Paul Coderre, CSP, ARM, Vice President of Risk Management Services
What does it mean for your business?
- It’s good and getting better / It’s bad and getting worse
- Changes go into effect 10/1/2022
- Intent: Incentivize companies to do better at preventing injuries
- Withdraw from NCCI for multi-state operations
They say, “Change is good”
As you may have heard, the New York State Compensation Insurance Rating Board (NYCIRB) is changing the way they calculate your Experience Modification Factor (aka “mod”). They are also withdrawing from the National Council on Compensation Insurance (NCCI) and eliminating the “Merit Rating” system for small businesses. This would probably be interesting if you are an insurance person (Like me). If you’re not an insurance person, you probably just want to know how it’s going to affect you in insurance availability and cost.
First: How is Workers’ Compensation Premium Calculated?
Your workers’ compensation (WC) carrier calculates your organization’s premium, using data provided by you, the State of NY, and their own (approved) factors. The calculation follows a standard formula in which the underwriter uses your workers’ compensation classification codes, loss cost rates tied to those codes (set by the State) and your payrolls to calculate your manual premium, which is the first step in setting the premium for a guaranteed cost policy.
The manual premium would be the same for any two companies that do the same thing, have the same number of people, and pay their people the same in wages. It does not consider the loss performance of either company. This is where other factors, including the loss cost multiplier (LCM) and the experience modification factor (EMF) come in.
LCM: The loss cost multiplier is a factor that is developed by the WC carrier, and approved for use by the State. Carriers can have several LCM’s approved for use, and reflect the carrier’s “feeling” about how your company will perform. Loss cost multipliers can range from 1.10 to over 1.5.
EMF: The experience modification factor is calculated by NYCIRB based on your classification codes (what you do), three years of your payrolls, and three years of your losses (how well you do what you do). This is the thing that is changing as of 10/1/2022.
A key to remember about the LCM and EMF is that they are “multipliers” in the premium formula; meaning the underwriter takes that initial “manual premium” figure and multiplies it by both factors.
Manual Premium X LCM X EMF = Standard Premium
The standard premium is the important premium number. There may be other discounts introduced by the underwriter, but it is the true basis for your annual workers’ compensation premium. Needless to say, the lower either “factor” is, the lower the impact on that standard premium number. So, if you want to control your workers’ compensation premium, you need to do what you can to control the LCM and the EMF.
Control: Since the LCM is set by the underwriter, you have little control over the number itself. Your opportunity to control the LCM stems from your operations, your overall performance, consistency in performance and the presence and effectiveness of your risk management efforts. It is really a more subjective decision by the underwriter whether you get an LCM of 1.12 or 1.45.
However, the EMF is a controllable factor. It is based on your injury costs over a three year period; if you minimize the frequency and severity of incurred losses, your modification factor will be lower, and will have a more positive impact on your premium. Unlike the LCM, the EMF can actually calculate to be less than one (<1). When the manual premium is multiplied by a modification less than one (called a Credit Mod) it actually reduces the ultimate premium figure (Yay!). So the bottom line is that in order to control your workers’ compensation premium, your best opportunity is to control your EMF.
This is why the State’s change to the EMF formula are so important to you and your business.
Second: Why is the State Changing?
New York State has been studying the performance of organizations from the standpoint of workers’ compensation injuries and costs. Those studies have revealed that companies performing very well (minimizing the frequency and severity of on-the-job accidents) are not realizing the benefit of their performance in their workers’ compensation premiums (remember, the EMF is based on performance over a three year period). The State also found that companies performing poorly in workers’ compensation outcomes are not being assessed adequately for their poor performance. (Note that the experience rating system is supposed to reward good performers and “incentivize” poor performers to do better) The bottom line is that the State felt it necessary to change the EMF formula to better affect what organizations pay in premium based on their performance.
