WCIRB Mod Talks 2019 Experience Rating Plan How the New Plan Will Work

WCIRB Mod Talks 2019 Experience Rating Plan How the New Plan Will Work Dave Bellusci EVP & Chief Actuary Rod Libbe Quality Assurance Director February 15, 2018 The Webinar Will Begin Shortly ANTITRUST NOTICE As members of the Workers Compensation Insurance Rating Bureau of California (WCIRB) and their agents, you are bound, when involved in presentations, meetings or other activities of the WCIRB, to limit your actions (and discussions other than social ones) to matters relating to the business of the WCIRB. Matters that do not relate directly to WCIRB business should be avoided. Members and their agents should particularly avoid discussions or conduct that could be construed as intended to affect competition (or access to markets). Thus, as members and their agents, you should not discuss or pursue the business interests of individual insurers or others, including, in particular, the plans of individual members involving, or the possibility or desirability of (a) raising, lowering, or stabilizing prices (premiums or commissions); (b) doing business or refusing to do business with particular, or classes of, insurers, reinsurers, agents, brokers, or insureds, or in particular locales; or (c) potential actions that would affect the availability of products or service either generally or in specific markets or locales. NOTICE & COPYRIGHT This training presentation was developed by the Workers' Compensation Insurance Rating Bureau of California (WCIRB) for informational purposes only. 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. 2018 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 test of statutes and regulations quoted within this work. Webinar Agenda WCIRB Mod Talks is a series of 30- to 45-minute webinar discussions on experience rating. Today s session summarizes the 2019 changes adopted last September by the Insurance Commissioner: 1. Background on Experience Rating in California 2. 2019 Experience Rating Changes - Why, What, How and When - Detailed Examples of How the New Plan will Work 3. Question and Answer Session Each WCIRB member company (Company) is authorized to reproduce any part of this work solely for the purpose of transacting workers compensation insurance. This reproduction right does not include the right to make any part of this work available on any website or on any form of social media. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Connect, WCIRB CompEssentials, 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

01 Background on Experience Rating in California What is Experience Rating?... a 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. Section 11730 of the California Insurance Code 3 01. Background on Experience Rating in California 2

What Does an Experience Modification Represent? An experience modification is a forecast of future losses - Not a recoupment program past experience is used only to the extent it is predictive of future experience - Not a proxy for safety safety is one of the factors that go into the X-Mod An experience modification is expressed as a percentage - Less than 100% means employer has better than average loss history - Over 100% means employer has worse than average loss history and experience rating is premium neutral on a statewide basis Experience rating is only one component of employer s premium determination - Loss experience and risk characteristics are also considerations 4 01. Background on Experience Rating in California What is the WCIRB s Role? The WCIRB is a licensed rating organization and the California Insurance Commissioner s designated statistical agent Administers and proposes amendments to the Insurance Commissioner s workers compensation regulations - Uniform Statistical Reporting Plan - Experience Rating Plan - Miscellaneous Regulations 5 01. Background on Experience Rating in California 3

The WCIRB s Process Proposing Changes to Experience Rating 1 2 3 WCIRB Research Review by WCIRB Committees. WCIRB Submits Regulatory Filing to CDI 6 5 4 WCIRB Issues Experience Modifications Insurance Commissioner's Decision Public Hearing/ Comment Period 6 01. Background on Experience Rating in California 02 2019 Experience Rating Changes 4

Recent Changes to Experience Rating 2015 2016 2017 2019 Amended to limit effect of a single claim in the experience period to no more than 25 points above the loss-free rating Experience rating eligibility determined using expected loss rates instead of pure premium rates Fixed $7,000 primary and excess split point replaced with a variable split point that varies based on the size of the employer Formula will be simplified and amended to eliminate the first $250 of each claim 8 What s Changing in 2019? Excluding first $250 of each loss from formula - Addresses potential underreporting of first aid claims - Modest impact on most employers X-Mods Simplify Formula - Eliminate credibility terms - No impact on X-Mods - Changes experience rating form 9 5

