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 Experience Rating Eligibility/Qualification Which Employers Qualify for an Experience Modification? Rod Libbe Quality Assurance Director IIABCal Webinar October 14, 2015 Notice The information provided in this webinar was developed by the Workers Compensation Insurance Rating Bureau of California (WCIRB) solely for the purpose of discussion during this webinar. 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 webinar. The Independent Insurance Agents and Brokers of California (IIABCal) is acting only as a host for this webinar and the WCIRB is not in any way affiliated with IIABCal. 2015 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 Online, X-Mod 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. 1
Purpose To provide information related to how eligibility for experience rating is determined. Agenda: What is the WCIRB s Role? How Data is Collected and Used by the WCIRB Experience Rating Effective Dates Experience Period Eligibility for Experience Rating 2017 Changes to Experience Rating References and Resources What is the WCIRB s Role? The WCIRB is a licensed rating organization and the California Insurance Commissioner s designated statistical agent, as defined by the California Insurance. Collects workers compensation loss and expense statistics Recommends advisory pure premium rates for approval by the Insurance Commissioner Administers and proposes amendments to the Insurance Commissioner s workers compensation regulations Maintains the Standard Classification System Conducts classification inspections and test audits Publishes experience modifications for eligible California businesses 2
Experience Modifications An experience modification is a forecast of future losses Less than 100% reflects better than average losses Over 100% reflects worse than average losses Approximately 20% of employers (more than 100,000) are experience rated, representing almost 90% of premium Most small employers do not qualify since their claims experience is not typically predictive of future losses How Data is Collected and Used by the WCIRB Every workers' compensation insurance policy providing coverage in California is required to be reported to the WCIRB within 60 days after policy inception. Payroll by classification and any claims are submitted to WCIRB by 20 months after the policy inception date. All claims on the policy are first valued at 18 months. Up to 9 additional reports are required annually, as long as there were open claims as of the prior valuation. Level Date of Valuation Date of Reporting 1 18 months 20 months 2 30 months 32 months 3 42 months 44 months 4 54 months 56 months 5 66 months 68 months 6 78 months 80 months 7 90 months 92 months 8 102 months 104 months 9 114 months 116 months 10 126 months 128 months 3
Experience Rating Effective Dates The experience rating process starts with the determination of the rating date/effective date of the experience modification. The inception date, or start date, of the policies determines the company's anniversary rating date. For example, if the policies always start on January 1 st, the anniversary rating date would be January 1. If inception dates change or there are multiple concurrent policies with varying inception dates, determining the rating date may be more complicated. The Experience Period Once the rating/effective date of the experience modification has been determined, then a determination must be made what experience (payroll and loss data) should be used to calculate the experience modification. The experience period shall be three (3) years, commencing four (4) years and nine (9) months prior and terminating one (1) year and nine (9) months prior to the date for which an experience modification is to be established. The payroll and loss data from all policies that incept within the experience period will be used in the calculation. 4
The Experience Period Rating Date Inception Date Inception Date 01/01/16 02/01/16 03/01/16 04/01/16 05/01/16 06/01/16 07/01/16 08/01/16 09/01/16 10/01/16 11/01/16 12/01/16 04/01/11 05/01/11 06/01/11 07/01/11 08/01/11 09/01/11 10/01/11 11/01/11 12/01/11 01/01/12 02/01/12 03/01/12 04/01/14 05/01/14 06/01/14 07/01/14 08/01/14 09/01/14 10/01/14 11/01/14 12/01/14 01/01/15 02/01/15 03/01/15 The Experience Period 01/01/11 01/01/12 01/01/13 01/01/14 01/01/15 01/01/16 01/01/17 Policy Period Current Policy Policy Period NOT USED Policy Period NOT USED Policy Period 3rd USR Valued July 2015 2nd USR Valued July 2015 1st USR Valued July 2015 Policy Period Policy Period 04/01/11 04/01/14 EXPERIENCE PERIOD January 1, 2016 ARD 5
