and let’s suppose that the claim was closed during 2012 for a total of $10,000. The 2013 Mod calculation, with the split point having been changed, effective January, 2013, will show $10,000 primary and $0.0 excess. Consequently, the closed claim of $10,000 will affect ABC Limo’s mod more adversely in 2013 than the open claim of $15,000 did in 2012. This will happen to many employers, and their advisors would be well-advised to advise them beforehand.
Medium-sized Employer, Big-sized Trouble
Here’s the worst-case scenario for a lot of medium-sized employers (premium in the $20-$100,000 range): if they have a frequency problem (a lot of relatively small injuries) and a severity problem (a few relatively big losses), the new split point for primary losses will more than likely increase their experience mod, perhaps substantially.
If you find yourself in this position, with an experience modification well above 1.0, you need to learn more about the intricacies of the rating process itself. There are opportunities for minimizing the impact of your losses. All of which are the subject of our next Experience Rating post.

A Basic Review of Claim Losses, the Building Blocks of Experience Rating

Wednesday, December 19th, 2012

This is Part 2 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent. Parts 3 to 5 will be posted after the holidays.
When you report a claim to your insurance carrier where outside medical bills are involved, the insurer will estimate the ultimate cost of the claim. For medical-only claims, the estimate is small; for lost time claims, it might range anywhere from a few thousand to hundreds of thousands of dollars, depending upon the severity and duration of the injury.
Your company’s claim losses are described in detail on a loss run, a written summary available through your agent or directly from your insurance company. The loss run lists what has already been paid plus what is projected for payment over the life of the claim. The projected, but as yet unpaid, amount is called the “reserve,” because it’s the amount set aside, or reserved, for future payments. The amount already paid plus the reserved amount is called the “total incurred amount.”
Example: John Doe injured his back one year ago:

Paid at the time of the loss run: $ 45,600
Reserved for future payments: $ 60,000
Total Incurred amount: $105,600

Reserves are based on the insurance claim adjuster’s investigation into the nature of the injury (diagnosis and prognosis) and the insurer’s experience with similar cases. The total incurred amount is the insurer’s best estimate of the ultimate cost of the claim: the expected payments for lost wages (indemnity), medical treatment, disability and nurse case management, rehabilitation, attorney fees and other related expenses over the duration of the claim.
The same injury to two workers might result in very different reserves. Among the factors included in setting reserves are:

  • Education level
  • Co-morbidities (medical problems which may impact recovery such as high blood pressure, diabetes, obesity, drug addiction, etc)
  • Age (younger workers generally heal faster than older workers)
  • Transferable skills (if unable to return to the original work, whether the injured worker has marketable skills)

The initial reserve is usually posted within 30 days. Once posted, reserves are periodically updated to reflect any changes in the course of the claim. The costs of a projected settlement are usually included in the reserve.
In terms of experience rating, whether a claim is medical-only or indemnity means a lot. Why? Because, with the exception of Massachusetts, medical only claims are discounted by 70% in the experience rating calculation (Massachusetts, a non-NCCI state with its own Rating Bureau, does not discount medical-only claims). However, once any indemnity payments are incurred, there is no discount for any medical costs already paid or projected to be paid, and the loss, up to its first $5,000 counts full value in experience rating. This first $5,000, the “split point,” is called Primary Loss, and it, as well as Excess Loss, all dollars above $5,000, is the subject of our next post. In it we address the imminent and upward change in the split point.

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.

Cavalcade of Risk and other news notes from the around the Web

Thursday, March 24th, 2011

Ready for a bi-weekly grab-bag of risk-related reading? Jacob A. Irwin hosts Cavalcade of Risk # 127 – Riskiest Jobs Edition at My Personal Finance Journey.
Agents & Experience Mods – What role do insurance agents play in keeping a client’s workers’ comp losses as low as possible? In PropertyCasualty360, Kevin Ring of the Institute of WorkCompProfessionals offers Six Ways to Keep a Client’s Experience Mod Under Control.
Federalization – Over the years, talk about the impending federalization of workers comp has surfaced time and again. In recent years, with healthcare reform and a move to increased federal oversight of financial industries, talk of workers comp federalization has increased. Joe Paduda classifies this as a “never gonna happen” thing, and he makes his case in a four-part argument: part 1, part 2, part 3, and part 4.
More charges filed in Upper Big Branch case – Ken Ward of Coal Tattoo reports that criminal charges were filed against a former Massey Energy employee who faked his certification to perform safety exams. Ward reports that “…he is the second person to be charged as part of what is said to be a broad federal criminal investigation of the explosion and safety practices at the Massey operation.” You can find more of Ken’s reporting in the archives of the Upper Big Branch Disaster.
Healthcare – Liz Borkowski of The Pump Handle looks at The Affordable Health Care Act’s first year and sees some disappointments but also great progress. Her post highlights a provisions that have already kicked in. And in another healthcare report, a new survey by Gallup reveals that there is a wide discrepancy in health coverage across U.S. metro areas. Nine of the ten most uninsured metro areas surveyed were in Texas and California; 8 out of the metro areas with the lowest percentage of uninsureds were in the northeast.
Just for fun – Your enjoyment and amusement at the following site will be in direct proportion to your age: Obsolete Skills is a wiki database of things we used to know that are no longer very useful to us. Some of these skills are everyday matters like dialing a rotary phone or adjusting rabbit ears, but the list is also a compendium of disappeared jobs, such as taking shorthand, asbestos installation, blacksmiths, bookbinding, and more. It’s a fun site to browse and because it’s a wiki, you can also contribute.
Quick Takes

Nevada leads the way

Thursday, November 13th, 2003

An interesting thing happened in Nevada today. And it may eventually affect employers around the rest of the country, especially in Massachusetts.

Workers’ compensation is amazing. It’s very stable in that every employee in the nation is covered by one form of it or another (except some of those in Texas; but we’ll write about that at another time).
But it’s also a very fluid social engineering concept because every state has its own version of the law. Fifty states, fifty laws.

Which brings us back to Nevada. The state, like most other states in the nation, is represented by the National Council on Compensation Insurance (NCCI) for purposes of rate filing. Some states, like Massachusetts, have their own “Bureaus” that represent insurers in the state and file rate request changes with their respective Divisions of Insurance.

Today, Nevada’s Commissioner of Insurance approved a rate filing request of the NCCI, and for most Nevada employers this will a mean a reduction in their next workers’ compensation premium of about 12.3%.

But the really interesting thing involves what is known as the ARAP. In Massachusetts, that stands for All Risk Adjustment Program, and is a kind of Experience Modification surcharge on top of the regular Experience Modification. In the rest of the country, ARAP stands for Assigned Risk Adjustment Program. Here’s what the difference is: in Massachusetts every emplpoyer, whether in the Assigned Risk Pool or the voluntary market, is eligible for an ARAP surcharge. In the rest of the country, the surcharge only applies to employers in the Pool. But regardless of where an employer happens to be, the maximum surcharge is 49%. That is, until today.

Hidden in the Nevada filing is a reduction in the maximum ARAP surcharge, from 49% to 25%. This is the main reason why overall rates in Nevada’s Assigned Risk Pool will drop by approximately 15%.
We’re going to watch further NCCI rate filings to see if the ARAP maximum surcharge is reduced in other states, as well. In addition, we’ll continue to lobby on behalf of Massachusetts employers to have the ARAP surcharge apply only to employers in the Pool. And we’ll keep you informed.
Peace to all.