Experience Rating Eligibility and the Impact of Unaudited Payroll

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1 W o r k e r s C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a WCIRB Talks Experience Rating Eligibility and the Impact of Unaudited Payroll The webinar will begin shortly. Notice The information provided in this Presentation was developed by the Workers Compensation Insurance Rating Bureau of California (WCIRB) solely for the purpose of discussion during this Presentation. The WCIRB shall not be liable for any damages, of any kind, whether direct, indirect, incidental, punitive or consequential, arising from the use, inability to use, or reliance upon information provided in this Presentation Workers Compensation Insurance Rating Bureau of California. All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted by federal copyright law. No copyright is claimed in the text of statutes and regulations quoted within this work. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Connect, X- Direct, escad and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRB s prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies. To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the Workers Compensation Insurance Rating Bureau of California at customerservice@wcirb.com. Webinar Agenda WCIRB Talks is a series of 30-minute webinar discussions on the 2017 changes to experience rating. Today s session includes: Experience Rating Eligibility Uncooperative Payroll Audits Question and Answer Session 3 1

2 2017 Changes to Experience Rating What to Expect this Year Feb 25 Talks #1 April 7 Talks #2 May 26 Talks #3 June Proposed 2017 rating values X- Calculator July 28 Talks #4 September Earliest issuance of January 2017 mods Sep 29 Talks #5 Nov 17 Talks #6 5 Experience Rating in California Statutory Definition Statutory definition contained in Section of the California Insurance Code: rating procedure utilizing past insurance experience of the individual policyholder to forecast future losses by measuring the policyholder s loss experience against the loss experience of policyholders in the same classification to produce a prospective premium credit, debit or unity modification. 7 2

3 Eligibility for Experience Rating All California insured employers of a minimum size are eligible (approx. 120,000 employers are experience rated every year) Experience rating depends on an employer s historical loss history to the extent it is predictive of future claim experience For very small businesses there is not enough historical experience to provide a reliable predictor of future experience Beginning in 2016, qualification is based on experience period payroll (typically 3 years) and approved expected loss rates The amount of payroll needed to qualify for experience rating depends on the classification of the business 8 Eligibility for Experience Rating Number of Full-Time Employees Earning $60,000 Annually over 3 Years Needed to Meet Eligibility Threshold Logging Painting (Low Wage) Nut Crops Retail Stores Glassware Mfg Hospitals Private Schools Dentists Attorneys Accounting Firms 9 3

4 Eligibility for Experience Rating Change in 2016 Prior to 2016, experience rating eligibility was based on approved pure premium rates January x-mods not issued until after CDI Rate Decision CDI Pure Premium Rate Decision typically in November Eligibility in 2016 based on approved expected loss rates Expected loss rates included in WCIRB Regulatory Filing January 2016 x-mods issued in September 2015 Expected loss-rate based eligibility of $10,300 is lower than prior eligibility threshold based on pure premium rates Number of eligible policyholders unaffected Eligibility threshold will be updated annually for inflation 10 Eligibility for Experience Rating Sample Computation Policy Period Class Code Reported Payroll 2016 Expected Loss Rate Totals 1/1/14 1/1/ (-) 300, $9,690 1/1/13 1/1/ (-) 200, $6,460 1/1/12 1/1/ (-) 100, $3,230 Total Eligibility Premium $19,380 The 2016 eligibility threshold is $10,300, so this employer qualifies to be experience rated. 11 4

5 Audit of Payroll The insurer determines the policyholder s final premium by an audit of the exposure by classification for the expired policy Auditor s examination of the policyholder s payroll records Or a signed payroll statement obtained from the employer If the insurer is unable to obtain an audit, the exposure on the Unit Statistical Report (USR) must be reported as estimated 12 Unaudited Payroll Experience Rating Plan directs not to use unaudited payroll in experience modifications When insurer reports that a policyholder has not cooperated with the audit, the WCIRB sends a letter to the policyholder Explanation of experience rating and the impact on insurance premium due to an incomplete audit Urges policyholder to contact the insurer to schedule an audit If audited exposure is not received within 60 days, the WCIRB will attempt to promulgate an experience modification using any reported losses but excluding the unaudited payroll 13 5

6 Experience ification Calculation Example Excluding Unaudited Payroll Policy Period Payroll Expected Losses # Claims Actual Losses 2/1/2014 2/1/2015 $ ,973 2/1/2013 2/1/2014 $1,151,685 41, /1/2012 2/1/2013 $1,057,068 36, ,515 Totals $2,208,753 78, ,488 Experience ification = 103% 14 Experience ification Calculation Example With Audited Payroll Policy Period Payroll Expected Losses # Claims Actual Losses 2/1/2014 2/1/2015 $1,371,629 49, ,973 2/1/2013 2/1/2014 $1,151,685 41, /1/2012 2/1/2013 $1,057,068 36, ,515 Totals $3,580, , ,488 Experience ification = 86% 15 6

7 Eligibility for Experience Rating Sample Computation Current Impact of Unaudited Payroll on Eligibility Policy Period Class Code Reported Payroll 2016 Expected Loss Rate 1/1/14 1/1/ (-) $0 Totals 1/1/13 1/1/ (-) 200, $6,460 1/1/12 1/1/ (-) 100, $3,230 Total Eligibility Premium $9,690 The 2016 eligibility threshold is $10,300, so this employer does not qualify to be experience rated. 16 Impact of Unaudited Payroll on Eligibility Change Effective January 1, 2017 For 2017, the Experience Rating Plan permits debit experience modifications (>100%) to be issued that would otherwise be ineligible for experience rating due to unaudited payroll When the exclusion of estimated payroll results in not meeting the eligibility threshold, an experience modification will be published if: The policyholder was experience rated in the immediately preceding year, and The experience modification is over 100% 17 7

8 Experience ifications Excluding Unaudited Payroll The Experience Rating Form ( ratesheet ) will contain a designation that the calculation excludes unaudited payroll data A letter is sent to the policyholder advising that the experience modification excludes the estimated payroll but includes any losses 18 Revision of Experience ifications Excluding Unaudited Payroll If the WCIRB subsequently receives a USR correction with audited exposure, the current and two immediately preceding experience ratings are subject to revision In accordance with the Experience Rating Plan, Section V, Rule 6, Experience ification Corrections Effective Dates 19 8