When you buy a workers’ compensation insurance plan, there’s a lot of work that goes on behind the scenes. Your agent has to keep track of the various ratings assigned to your company, then adjust them any time claims are made against your policy.
The calculations can be complex. Hence, the Experience Rating Worksheet. A worksheet is created for every business that buys a workers’ compensation plan.
Your company is assigned an experience rating on your policy—as long as it is subject to experience rating. This rating appears on your policy.
Several terms and numbers appear on your experience rating worksheet. Each one of them affects the other in one way or another. You need to see just how they fit in and affect other numbers.
This is a number multiplied by your premium. Ideally, your experience modifier should be equal to or less than 1.0—you’ll get a credit or a reduction on your premium. If your experience modifier is higher than 1.0, you receive a debit—an increase on your premium.
The National Council on Compensation Insurance (NCCI) is the organization responsible for calculating your business’ experience modifier. If your business is not in an NCCI state, then your experience modifier is determined by the workers’ compensation rating bureau in your state. Every business in every state, no matter who calculated their modifier, receives the worksheet that spells out the modifier and how it was calculated.
The NCCI or your state’s compensation rating bureau arrives at this number by working from a three-year history of your business’ payroll and losses.
“Experience,” when explained by workers’ compensation, takes it a little further. It’s comparison of the premium, using your payroll and your losses that have been arrived at using a risk during an individual policy period.
The loss record of the insured (your business) is also determined. The risk’s history, coming from the company’s losses and payroll on a unit card. (A “risk” is an individual entity or business.) Your paid premium is examined and compared to the losses that workers’ compensation has paid out against your insurance policy.
Finally, a total of premiums paid or losses sustained within your state within a determined period of time are recorded.
This section appears at the top of the experience modification worksheet—an account summary. The summary section contains several subsections with company information in each.
Class Codes, Payroll and Expected Losses
This may look like so much gibberish to you, but every number and term has a purpose.
The “class code” is the classification code for an occupational class. This is a four-digit number assigned to a specific occupation. The class code comes from the type of business you do (auto dealership, roofer, clerical or other). For clerical companies or workers, this is “8810.”)
This is the wages you pay to your employees within your state. Workers’ compensation uses your payroll to arrive at the premium amount you’ll pay for your policy.
Expected losses should appear in the second column under “Expected Loss Rate,” or ELR. Here, your premium and loss data are calculated and displayed. It’s the dollar amount that your insurance company has determined that it will spend on your losses, per $100 of payroll. As an example, if your business’ ELR is .10, this means your insurance provider anticipates that it will spend .10 on losses based on every $100 of your business’ payroll. They are calculated by multiplying the ELR with your payroll, then dividing by 100.
Primary vs. Excess Losses
Workers’ compensation works hard to be fair to the companies to which it provides insurance. Just a portion of your business’ large losses are used to arrive at your experience rating. In this way, your business avoids having one large loss negatively affecting your experience modifier.
Most (not all) states have set $15,000.00 as the threshold that divides excess losses from primary losses. The amount specific amount of a loss up to, but not exceeding the specified loss is called your primary loss. The amount over that becomes your excess loss. Depending on what kind of claim you have filed against your policy, every penny of the primary loss is used in arriving at your experience rating; only some of the excess loss can be used to calculate your business’ rating.
Discount RatioActuaries came up with the Discount Ratio (D-ratio). Your primary loss is calculated by multiplying the discount rate into your expected losses. Next, your primary expected losses are subtracted from your total expected losses. The answer is your excess expected losses.
Claims and Actual Losses
On the Experience Rating Worksheet, the remaining five columns are shown on the right side of the sheet. These are concerned with any claims you file, along with any actual losses your business has sustained.
This is where your business’ claims are listed—beneath the Claims Data heading. They are listed by number. Smaller claims that total less than $2,000 will be listed in one lump sum. These are categorized by “NO” and a number. That number tells you and your agent how many of these smaller claims have been put into this number. However, smaller dollar claims are only placed in one number if they involve the same type of claim—medical only.
Going a little deeper, these claims are denoted by injury codes. One (IJ) means the claim is “injury only.” Another code stands for a temporary disability claim, either partial or total. Medical-only claims are categorized with a “5.” Temporary disability” claims are noted by a “6.”
Next to the injury code column is another column called “OF.” In the boxes beneath this column, you’ll see a claim status of either “F” or “O.” “O” means the claim remains open; “F” tells you that the claim is final or closed.
To the right of the injury code column, two other columns hold data relevant to the losses that you have incurred. In one column, you’ll see workers’ compensation benefits paid out (this includes medical expenses paid to doctors and disability payments sent to your employees). Your insurance provider has paid these claims to your employees for you. Another column contains the losses reserves for those claims that are still open. (This is the amount that your insurance company has put aside and designated for a future payment to your employee and their doctor.)
