Workers Compensation News

Split Point

NCCI Rating Plan Changes

The National Council on Compensation Insurance (NCCI) made changes to their rating plan effective Jan. 1, 2013, which has variable impact on policyholders as the new calculation is applied in each state. NCCI’s Experience Rating Plan was designed to modify the premium of policyholders based on their loss experience. It uses a “split point” system to give heavier weight to the frequency of losses rather than their severity. In essence, full weight is given to losses under a certain threshold (the “split point”), while a reduced weight is placed on losses above the threshold.

Due to inflationary trends in loss severity, the split point should change over time to remain sensitive to disparities in loss experience. However, NCCI hasn’t increased the split point since 1991, despite a significant increase in the average cost of claims. Beginning Jan. 1, 2013, NCCI will introduce changes to rectify this by increasing the split point in non-monopolistic states.

Why is it Changing?

Ultimately, the effectiveness of an experience rating modification system lies in its ability to accurately and consistently differentiate between, and adequately correct for, disparities between policyholders.

Under the current formula, any ratable individual loss up to $5,000 is known as primary loss (those given full weight and reflect frequency) and excess losses (those given partial weight and reflect severity) is anything greater than $5,000. In other words, the portion of an employee injury considered primary and accounting for 100% in the experience mod calculation is set at $5,000. All claims over the split point are discounted by the weighting factor. For individual claims below $5,000, the entire amount is primary loss and excess loss is $0. Under the current formula, any ratable individual loss up to $5,000 is known as primary loss (those given full weight and reflect frequency) and excess losses (those given partial weight and reflect severity) is anything greater than $5,000. In other words, the portion of an employee injury considered primary and accounting for 100% in the experience mod calculation is set at $5,000. All claims over the split point are discounted by the weighting factor. For individual claims below $5,000, the entire amount is primary loss and excess loss is $0.

Due to inflation, policyholder modified premiums, especially for those policyholders with exceptionally good or poor loss experience, are no longer adequately modified. As a result, “good” risks are overcharged and “poor” risks are undercharged. This reduces the incentive for policyholders to maintain or improve their workplace safety standards and practices.

How is the split point changing?

For NCCI states and most independent bureaus (including Michigan and Wisconsin) the experience modification split point will be changing according to the following schedule:

Date Split Point
2013 $10,000
2014 $13,500
2015 $15,000 + 2 years inflation to closest $500
Beyond 2015 Inflation matched to 2015 level

NCCI is estimating that 78% of mods will be impacted by +/- 5 points when the $10,000 split point is applied. With this change, the minimum experience mod that any business can achieve will decrease due to the increase in expected primary losses.

What does this mean? Every business will have greater control over costs by taking control of their losses. Workers’ compensation is the only line of insurance where employers have the ability to control costs. This is done by hiring the right people, creating safe work environments and implementing safety policies, selecting the right physicians for injured workers, developing effective return-to-work programs, etc.