WCIRB ‘s New Mod Formula Hefty Effects Small California Employers

August 14, 2013 By JL Risk Management Consultants

WCIRB ‘s New Mod Formula – Small Employers Must Enact Safety Programs Now

WCRIB’s new mod formula will heavy affect small employers with a less than stellar safety record.

Last Friday, I briefly covered California’s WCIRB and the change in the X-Mod Calculation effective 1/1/2013. I thought I would cover the formula to show smaller employers in CA that the new X-Mods will no longer have a smaller employer discount.

Hand Holding Calculator With Mod Formula Icon

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This may be getting into the numbers-geek area. Hang in there and read it through once or twice. You will see that small employers need to invoke or improve their safety program along with monitoring their loss runs very heavily this year and forward.

The WCIRB, in my opinion, found an anomaly that, instead of leveling the playing field between larger and smaller employers, actually gave too much of an advantage to smaller employers. One could say the safer smaller employers and all larger employers were subsidizing the smaller unsafe employers.

The old formula for calculating X-Mods was:

[(Ap x Cp) + (Ep x (1 – Cp))] + [(Ae x Ce) + (Ee x (1 –Ce))]
Modification = ——————————————————————————
E
Ap = Actual Primary Losses
Cp = Credibility Primary Value
Ep = Expected Primary Losses
Ae = Actual Excess Losses
Ce = Credibility Excess Value
Ee = Expected Excess Losses
E = Expected Losses

The Primary Loss is from $0 to $7,000 Total Incurred
The Excess Loss is any part of the loss greater than $7,000 Total Incurre

Actually the new X-Mod formula is no different. One has to look further into Cp side of the equation. The Cp is bolded in the above equation.

This is the beginning of the new Credibility Table – Effective 1/13/2013

Expected Losses Credibility Primary Credibility Excess

Below — 14,722 1.00 0.00
14,723 — 16,505 1.00 0.01
16,506 — 18,433 1.00 0.02
18,434 — 20,515 1.00 0.03
20,516 — 22,760 1.00 0.04

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This is the beginning of the old Credibility Table – Effective before 1/13/2013

Expected Losses Credibility Primary Credibility Excess

Below — 6,456 0.38 0.00
6,457 — 6,733 0.39 0.00
6,734 — 7,019 0.40 0.00
7,020 — 7,316 0.41 0.00
……
38,438 — 40,147 1.00 0.08

What does this all mean???

The WCIRB has eliminated giving credibility to and lessening the impact of smaller losses. The X-Mod formula will now be:

Ap + (Ae x Ce) + (Ee x (1 –Ce))
Modification = —————————————————————————
E

There was some type of discount up to 40,000 in primary losses. That discount is no longer in effect. The bottom line is there is no longer a discount for smaller unsafe employers. The larger similar employers (more payroll) will have higher Expected Losses – not so for smaller ones.

Regardless of whether or not this may seem as fair to smaller employers in CA, you must adjust your safety measures and loss run reviews ASAP or you may find that your Mod has jumped appreciably in one year.

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Reinsurance/Excess Insurance Market Hardens

February 11, 2013 By JL Risk Management Consultants

Reinsurance Market No Longer Soft

The reinsurance/excess Insurance Market has started to change from a commodity marketplace. The excess insurance market is usually the bellwether for the rest of the marketplaces.

Picture of buildings Insurance Market place

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Reinsurance/Excess Insurance is basically defined as a risk management technique. The employer will purchase this type of insurance to cover claims that exceed a certain payout per claim or an overall claims total known as an aggregate.

According to a recent article in Business Insurance, the employers may not be able to choose their Third Party Administrator (TPA) and then just pursue the lowest priced reinsurance. Reinsurers are starting to use more predictive analysis when underwriting a risk.

Hand Pointing Towards Insurance Market Icons

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Insurance companies are not offering the same standalone product for reinsurance as in the past. The reinsurance/excess insurance market is now operating with ever-thin margins due to the return on investment the carriers are receiving for premium invested in stable investments such as money market funds.

The striking quote from article is that employers should expect a 10% increase in their excess insurance premiums. The other change is that re insurers are going to require employers to endure the same process as other insurance coverages.