While the calculations look like they would twist someone’s brain, they do make sense. Without working out an actual equation, let’s go through each number and what it means.
The “weighing value” is used in states that use the NCCI model. It increases as expected losses also increase. Also, if your business is larger, with a bigger payroll and more employees, then, your business’ claims experience has more of an influence on the result.
Expected Excess LossesThis is the difference between expected losses and expected primary losses.
Expected lossesThis uses your business’ expected loss rates. Your classification codes and the payroll numbers between these codes have an effect on your expected losses.
Expected primary lossesA discounted part of all expected losses is used to arrive at this number.
Actual Excess LossesThis is the difference between the actual primary losses and total actual losses.
BallastThis statistic varies, depending on your expected losses. Its intent is to try and keep your mod close to 1.00.
Actual incurred lossesThe total amount of claims (indemnity and medical only). Your per-claim limits vary by state. This total can also have another limitation that’s called the Experience Rating Adjustment. This ERA provides for a 70 percent discount for only medical claims.
Actual primary losses
This is the total of the first $5,000 of all claims. This total changed to $10,000 on January 1, 2013.
Here’s what the actual equation looks like:
APL + B + (W x AEL) + (1-W) x EEL = EMR (Your actual losses)
EPL + B + (W x EEL) + (1-W) x EEL (Your expected excess losses)
Actuaries again developed two factors to create the rating factors.
First, the “weight factor” figures out your total actual excess losses which will be used to arrive at your modifier. This factor is smaller for small businesses and it grows as your business grows.
However, if your small business has a big loss, this weight factor will actually lessen its impact of the loss that is illustrated in your experience modifier. Conversely, that big loss will have a much bigger effect on the modifier of a big business.
The next factor is “ballast.” As it does on a boat, the ballast works to stabilize your business’ modifier, with the goal of keeping it as close to unity as possible. Ideally, your modifier won’t stray too far from the unity point of 1.0.
Experience Rating Adjustment
Only medical claims affect this part of your rating worksheet and policy. If the experience rating adjustment (ERA) does apply, only 30 percent of the claim amount will be applied for your business’ experience rating, with the remainder (70 percent), being ignored.
The ERA does not apply to claims that will ultimately end up in disability payments being sent to your employees.
By applying 30 percent to your business experience rating, this lessens the impact of the claim against your premium.
Just like any business owner, you look for ways to save money here and there. On your workers’ compensation policy, you should be able to accomplish this. Ask your insurance agent to review upcoming policy renewals about six or eight months before a renewal takes effect.
The reason you want to do this is that columns seven through nine of your experience rating worksheet holds the actual compensation claims made by your employees during a policy period. These amounts are based on claims reported by stat cards that are submitted by insurance carriers to NCCI. In addition, the claims are generally based off a stat card cut-off date that occurs six months before the renewal of your policy.
This means that the reported losses on your policy include outstanding, or open claims and those which have already been paid. The open claims are reserves for medical and indemnity payments put together. Your reserves on open claims are based on your insurer judgment. The paid medical and permanent total disabilities are not applied against your worksheet.
If experience rating worksheets are not reviewed periodically, inaccuracies may slip past your insurance provider, which may mean that you’re going to pay more in the next renewal period.
This may happen if an open claim has been inadvertently closed with no payments (or very few) payments) made to your employee. If your carrier overlooked filing a corrective stat card on these particular claims or if a reserved claim was closed just after the cut-off date, this means the reserve amount will still be on your business’ worksheet. Further, that amount will be denoted with an “O” next to it.
This leads to costly errors. One claim ($60,000) in open reserve status was closed before the stat card valuation date. The modification showing on the business’ worksheet was above 1.0—it should have been 0.94, which led to the business having a higher premium owed in the new renewal period. Even worse, this error could not be corrected until the upcoming reporting period came up, per NCCI’s rules.
This one is big. A $22,000 loss was still in open reserve status for nearly three years after it was paid. Worse, the $22,000 loss continued to show on following stat cards—even though the reserve had been reduced repeatedly. Finally, after the last stat card’s valuation date, the outstanding claim was closed at $4,800. If the loss had been closed when it should have been closed, the modification would have come down to 1.15. Instead, it was at 1.21.
A fraudulent $35,000 claim was shown on a business’ experience rating worksheet, leading to a 1.17 mod. Even after the claim was proved to be fraudulent, the company didn’t file a stat card as it should have done. After the stat card was filed, the business’ premium fell by nearly one-third.
Because a current mod can’t be reevaluated until the next rating period comes along, it’s really important for business’ insurance agents to file their stat cards in a timely manner.
Reserves are based more on judgment, so, if you believe yours is wrong, challenge it if you think it’s too high.
If you are the insurance agent and you are suspicious that a reserve amount is too high because a carrier habitually over-reserves, document everything that proves this. You may need to present this proof to the insurance department, workers’ compensation commission or labor department in your state.