Coppelman: NCCI’s Experience Rating: Small Insureds, Big Problems

Jon Coppelman

I have the utmost respect for the number crunchers at NCCI. Through experience rating, they have contrived an ingenious mechanism for surcharging premiums of employers with high losses and discounting premiums for those with low losses. Dramatic changes in the way the experience rating is calculated, however, have had a disproportionate impact on Main Street businesses. Smaller insureds with losses have seen their mods go through the roof.

From 1990 until 2012, the experience mod calculation divided individual claims into three components: the first $5,000 of every claim was labeled “primary” and entered the experience calculation dollar for dollar; losses above $5,000, labeled “excess,” were discounted substantially – as much as 90 percent or more was excluded from the calculation; finally, losses above the state rating point (ranging from $130K in Maine to $360K in Illinois) were excluded from the calculation. Primary losses, because they begin at dollar one for each claim, are intended to penalize employers for having multiple claims.

In 2012, NCCI began increasing the split point, first doubling it to $10,000; by 2017 the primary split point reached $16,500. The increase reflects the growing severity of lost-time claims across the country: in 1990, the average claim was about $13,000; today, it’s over $50,000. The goal of experience rating has not changed: penalize employers for frequency and cushion the blow for the isolated large loss.

Unintended Consequences

The new rating plan is hammering smaller insureds. Here’s how this works: For employers with premiums in the $10K to $25K range, total expected losses run anywhere from one third to one half of the premium: roughly $5K to 12.5K. Expected primary losses are about 30 percent of total losses: $1.5K to $3.75K.

If a small employer has a single claim valued at $16,500 – a relatively modest loss by comp standards – the actual primary losses are anywhere from 4 to 10 times higher than expected. The single claim generates an experience mod well above 1.25. One modest claim should not have such a disproportionate impact on premiums. It’s simply not fair.

The California Solution?

As an independent state, California is not governed by NCCI rules. They have their own idiosyncratic approach; indeed, everything about California is unique, with the state having the dubious distinction of being the most expensive system in the country.

In one area of workers comp, however, California has demonstrated some innovative thinking. Recognizing that a single split point does not take into account the relative size of employers, California has established a sliding split point, based upon the size of the insured: the scale for primary losses starts at $4,500 for employers with under $9,000 in expected losses and increases to a whopping $75,000 where expected losses reach $10 million. By using this sliding scale, the state cushions the impact of a single claim on smaller insureds, while holding larger insureds accountable for higher than expected losses.

So, NCCI please take note: when it comes to primary losses, one split point does not fit all.

Finally, we cannot tackle the complexities of actuarial science without at least one actuary joke, this one in the form of a bumper sticker that echoes our discussion of split points: “Actuaries do it with frequency and severity.” Unfortunately for smaller insureds with losses, the new split point is no joke.

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