2019 Change to X-Mod Formula Why? 2015 2017 2019 WCIRB established broad working group on non-reporting of small First Aid claims Working group findings & recommendations Non-reporting of claims is a significant issue affecting workers access to benefits, fairness & insurer s ability to manage claims Clarify reporting requirements Remove disincentive to report small claims by eliminating the use of these claims in X-Mod formula Reporting requirements clarified - all claims with medical treatment costs must be reported Claims less than $250 not used in X- Mod formula (includes 2017 claims) Objective: Get all workers comp claims into the system Also take opportunity to simplify the formula 10 2019 Change to X-Mod Formula Why $250? Most Claims Meeting California Definition of First Aid will be less than $250 in Value Higher Alternative Thresholds Reviewed had Significant Impact on Plan Accuracy, Loss-Free Credits and X-Mod Distribution WCIRB Will Regularly Review $250 Threshold and Adjust for Inflation as Needed 11 6

2019 Change to X-Mod Formula How Will it Work? Simplifying the X-Mod Formula Current formula: [(Ap Cp)+(Ep (1 Cp))] + [(Ae Ce)+(Ee (1 Ce))] E Ap = Actual Primary Losses Cp = Credibility Primary Value Ep = Expected Primary Losses E = Expected Losses Ae = Actual Excess Losses Ce = Credibility Excess Value Ee = Expected Excess Losses 12 2019 Change to X-Mod Formula How Will it Work? Simplifying the Experience Modification Formula With Cp = 1 and Ce = 0, the experience rating formula simplifies to: [Ap + Ee] E Ap = Actual Primary Losses Ee = Expected Excess Losses E = Expected Losses 13 7

2019 Change to X-Mod Formula How Will it Work? $250 Loss Exclusion? 2019 Change will: Apply to all claims not only medical share of claims Reduce each claim s primary losses by $250 Result in modified experience rating worksheet Show all claims individually (not only those over $2,000) Primary Losses: For Incurred Loss Amounts $250 or less: - Actual Primary Loss = 0 For Incurred Loss Amounts between $250 and primary threshold: - Actual Primary Loss = Actual Loss less $250 For Incurred Loss Amounts above primary threshold: - Actual Primary Loss = Primary Threshold less $250 14 2019 Change to X-Mod Formula How Will it Work? $250 Loss Exclusion Examples Primary losses with primary threshold: $10,000 $ For Incurred Loss of $200 Actual Primary Loss = 0 $ For Incurred Loss of $5,000 Actual Primary Loss = $4,750 $ For Incurred Loss of $10,000 Actual Primary Loss = $9,750 $ For Incurred Loss of $50,000 Actual Primary Loss = $9,750 15 8

2019 Change to X-Mod Formula How Will Employers Be Impacted? No Impact on any X-Mod from simplification of formula $250 Loss exclusion - No overall pure premium impact no significant impact on average X-Mod - Impact on individual employer X-Mod will depend on individual employer s claim and exposure history - Impacts generally modest more than 85% of X-Mods will be impacted by 2 points or less - Loss-free employers will generally see a small increase 16 2019 Change to X-Mod Formula How Will Employers Be Impacted? All Employers Estimated impact of change from variable split to variable split with $250 exclusion: Policy years 2010-2014 combined Share of Employers 35% 30% 25% 20% 15% 10% 5% Statewide 0% Source: WCIRB <= -15% -14% -13% -12% -11% -10% -9% -8% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% >= +15% Experience Modification Changes from Variable Split to Variable Split with $250 per Claim Exclusion 17 9

2018 Workers Compensation Experience Rating Form Sample 1 18 2018 Workers Compensation Experience Rating Form Sample 1 ( continued) Remove $250 Column goes away Group claims listed individually 19 10

2019 Workers Compensation Experience Rating Form Sample 1 20 2018 vs 2019 Format Sample 1 vs. 2018 Format 2019 Format Remove $250 Column goes away Group claims listed individually Simplified Formula 21 11

2018 Workers Compensation Experience Rating Form Sample 2 Remove $250 Column goes away Group claims listed individually Group claims listed individually 22 2019 Workers Compensation Experience Rating Form Sample 2 23 12

2018 vs 2019 Format Sample 2 vs. 2018 Format 2019 Format Remove $250 Column goes away Group claims listed individually Group claims listed individually Simplified Formula 24 2019 Change to X-Mod Formula When? What to Expect. Q1 2018 Mod Talks Session 1 How the New Plan will Work Q2 2018 Mod Talks Session 2 Treatment of Exception Claims Q3 2018 Mod Talks Session 3 Proposed Rating Values & How to Use X-Mod Estimator September 2018 Earliest issuance of January 2019 X-Mods June 2018 Regulatory Filing Proposed 2019 Rating Values X-Mod Calculator Q4 2018 Mod Talks Session 4 How the New Plan is Working 25 13