The Effects of the NCCI Mod Calculation Changes

The Problem

The National Council on Compensation Insurance (NCCI) has changed an integral part of the calculation of the experience modification factor. We are long overdue for this change as the last increase in the split point was done twenty years ago and claims cost has increased significantly over that period of time. The change is coming in phases beginning in 2013, with an increase again in 2014 and the third increase taking place in 2015. The question is… how is this change going to affect your or your client’s experience modification factor? We ran several examples through our Mod Master program and are able to make some generalizations regarding how experience ‘mods’ will be affected.

Explaining the Mod

First some basics - we all know that an experience modification (mod) is a calculation that reflects the workers’ compensation claims experience of an employer. Quite simply, a 1.0 mod is average, if an employer’s claims experience is better than average (ie: unity or 1.0), it produces a credit mod (ie: .90), if the claims experience is worse than average (ie: 1.2), a debit mod is produced. A credit mod helps to reduce the premium while a debit mod increases premium.

One of the main factors used in calculating the mod is the “Split Point” factor. The Split Point divides each loss an employer has into two parts called the Primary and the Excess. The Primary portion of the loss is an indicator of frequency. The Excess portion of the loss is an indicator of severity. The Primary portion of the loss goes into the mod calculation dollar for dollar while the Excess portion is discounted by as much as 80% or more. The change that is occurring centers around the Split Point factor.

What’s New

In years past, the Split Point was at $5,000. This meant that any claim that cost $5,000 or less used the full amount of the claim cost in the calculation of the mod. However, if the claim was $8,000 for example, $5,000 was used in full (Primary) and the remaining $3,000 (Excess) was discounted.

During 2013, the Split Point is changing to $10,000. So in the example above, the full $8,000 of the claim is considered Primary and is therefore used in full in the calculation of the mod and there is no Excess.

This calculation applies to every claim an employer has in a given policy period. Therefore, the total claim value could change dramatically if the average claim cost for an employer is say, $12,000.

As indicated there will also be a change in 2014 which increases the split point to $13,500 and $15,000 or more in 2015 based on country wide severity changes.

Method of our Study

We created seven case studies with the same payrolls and class codes BUT with different losses. We ran two scenarios for each of the seven case studies – once using the $5,000 split point and once using the $10,000 split point. We then analyzed the results.

Results of our Study

The most interesting finding was that while significant credit mods tend to decrease with the implementation of the new split point, those mods that are only a slight credit can actually become debits if the employers incurred losses tend to exceed $5,000. See Exhibit A that shows a .98 mod at the $5,000 split point increases to a 1.01 mod at the $10,000 split point. Many employers must keep their mod at 1.00 or better to satisfy contract requirements related to insurance and employee safety, so these type employers need to keep a close eye on their losses.

The most unexpected change we observed was to those mods that were a moderate debit . One of the case studies we ran had a mod that was at 1.10 at the $5,000 split point. With the $10,000 split point, that mod became 1.19. A 9 point increase in a mod so close to unity to start with is substantial. See Example B.

Interestingly, one large loss in a modification experience period does not have the impact of several smaller losses with similar total cost. For instance, in Example C, a mod that was at 1.17 at the $5,000 split point moves only 6 points to a 1.23 at $10,000 split point. The important fact here is that in Example C there were $240,000 total losses in the experience period and in Example B there were $109,000 in total losses in that experience period. We used the same class codes with the same payrolls for these two examples. Even though Example C had 2.2 times the incurred losses as Example B, their modifications are now only 4 points apart under the new split point. Under the old split point, the mods in these two examples were 7 points apart.

Large Debit modifications appear to be impacted a bit less than expected per the example we ran. A mod that was at 1.6 at the $5,000 split moved 13 points to a 1.73 split point. See Example D

NCCI has indicated that if all of an employer’s indemnity losses are below $5,000 there will be negligible change in the mod. However, according to our Example G, if losses are all at $5000 or less, the mod went from 1.10 to .99 showing that an employer can go from a debit mod to a credit mod as long as their claims are $5,000 or less. When the mod is already a credit, our research indicates that the mod will fall. Example E exemplifies this as the mod fell from a .94 to a .87.

Example F shows a case study with a credit of .83 under the $5,000 split point with losses all above $5,000. When you run the same scenario with the new split point, the mod went up to .84. Although the adjustment was negligible the outcome is interesting because the employer only had three $10,000 claims in the experience period.

Example E, F and G show us that not managing the severity of claims has an adverse impact even on a credit mod. In comparing Examples E and F, it is interesting to note that while Example E has a total loss amount of $62,000 in the experience period and Example F has $30,000 in total losses in the experience period, the mods using the new split point have converged and are only 3 point apart versus 10 points difference under the old split point. The reason for this is that all of the indemnity claims were $5,000 or below and the majority of the losses in the experience were medical only claims that are discounted to only 30% of their value in calculating the mod.

In Summary

In summary, these examples clarify an important point, which is, the development in a modification caused by the new split point is not a factor of whether a modification was a debit, credit or at unity under the old split point. Rather, the impact is based on what the size and type of losses are in the experience period. If the modification is driven by losses that are medical only or indemnity losses at or below $5,000 the impact should be flat or even a reduction. If the modification is driven by one or two large losses the impact should cause a  moderate increase. Clearly, if employers have frequent losses with loss dollars falling in the $5,000 to $10,000 range, they will experience the greatest growth in their modification. It is not the total loss dollars in the experience period; rather, it is the total loss dollars that will be captured in the growth of the primary loss from $5,000 to $10,000.

Now What

In light of the results of this research, one thing is for certain: keeping claims frequency down and claims cost to a minimum are imperative to keeping experience modification factors as low as possible.  This, in turn, will help to reduce worker’s compensation premiums. As mods increase, so do premiums. Some ideas to help mitigate the affect of the split point change are below.

In net reporting states such as Georgia, South Carolina and Missouri small deductible programs are a very good option because the employer absorbs the first dollars of any claim and those dollars are not included in the mod calculation.

In gross reporting states such as North Carolina and Illinois, small to mid size deductibles are effective short term pricing tools for accounts that are seeing increases in their mod due to the changes since the deductible allows for pricing credits on premium which would offset some of the mod increase.

Investing in loss prevention programs will help to avoid accidents which, in turn, will lower the mod. Developing a functional safety committee, completing accident investigations, including evaluation and solution discussions, and implementing a strong modified duty plan are good places to start.

As the study shows, keeping the claims dollars spent to a minimum will keep the mod down. Therefore, once an injury occurs, an employer should direct treatment to a physician who is familiar with the employer’s operation, will provide light duty restrictions instead of placing the employee completely out of work and will always perform post accident drug testing.

Hiring the right employees can drastically improve how many claims occur. Essential Function Questionnaires are an effective way of determining whether the employee to be hired is fit to do the job. This simple questionnaire will help reduce injury frequency and severity. Implement wellness programs to keep staff healthy. An injured employee who is otherwise healthy has better outcomes with less cost associated with the claim.

Place workers’ compensation coverage with a workers’ compensation provider with quality claims and loss prevention services such as Synergy Coverage Solutions.