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SCCA Magazine March-April 2010 |
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Understanding workers' comp rates
After several years of decreasing
workers’ compensation rates resulting
from workers’ comp reform,
many companies are bracing for
anticipated increases in 2010 workers’
comp premiums. Most companies agree
premium increases couldn’t come at a
more difficult time with the current state
of the economy, especially for the construction
industry. At the same time, since 2005,
the average cost of a single lost-time claim
in California has risen by more than 47
percent to $57,164.
Your workers’ compensation net rates
are calculated using:
Pure Premium Rates
Carrier PPR Modifiers, Premium Discounts
and Scheduled Credits
Experience Modification Factors
State Surcharges and CIGA Assessment.
Pure premium rates
The pure premium rate (PPR) is that portion
of your final rate (net rate) that the
Workers’ Compensation Insurance Rating
Bureau of California (WCIRB) has determined
is required to pay expected losses.
WCIRB recommends the rate, which must
be approved by the State Insurance Commissioner.
PPRs do not take into account money
for insurance company expenses and profitability.
Every insurance company starts
with the same PPR as a starting point for
determining net rates.
Carrier PPR modifiers
Each insurance company then uses its own
pure premium rate modifier (or multiplier)
that they then apply to the PPR to set a
base rate. (Last year, most carriers increased
their modifiers considerably.) Then
they apply credits and premium discounts.
Your company’s characteristics, experiences
and reputation will be used by the
insurance companies to determine what
discounts and credits apply. Your loss history
and safety culture are also factors.
Experience modification factors
The greatest source of confusion in workers’
compensation rates comes from the recent
changes to California’s Experience
Rating Plan (ERP). Companies with premiums
in excess of $16,299 can qualify for a
premium multiplier called an Experience
Modification Factor or “X-Mod” that can
be used to adjust your premium up or
down. The X-Mod takes into account company
payroll and loss history (generally
for three years) and compares it to companies
with similar classification codes.
Historically, if your X-Mod was 100 percent,
your performance was considered average
compared to your peers. That meant
your company’s losses were what WCIRB
expected based on your payroll and classification
codes. However, recent revisions
to the ERP formula change that. Although
WCIRB says the revisions will “improve
the X-mod's predictive value and make it
easier to understand,” risk managers are
finding the cumulative effect of these
changes negatively impacts the X-Mod calculation
for most industries.
First, expected loss rates are a critical
component of the ERP Formula. We’ve
seen a dramatic reduction in these rates
during the past few years. The “D” ratios
also play a significant role in the calculation
and determine expected primary
losses. D ratios have been decreased. This
drives up your X-Mod.
The formula for splitting actual losses
into primary and excess has been changed
to a "single split" model, with the first
$7,000 of every loss considered primary.
The change to the split point means any
claim up to $7,000 goes into your X-Mod
calculation dollar for dollar as a “primary
loss.” (The split point was $2,000 before
the split.) This will clearly penalize a company
that has a large percentage of smaller
claims, and losses from $2,000 to $24,500
will have greater impact than they did
under the old formula.
Changes to the credibility values (“W”
values) in the X-Mod formula seem to impact
every industry differently. Although
WCIRB’s Jack Hannan said approximately
60 percent of companies are seeing either
lower X-Mods or little to no change in their
X-Mods due to formula changes, this is not
the case for a majority of the calculations
we’ve reviewed. Many contractors are seeing
X-Mod increases of 10 percent to 12
percent as a result of the change in the formula,
and some have been hit with rate increases
of more than 20 percent.
Under the revisions, the X-Mod for
many construction companies will significantly
change even if payrolls, classifications
and losses remain the same. The new
formula only rewards relatively claim-free
results. Some companies with losses below
WCIRB’s “expected loss values” have 2010
X-Mods of more than 100 percent.
State surcharges, CIGA assessments
In 2000, California workers’ comp policies
applied surcharges of 0.26 percent to premiums.
The tax, which is set by the state,
increasing on 2001 policies to 1.36 percent
and has risen steadily to more than 4.7 percent
for the 2010 policy year.
What you can do
The best strategy for dealing with these
changes is to be sure your company has an
effective risk management and safety program,
including the assistance of a claims
specialist to help manage your claims.
Every claim counts and the frequency of
claims is critical. Next, study the changes
in the ERP formula so you understand
them and can work within the new parameters.
Also, the new X-Mod formula requires
employee buy-in. It’s paramount your employees
know if your company’s X-Mod exceeds
124 percent, you are disqualified from
bidding some types of work. No longer is
workers’ comp insurance simply a cost of
doing business; your X-Mod may be a primary
factor in your company’s survival and
your ability to secure future work.
By
Steven C. Mosier, ARM, CSP, (ret.) and Griff
Griffith, CPA, CIC, Garrett/Mosier Insurance
Services, dba GMGS Insurance Services | |
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