The 10% increase is also for the employers with normal loss histories. Employers may see more severe increases with higher Mods or Loss Development Factors (LDF’s). The re insurers will likely analyze the same variables as normal Workers Comp carriers. One area that will receive more attention is whether or not an employer has a full safety and loss prevention program in place.

The one component that keeps the reinsurance market from actually being deemed hard is the availability of reinsurance. There are many carriers still offering reinsurance.

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California Employer Question On Experience Modification Factor (XMod)

January 23, 2013 By JL Risk Management Consultants

California Employer Question

A California employer emailed in this question last weekend. “We are a medium-sized employer (dry cleaner) in central California. Our Experience Modification Factor increased significantly over the last few years. The increase seems to have resulted in our Workers Comp premiums rising significantly. What is in included in the Experience Mod calculation? Is this the same as the Mod that is produced by NCCI?”

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The Experience Modification Factor in California is called an Xmod or X-Mod. It has the same basic function as NCCI’s Emod. E-Mods and XMods individualize the riskiness of an employer’s work environment as compared to other employers with the same job types or functions.

The XMod is produced by California’s Workers Compensation Independent Rating Bureau (WCIRB) and only applies to employers in CA. The calculation of the XMod differs from NCCI’s E-mod calculations.

NCCI has recently significantly changed the way E-mods are calculated. The WCIRB did not follow this change with any formula modifications. The WCIRB defines an X-Mod as:

Dollar symbol California Employer shadow reflection

Wikimedia Commons – Svilen.milev

a comparison of the loss or claims history of one company to all other companies in the same industry that are similar in size. Generally, an experience modification of less than 100% reflects better-than-average experience, while an experience modification of more than 100% reflects worse-than-average experience. Accordingly, an experience modification that is greater than 100% usually increases the cost of your workers’ compensation insurance premiums, while an experience modification that is less than 100% usually decreases the cost of your workers’ compensation insurance premiums.

The XMod is calculated by comparing the actual losses to the expected losses. Actual losses are the claims, both medical and indemnity, that an insurance company must pay as a result of a work-related injury. Expected losses represent a business’s share of the annualized cost of projected losses for the industry in which it operates. In other words, given its classifications and payroll, expected losses represent the statistical average losses that a business of a similar size is expected to incur. Given two businesses within the same industry, the larger the business, in terms of payroll, the more losses that business is expected to sustain.

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If you were to read the NCCI’s definition of an E-Mod, you would see almost the same definition. The one main area of difference is what is called the Primary Loss. In the NCCI states, before 2013, the primary part of the loss was set at $5,000. The WCIRB has set their primary loss at $7,000.

The primary portion of the loss is more heavily weighted into the NCCI’s or WCIRB’s formula. In essence, your company will pay premium at a much higher rate for the first $7,000 part of a claim than the part of the claim that exceeds $7,000 known as the Excess Loss.

If you want to see why it costs more, you should check Primary vs. Excess Loss. The X-Mod formula is not included in this post due to readability and fit on the page.

There are other factors such as class code rates and payroll that may also have compounded your premium increase.

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How Do Excess Losses Affect My Premiums – Reader Question

March 29, 2011 By JL Risk Management Consultants

Term Of The Day – Excess Losses

In the Experience Modification Factor formula, Excess Losses are the amount of any single claim that is more than the cut-off point for inclusion as a primary loss. The NCCI experience rating formula uses the threshold of $15,000. The threshold varies in the formulas used by other rating bureaus.

Wikimedia Commons – Merzperson

The Loss (beyond $15,000) is usually discounted by a factor to reduce its impact so as to not penalize an insured for a few large losses versus numerous losses over the same time period.

The Primary Losses (Up to $15,000) peg to the Experience Modification Factor very heavily.

The Excess Loss figures appear as Ae in the above formula box.

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Excess Loss Is Very Important on Experience Mod Sheets

May 21, 2010 By JL Risk Management Consultants

Term Of The Day – Excess Loss

The Workers Comp term of the day is excess loss. It is the amount of a Workers Compensation claim that exceeds the Primary Loss – usually $5,000.