Eligibility for Experience Rating To determine eligibility, the payroll developed during the experience period is totaled by classification code. These totals are multiplied by the qualifying rate that applies as of the effective date of the experience modification, for the particular classification. The sum of these premium calculations must equal or exceed the minimum premium threshold. Eligibility for Experience Rating Effective January 1, 2016, there was a formulary change whereby expected loss rates rather than pure premium rates are now utilized as the qualifying rate to determine eligibility. This change was not intended to impact the number of employers that qualify for an experience modification, rather to speed up the process of issuing experience modifications. 6
Loss Rates Effective January 1, 2016 Table of Loss Rates and D-ratios (Approved) 0005 2.48 0.22 2108 3.45 0.21 3022 3.39 0.19 3643 1.65 0.20 4362 0.59 0.20 0016 3.64 0.21 2109 2.77 0.24 3030 3.93 0.19 3647 3.18 0.18 4410 3.23 0.21 0034 3.31 0.22 2111 2.44 0.23 3039 3.59 0.19 3651 1.38 0.24 4420 4.51 0.23 0035 2.59 0.21 2113 5.98 0.19 3040 3.98 0.20 3681 0.51 0.22 4432 1.74 0.19 0036 4.08 0.20 2116 2.09 0.23 3060 3.69 0.19 3682 0.63 0.23 4470 1.81 0.20 0038 6.36 0.16 2117 4.23 0.22 3066 2.22 0.21 3683 3.38 0.20 4478 3.40 0.20 0040 2.20 0.22 2121 1.98 0.21 3070 0.21 0.23 3719 0.78 0.13 4492 2.91 0.20 0041 2.86 0.22 2123 2.61 0.25 3076 3.32 0.18 3724 2.13 0.17 4494 2.77 0.19 0042 3.49 0.20 2142 1.38 0.22 3081 4.78 0.21 3726 1.65 0.17 4495 2.66 0.20 0044 2.78 0.20 2150 3.52 0.24 3082 4.89 0.15 3805 0.47 0.18 4496 3.15 0.20 0045 2.23 0.20 2163 2.83 0.21 3085 4.09 0.20 3808 1.61 0.22 4497 2.37 0.21 0050 3.33 0.19 2211 7.44 0.20 3099 1.99 0.20 3815 2.66 0.23 4498 2.61 0.20 0079 2.14 0.20 2222 2.77 0.19 3110 3.22 0.19 3821 4.75 0.21 4499 3.05 0.20 0096 2.72 0.23 2362 6.04 0.20 3131 2.60 0.21 3828 2.13 0.21 4511 0.43 0.21 0106 6.50 0.16 2402 3.66 0.21 3146 1.78 0.21 3830 1.14 0.16 4512 0.12 0.27 Loss Rates can be found on WCIRB.com under Manuals and Plans Eligibility (Effective January 2016) Eligibility Requirements A risk shall qualify for experience rating if its California workers compensation insurance premium is no less than $10,300 by applying Loss Rates to the total remuneration that would be used in the experience rating calculation for the risk. Only completed policy periods shall be used in determining eligibility. Any risk eligible for experience rating shall be experience rated. 7
Eligibility (Effective July 2015) Eligibility Requirements A risk shall qualify for experience rating if its California workers compensation insurance premium is no less than $28,461 by applying Pure Premium Rates to the total remuneration that would be used in the experience rating calculation for the risk. Only completed policy periods shall be used in determining eligibility. Any risk eligible for experience rating shall be experience rated. Loss Rates vs. Pure Premium Rates loss rates are different than pure premium rates. loss rates reflect average losses by classification for the experience period used in the calculation. For 2016, expected loss rates reflect average losses estimated by classification for 2014 policies (valued at 18 months), 2013 policies (valued at 30 months) and 2012 policies (valued at 42 months) Pure premium rates reflect rates sufficient to cover all losses to ultimate closure, which may be 50 years or longer. 8
Eligibility Example The Rod Libbe s Rubber Belt Company started business in 2012 The classification for the business is 4410, Rubber Goods Mfg-N.O.C. The 2016 Loss Rate for Classification 4410 is $3.23 per $100 of payroll The next slide shows payrolls by classification for the 2012, 2013 and 2014 policy years Table of Loss Rates and D-ratios (Approved) 0005 2.48 0.22 2108 3.45 0.21 3022 3.39 0.19 3643 1.65 0.20 4362 0.59 0.20 0016 3.64 0.21 2109 2.77 0.24 3030 3.93 0.19 3647 3.18 0.18 4410 3.23 0.21 0034 3.31 0.22 2111 2.44 0.23 3039 3.59 0.19 3651 1.38 0.24 4420 4.51 0.23 Eligibility Example Policy Reported 2016 Period Classification Payroll E.L. Rate Totals 01/01/14-15 4410(-) 100,000 3.23 $3,230 01/01/13-14 4410(-) 200,000 3.23 $6,460 01/01/12-13 4410(-) 300,000 3.23 $9,690 Total Eligibility Premium $19,380 The eligibility threshold is $10,300 so this employer qualifies to be experience rated. 9