Discontinue participation in NCCI: The National Council on Compensation Insurance is an organization that provides EMF calculations for companies with operations in multiple states. While they do not cover all states, those companies whose operations are within a state that is a member of NCCI would have a common EMF for all such operations in all such states. Not all states participate in the NCCI system. In a case where a company has operations in both NCCI states and non-NCCI states, premiums will be calculated for NCCI States using the common NCCI mod, and for Non-NCCI states individually using the experience mod calculated for that state on its own merit. Since NY no longer calculates a mod the way that NCCI does, it needed to withdraw from the NCCI program.
Discontinue the merit rating system: Very small companies in New York (WC Premium < $5,000) have traditionally been treated differently in their workers’ compensation premium calculation than larger companies. They fell under a program called “merit rating.” With the changes made to the experience rating formula (specifically the variable split point) the State felt it was no longer necessary to have a separate means of premium calculation. Companies who previously qualified for merit rating will now be rated the same way as all other workers’ compensation risks in the state. The changes to the EMF calculation are designed to accommodate small, medium and large risks. (More on the variable split point in a moment).
What Has Changed?
Key elements of the experience rating formula have changed. It is felt by the State that those changes will result in the following:
Organizations that in the past have had a very favorable credit mod will likely see their EMF improve further. Those companies who in the past have struggled with a very poor debit mod will likely see their new mod get even worse. And those companies who have been in the middle (not great but not terrible) will see only minor changes to their newly calculated EMF. That is how the State described the expected outcome of changing the mod formula. Our early observations have shown a little more tendency for mods to move up slightly for those in the middle group.
Variable Split Point: A key change to the formula has been the establishment of a “Variable Split Point.” The split point defines what portion of incurred claim costs on a specific claim will be considered primary, and what will be considered secondary. The mod formula leans heavily on costs associated with small to moderately severe claims, and discounts high severity claim costs so they don’t over skew the mod.
This was a point in which a smaller company’s mod could be overly impacted by a single claim, while a larger company may not feel the impact of several claims as intended by the State. The new method sets the split point value based on the company’s payrolls and Expected Losses. A small company may have a split point of $1,500, while a larger company’s split point may be $60,000. The result is that if each company had a single claim that totaled $65,000: the small company would have $1,500 used in the mod calculation while the larger company would have $60,000 entered into their calculation. While it seems harsh, the larger company’s higher expected losses do soften the blow of the higher split point.
Caps and Limits
First Year Cap: During the first year of applying the new calculation (experience mods effective from 10/1/2022 to 9/30/2023), a mod calculated under the new method that generates result greater than 0.30 higher than using the old calculation will be capped at the mod calculated by the old method plus (+) 0.30. This will show up on the experience rating sheet provided by the State (NYCIRB).
Claim Count Limits: There is also a limit on the experience modification for organizations having only 1, 2, 3 or 4 claims in the rating period. This is another way for the State to limit the impact of a single or a very few claims having a severe impact on a smaller company’s experience rating; and for a larger company’s mod to be limited by a calculated cap (although this cap can still be fairly high).
- For an organization having only 1 claim, their mod cannot exceed 1.12.
- If the organization has only 2 claims, their mod is capped at 1.40.
- If the organization has 3 claims, the cap is 1.75, and
- If the organization has 4 or more claims the mod is capped via formula – (2 + 0.000003 X Expected losses)
The Bottom Line and What Can We Do About It?
The bottom line in the changes made to the experience rating formula is that it is here and it is real. The State (NYCIRB) has begun applying it to those mods effective on 10/1/22 or after. For many, their mod will go up; some slightly, others not so slightly. For others, their mod will go down and they will realize the benefits in their next policy renewal.
What we can do is:
- Work with OneGroup to stay ahead of the game. We can do some prospective calculations of your mod to see (approximately) where it’s going to be at renewal time. This will help in making decisions relating to carriers and programs.
- Work with OneGroup Risk Management and Claim professionals to help minimize the occurrence and severity of workers’ compensation losses. Remember, the only real option you have in controlling your experience mod is to control the losses driving it.
If you want to know more about the details surrounding the change to the mod formula and the potential impacts of those changes:
- Contact your OneGroup representative. We can get into the weeds on the mod formula and its impacts. We are insurance nerds… we love this stuff.
- Go to the NYCIRB website: https://www.nycirb.org/experience-rating-transition.php