Graphic Of Sack Of Money Excess Loss Color Green

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The Excess Loss does not affect the EMR/E-Mod/X-Mod as much as the Primary Loss on a dollar-per-dollar basis. It is still an important factor in determining the premium amount.

The split point level was increased by most of the rating bureaus including NCCI in 2012. The level was increased from 5,000 to 15,000 over a span of three years. J&L Risk Management Consultants wrote numerous articles on the very critical increases.

NCCI had expressed in various articles that the increased minimum Excess Loss was premium neutral. This may not have been the case for many safe employers. Many saw increases in their E-Mods with no adverse claims data.

As with the Primary Loss part of the Workers Comp claim, the amounts are based on the Total Incurred associated with the claim.

The rating bureaus provide a factor that reduces the effect on the Experience Mod. The factor appears on the Experience Rating sheets.

Update – The Split point now begins at $15,000 for most NCCI-rated states. California has a floating split point that relies on company size.

Split Points – There Is No Such Thing As Small Claim – Part III

October 2, 2008 By JL Risk Management Consultants

Split Points – A Small Claim – Part III

Split points represent the line between as the Primary and Excess Loss parts of a claim.

Picture of Small Claim Split Points Document And Gavel

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Well, we have covered how a small claim is not really such a tiny claim after all. The one thing that we often see in workers comp audits – both premium and reserves – is that the smaller claims are ignored and the large claims are targeted. That can be a dangerous way to examine claims.

Take the case of the $10,000 Workers Comp claim that is four years old. That may seem like an insignificant claim, but please look at the previous two posts on Small Claims and you will see that the basic way that the claim is charged to premiums is:

The first $5,000 figures in the E-Mod at the full value – the primary part of the loss.
The next $5,000 figures in the E-Mod at a discounted value – the excess part of the loss. Using the previous post, it would figure into the premium at $2,000.
From #1 and #2 above, a $10,000 reserve set by the adjuster would contribute $7,000 to the E-Mod/premiums.

That is the norm for a $10,000 claim, but what if the claim closes out at $1,000 after four years? That means the employer has overpaid on the claim for three years, and that the file was over-reserved by $9,000.

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It is not $9,000, but even more as it is $4,000 in Primary Losses and $5,000 in Excess Losses. The parts that figure into the E-Mod are:

$1,000 in Primary Losses were paid
$4,000 in Primary Losses were over-reserved
$5,000 in Excess Losses were over-reserved

I think we can leave it there for this post. We will pick up in the same place in the next post. It may be good to print out the posts on this subject and look at them. You will be astounded. I guarantee it.

Small Workers Comp Claim Does Not Exist – Risk Is Risk

September 27, 2008 By JL Risk Management Consultants

A Small Workers Comp Claim Is Still Expensive

The term small workers comp claim is such a nefarious item. I have heard that term often over the past 27 years. The term should be a smaller part of the risk of a larger loss.

Vector graphic of worried man in the weighing scale Small Workers Comp Claim balancing gadget to credit card

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Please note this is an older post before NCCI changed the Primary Loss level. The concept is still the same. The Primary Loss part of a claim is now $15,000 in most cases. This makes the concept of small claims even more false than when this post was written in Sept 2008.

There are two ways that Workers Comp reserves have an effect on your Experience Mod (E-Mod, Mod, X-Mod).

The first $15,000 of the Total Incurred on each claim (reserves + paid) is called the Primary Loss. This is a very expensive part of a Workers Comp claim. Due to the way the Workers Comp system has been structured, there is no such thing as a small claim.

The original thought was that employers with many small claims are more likely to have more large claims out of the many small claims. This was actually a great way to structure the E-Mod calculation. There is a penalty that was never really assessed properly which may be an unfair part of the E-Mod process.

For example, if an adjuster sets a reserve on a small claim at $30,000. The two parts of the loss would be:

$15,000 Primary Loss
$15,000 Excess Loss

Looking at the numbers, you might think that your company will pay the same amount of premium for the first $15,000 as for the next $15,000 of the claim.

Check out my next post to see how the Primary Loss (less than $15,000) can cost your company up to 500% more than the Excess part of the loss.

Update – we had to change the values in this post as the Primary Loss portion for most states is now $15,000. The same concept applies – just different numbers that represent a small workers comp claim comparison.