Let s Test Your Knowledge Approximately how many California employers are large enough to qualify for an experience modification? a. 500 b. 10,000 c. 100,000 d. 500,000 True or False: A new employer may qualify for experience rating within the first year of business. What is the purpose of the 2016 eligibility change? a) To increase the number of experience-rated employers b) To decrease the number of experience-rated employers c) To expedite the issuance of January experience modifications 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 Changes to Experience Rating for 2017 A Preview of Upcoming Changes 10
Changes to Experience Rating for 2017 For 2017, the Experience Rating Plan permits debit experience modifications, in specified circumstances, to be issued excluding the unaudited payroll for policyholders who are uncooperative at the time of a final audit. The 2017 Experience Rating Plan also replaces the fixed $7,000 primary and excess loss split point with a variable split point that changes based on the size of the employer. This change will enhance the accuracy of the experience rating formula, especially for smaller employers, reducing volatility and providing flexibility for simplifying the experience rating formula in future years. What is a Split Point? The split point is used to divide claims into two parts, a primary amount and an excess amount. Primary losses represent the more predictive and controllable portion of a claim, which is used in entirety in the experience modification formula. Excess losses represent the less controllable portion, which is used to a lesser extent or not at all depending on the size of the employer. Places greater weight on the frequency of claims rather than severity of claims, as generally, an employer has some control over the frequency of claims, but little control over the ultimate cost of claims. 11
What Does the Split Point Do? Injury Type 01 = Death 02 = Permanent Total Disability 03 = Major 04 = Minor 05 = Temporary 06 = Medical Only 07 = Contract Medical 08 = Compromised Death Claim Principal Features of the Variable Split Plan Split point proposed to vary from $5,500 for small employers to $70,000 for very large employers. Variable split plan enhances accuracy, especially for smaller employers. Impact of large shock loss is generally reduced. Credibility for claims in excess of the variable split is zero, so no excess loss values will be used under the new formula. 12
Impacts of Transitioning to a Variable Split Plan No overall pure premium impact and no impact on average modification. Net movements of modifications above/below key thresholds (e.g. credit/debit, 125%, 200%) are expected to generally be less than 1%. Generally, the variable split plan places greater emphasis on claim frequency and less emphasis on the severity of claims. Employers with high claim frequency relative to their peers will generally have higher experience modifications. Employers with very large shock losses will generally have lower modifications under the variable split plan. Summary Today s presentation provided an overview of eligibility for experience rating. We also discussed upcoming changes: January 1, 2016 Experience rating eligibility is based on expected loss rates rather than advisory pure premium rates. January 1, 2017 Experience Rating Plan permits debit experience modifications, in specified circumstances, to be issued excluding the unaudited payroll for policyholders who are uncooperative at the time of a final audit. January 1, 2017 Experience Rating Plan will replace the current fixed $7,000 primary and excess loss split point with a variable split point that varies based on the size of the employer. 13
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 References and Resources References & Resources California Insurance Section 11734 www.wcirb.com California Workers Compensation Experience Rating Plan 1995 California Workers Compensation Uniform Statistical Reporting Plan 1995 14
www.wcirb.com Agents and Brokers content on wcirb.com 15
Loss Rates Available on wcirb.com WCIRB at InsurFEST 2015 InsurFEST 2015 November 4-6, 2015 Waterfront Beach Resort, Huntington Beach WCIRB workshop 2016 Changes & Preview of the 2017 Variable Split Plan For more information, visit www.insurfest.org 16