In 2011, the National Council on Compensation Insurance (NCCI) proposed a change to the experience rating plan to increase the primary-excess split point over a three-year transition period. The first stage of the transition took effect with each state’s approved rate and loss cost filing on or after Jan. 1, 2013. This change has also been adopted by several states which utilize independent bureaus.
Understanding the Primary-Excess Split
In the experience rating process, each loss is divided into a primary and excess portion. In most states in 2014, the first $13,500 of every loss will be allocated as a primary loss, with everything over and above considered an excess loss. For example, a $9,000 loss has no excess value. On the other hand, a loss of $25,000 will have $13,500 in primary losses and $11,500 in excess losses. Primary losses are used as an indicator of frequency, and are used in full in the mod calculation. Conversely, excess losses receive partial weight in the mod calculation. This means that primary losses affect the mod more than excess losses do. The rationale behind assessing primary and excess loss amounts is that “severity follows frequency,” or in other words, an organization that displays a continual pattern of loss has an increased chance of a severe loss in the future. Thus, a company with a large number of primary losses will have a higher mod than a company with the same amount of losses split between primary and excess.
Changes to the Split Point
In July 2011, NCCI announced a proposal to raise the split point from $5,000 to $15,000 over a three-year period to better correlate with claim inflation. The process of transitioning to the new split point began in 2013, with an increase in the split point from $5,000 to $10,000. In 2014, most states are increasing the split point to $13,500. In 2015, the split point will increase to $15,000 plus an adjustment for claim inflation, for an anticipated total of $17,000 or 17,500. The split point will continue to be adjusted for claims inflation in 2016 and beyond.
These changes directly affect the 34 states and the District of Columbia currently using the NCCI’s rating system. The independent rating bureaus of Indiana, Michigan, Minnesota, New York, North Carolina and Wisconsin have also adopted the change, and other independent bureaus (Massachusetts and Texas) may re-evaluate their split points as well. The rating methods used by California, Delaware, New Jersey and Pennsylvania differ widely from NCCI’s approach, so similar changes in those states are not anticipated.
How Does This Affect My Organization?
In general, the split point increase tends to cause debit mods (those over 1.00) to gain points and credit mods (those under 1.00) to decrease in points. Employers who already have a fairly significant debit mod are most vulnerable to further increases. However, the exact impact on your mod depends on a number of factors.
In 2013, approximately 75% of all mods stayed the same or decreased while the remaining 25% increased. In subsequent years, the effects of the split point change will be less dramatic. In all years of the change, employers may see their minimum mod, or loss-free rating, decrease.
It’s important to remember that NCCI’s goal is to have the industry-wide average modification factor be 1.00. Along with the split point change each year, NCCI adjusts other factors affecting the formula so that the average mod across all employers does not change.
Another minor change which accompanied the 2013 split point change was an adjustment to the maximum debit mod formula which caps debit mods based on state and employer size. NCCI reports that the cap applies to only 2% of employers. As a result of this change, small risks who reach the cap may have seen their mod increase while larger risks may have seen their capped mod decrease.
Preparing for Change
Although no one knows exactly what a future mod will be until all payroll, losses and rating values are available, we can work with you to project how your organization’s mod—and premium—may be affected by these rule changes. Monitoring the impact of the split point increase is especially important for companies that are required to maintain a certain mod in order to bid on jobs or contracts. It is essential to address and control losses and become familiar with your loss profile so your organization can be proactive about these and any other changes.