Now that 2013 has arrived, it's not just the changes in tax rates employers have to keep an eye on- the formula used by the National Council on Compensation Insurance (NCCI) to compute experience modification factors for employers has changed, and that means that employers have more reason than ever to keep a sharp eye on how their experience mods are calculated.
NCCI computes the experience modifiers (also known as X-Mods, mods, and EMRs) used on Workers Compensation insurance policies in a majority of states in the U.S. and these modifiers directly impact the insurance premiums paid by employers.
For example, an experience modifier of 1.25 means an employer is paying a 25% surcharge for Workers Compensation insurance. A modifier of .75 translates to a 25% credit.
Experience modifiers are calculated using losses and payroll information from past Workers Compensation insurance policies, but NCCI (and other independent rating bureaus) apply a complicated formula to this data. One important aspect of this formula is that it discounts the impact of large individual claims, so that, for example, five claims of $20,000 each would have a greater impact on a modifier than a single claim of $100,000.
But under the new formula, NCCI has changed how much of a single claims gets fully counted in the experience rating formula. The net effect will be that employers with low claims histories will get modifiers lower than would have been the case under the current formula. But employers with some expensive claims in their history will see modifiers higher than would have been the case under the current rating plan.
Under the old formula, only the first $5,000 of each claim was fully counted in computing the modifier. Everything over this "split point" was discounted. But the new rating plan by NCCI increases the split point. In 2013, the split point increases to $10,000. In 2014, it goes to $13,500. In 2015, the split point becomes $15,000, and then is subject to annual adjustment for inflation.
The other change in the new formula is to adjust the maximum modifier that can be calculated for an employer. This maximum will vary by employer, as it is calculated based on past payrolls and classifications codes. The maximum doesn't affect most employers, but the new formula will act to generally raise that cap on experience modifiers for those employers who qualify.
This will be an issue not just for those employers who see higher modifiers--and thus higher premium charges for Workers Comp insurance. It will be an even greater issue for those in the construction business, as a modifier of 1.00 is required to bid on many projects. With a modifier higher than 1.00, many contractors will find themselves locked out of even bidding on important projects. So employers who were just under that threshold of 1.00 may well find that their new modifier exceeds 1.00, even though no change in the safety of their operations has occurred.
Here's a link to a PowerPoint that goes into more detail about the new experience rating plan from NCCI.
This change in experience rating by NCCI may well create significant problems for many contractors, and likely will make careful review of experience modification factor calculations more important than ever.