As Workers Compensation E-Mod Split Points Continue to Rise, It’s time to Focus on Loss Control

Property & Casualty In 2011, NCCI introduced the first major changes to the experience mod calculations in almost 20 years. These changes resulted in the increase in loss split points used in the mod calculations. Prior to 2013, individual losses were capped at $5,000 for the  frequency calculation on the mod and the remaining amount was treated as excess losses which were weighted across all excess losses for the class of business and ultimately capped at a state determined maximum. The problem with the $5,000 cap for frequency was it did not reflect the true average loss in 2011 dollars which was, by then, north of $7,500. The experience mod is designed to measure the individual risk’s frequency vs. other risks in the same classification and state that the individual risk resides in. This calculation is frequency sensitive and caps and spreads severity above the frequency split point over other similarly classified risks in that state. With the average loss above $7,500 by 2011 and the split point still remaining at $5,000, too much of the frequency loss dollars were not getting charged 100% to the individual risk experience mod and these dollars between the $5,000 split point and the average loss of $7,500 were being spread throughout the excess calculations. NCCI had to do something to adjust for the loss inflation that had occurred since 1991 so they introduced an increase to the frequency split point. $10,000 in 2013 for most of the 38 states that use NCCI calculations, $12,500 for 2014, $15,000 for 2015 and annual adjustments for inflation after 2015 calculations. Fast forward to 2017, the split Point is now $16,500. So, the first $16,500 of a loss fully impacts the insured’s mod vs. $5,000 a short 5 years ago.

The introduction of the new split points received much attention from the industry, particularly in the years of 2011-2014 that covered the introduction and implementation period of the new calculations. Since then, not much attention has been given to the calculations based on articles written in the trade press, webinars etc. The purpose of my blog today is to get the split points back in front of the insureds, particularly smaller businesses who pay less than $50,000 in workers compensation premium annually. One loss of $20,000 can have a devastating impact on your e mod the year after next when that loss is applied to the new frequency calculation. While NCCI stated at introduction that the new split points were designed to be revenue neutral vs. the old split points, the result has not been revenue neutral. The first year after the new split point introduction alone had a +3 point increase in overall mods vs. the old calculations. As the frequency loss calculation rises, the impact of even one loss on smaller businesses is resulting in higher mods on smaller risks than before.

What can an insured do to manage the impact of the ever increasing split points? It turns out you can do much more than you think. When you look at the daunting e- mod sheet, there are lots of calculations like ELR’s (Expected loss rates) and Ballast and weighting factors etc. Very confusing stuff. It is one of the reasons that most insureds (and Agents too) just go to the bottom right hand corner of the e mod sheet and look at the summary mod. Credit mod equals you are doing well. Debit mod equals not so good. However, you can have an impact on your mod and here are some ways that you can take control:

    • Review the payroll and losses for each of the three years in the e mod calculation for accuracy. Sometimes the wrong payroll is applied to the wrong classification code. Same thing for losses. Sometimes, other risks losses can be coded to your mod sheet. It happens.
    • Review the classification that your payroll is coded. NCCI publishes a manual called SCOPES that provides detailed description of operations that go into each 4 digit classification code next to your payroll on your mod sheet. There may be a more appropriate classification that you are not being coded to. Expected losses for one classification code will be different for another classification code. Many states have state exception classifications that could result in a lower expected loss for that classification than the one you are in, possibly resulting in a lower rate and premium for your payroll. You can have NCCI perform a classification inspection by doing a physical visit to your location.
    • Review the mod sheet to make sure the payroll you have is coded to the correct state.
    • Make sure the payroll and loss history includes all states that you operated in and the full policy term payroll and losses have been reported on the worksheet. NCCI rules govern 38 states. So, there are some states like Michigan and Pennsylvania that calculate their own mod and these states will not be included in the NCCI mod calculation. Just make sure that all NCCI states that you operated in are included.
    • About 8 months before your next renewal (Yes, that soon in advance) ask your agent or carrier for a currently valued loss report. Focus on claims that are open and work with the agent/carrier to come up with a strategy to reduce reserves and drive towards a claim settlement. Many, many workers compensation claims are reserved for high amounts and not aggressively worked by case managers, insureds and agents for reduction or closure. These claims, particularly those at or above the frequency e mod split point can have a devastatingly negative effect on your future mod not only for next year but potentially 3 total years of the mod calculation. You need to do this 6-8 months before the next renewal because e mods are calculated by NCCI from 3-6 months ahead of the next renewal. Once calculated, there is little you can do until the following year to change the inputs. You can have an impact, though, 6-8 months out.
    • Loss Prevention- Are you working with your insurance carrier to bring their safety offerings to your workforce? They are often free of charge and their knowledge bank of what can be done to prevent unsafe acts that result in losses is second to none. They are the ones who pay the losses so they have much experience on how to prevent them. When is the last time you asked your agent to increase the visitation from your carrier’s loss prevention staff?
    • Review past losses for accident prevention and education of your personnel.

It appears that the e mod dollar split points will continue to rise in the future. It is conceivable that in the next decade the frequency split point could be $20,000 or $25,000. The impact of a single loss at these dollar amounts will cost insureds hundreds, if not thousands, more on future workers compensation renewals if left unmanaged.  I would recommend not navigating through all the options listed above by yourself. Our insurance staff at Assured Partners NL has the experience to work through the above steps with you to develop a favorable outcome on your experience mod. Visit AssuredPartners NL Property & Casualty or give us a call and we will be happy to help you lower your total cost of insurance.

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