2013 Proposed Primary/Excess Split Point Change

As you may have recently heard, the National Council on Compensation Insurance (NCCI) has proposed an increase in the Primary/Excess Split Point Value in the Experience rating calculation, this value has not been changed in at least two decades.

For those of you who are not familiar with Experience Rating, here’s a quick and brief description:

Experience Rating is a key element in the calculation of workers’ compensation premium; it’s a methodology in which the individual characteristics of each employer are used to tailor the cost of their comp insurance. Experience Rating allows the employer the opportunity to manage their comp costs by illustrating areas in need of improvement regarding claims frequency and severity.

The Experience Modification, aka the mod, is a direct result of the employer’s loss and payroll history as well as other rating factors, such as class code and state rates; the split point refers to the claim/loss portion used in the rating/factor calculation.

Each loss on the mod is divided into primary and excess portions creating a “split point’. Currently, the split point value is and has been $5,000. This means that the first $5,000 of any loss is allocated to primary losses, and any amount over $5,000 is allocated to excess losses.

All primary loss portions are used at “full-dollar”, whereas all excess loss portions are “reduced” by an applicable weighting factor; hence, a split-point of $5,000 for every claim incurred.

Small Losses – (losses less than the $5,000 split point) have NO excess value and are viewed as an indicator of loss frequency. For example, three $5,000 losses produce $15,000 in primary and $0 in excess.

Large Losses – (losses over the $5,000 split point) always create excess values, these are viewed as an indicator of loss severity. For example, one $15,000 loss produces $5,000 in primary and $10,000 in excess.

Reasoning behind the change…

NCCIs goal in changing the split-point is to compensate for increasing claim costs; since the current value implemented two decades ago the cost of the average claim has tripled causing the portion allocated to the experience rating formula as a primary is much smaller than what it was 20 years ago.

The change will increase the spread between employers with credit mods and employers with debit mods, meaning the employers with (credit) mods below a 1.00 will likely see further decreases and employers with (debit) mods higher than 1.00 will likely see an increase in mod factors.

That being said, it’s reasonable to assume that companies with certain payroll and losses may be more susceptible to the impact of this change than some.

Which of the two employers would be more vulnerable to an increased mod as a result of this change in the split point?

Employer A .95 Mod Factor
Employer B 1.25 Mod Factor (Definitely Employer B)

A few things to keep in mind when discussing this change with our agents and clients…

Does the insured have a frequency (primary loss) issue? If so, it would be an ideal time to begin talking about increased safety measures and staff hiring practices to reduce the loss incidents, and the importance of keeping losses medical-only (aka MO), in states where the 70% reduction in MO claims applies (all Summit states excluding, GA and LA).

What is the company’s current mod? If it’s at or only slightly under 1.00, and the company is one that must have a 1.00 or below in order to bid on certain jobs, then you definitely want to get them to review the current losses and what they can do to keep losses under control in the near future.

NOTE: The impact to premium dollars should be neutral. This is due to the planned corresponding changes to the primary and excess actual losses will be matched by a change in the primary and excess expected losses also used in the calculation. The impact of the split point change will be risk-specific and will vary from risk to risk depending on individual risk loss experience.

Example One:

Employer A Current Split Point = $5,000
1 Claim = $25,000 Primary Loss Excess Loss
$5,000 $20,000
$5,000 $20,000 Total Primary and Excess loss amounts for Employer A.

Proposed Changes (for Employer A) to the Split Point Value (aka the Primary Loss Cap):

The Primary Losses have increased from $5,000 (2012) to $15,000 (2015); that’s an increase of $10,000 in just 3-years, for the same exact claim. Instead of using only a small portion of the claim at “full-dollar” in the calculation, the insured will now have more than ½ of the claim total at “full-dollar” in the mod calculation. Just looking at these figures you can imagine how much the mod factor will fluctuate for each of these years.

Note: All Primary Losses are used at “full-dollar” amount in the mod calculation. All Excess Losses are reduced by an applicable weighting factor in the calculation.

Example Two:

Employer B Current Split Point = $5,000
1 Claim = $25,000 Primary Loss Excess Loss
1 Claim = $15,000 $5,000 $20,000
1 Claim = $5200 $5,000 $10,000
1 Claim = $1250 $5,000 $200
$1,250 $0
$16,250 $30,200 Total Primary and Excess loss amounts for Employer B.

Proposed Changes (for Employer B) to the Split Point Value (aka the Primary Loss Cap):

You can clearly see how much of an impact this change will have on employers with claims similar to or by exceeding those of Employer B. The Primary Losses have increased from $16,250 (2012) to $36,450 (2015), that’s an increase of $20,200 in just 3-years, for the same exact claims. Instead of using only small portions (less than ½ of the original total of $46,450) of the claims at “full-dollar” amount in the calculation, the insured will now have more than ½ of the claim totals at “full-dollar” in the mod calculation. Just looking at these figures you can imagine how much the mod factor will fluctuate for each of these years.

Note: All Primary Losses are used at “full-dollar” amount in the mod calculation. All Excess Losses are reduced by an applicable weighting factor in the calculation.

Source: Plan Now for Upcoming NCCI Split-Point Change