NCCI Experience Modification Factor 2024 Changes FAQs

The National Council on Compensation Insurance (NCCI) is making alterations to its experience modification factor for 2024. These changes are slated to go into effect on each state’s regular filing date on or after Nov. 1, 2023.

This Work Comp Insights provides the NCCI’s answers to frequently asked questions (FAQs) concerning the new changes. 

General FAQs

What is changing?

The formulas and general structure of the Experience Rating Plan (Plan) remain unchanged. Certain underlying components will be impacted:

• Primary/excess loss split point (split point)
• State per claim accident limitation (SAL) and United States Longshore and Harbor Workers’ Compensation (USL&HW) per claim accident limitation
• G value
• Credibility parameters underlying calculation of the weight (W) and ballast (B) values
  
• Discount ratios (D-ratios)

When will the proposed changes in Item E-1049 become effective?

This item will become effective for experience rating modifications with rating effective dates on and after each state’s anticipated loss cost/rate filing, which are generally effective in 2024. The specific state rating effective dates span from Nov. 1, 2023, to Aug. 1, 2024, with the most common effective date being Jan. 1, 2024.

Why are these changes being proposed now?

NCCI periodically evaluates Plan methodology and performance. During the latest review, NCCI identified some opportunities to improve Plan performance, with revisions that will result in:

• A more accurate and predictive experience rating modification
• Experience rating modifications that reflect a more equitable determination of primary and excess losses across states with varying cost levels
• More comparable Plan performance in states with claim costs that vary significantly from the countrywide average
• Experience rating modifications that are less sensitive to large outlier claims without sacrificing predictive accuracy
• More consistent calculation of each employer’s expected claim count, which is expected to result in more appropriate credibility being assigned to each employer’s loss experience.
• Recalibrated credibility parameters underlying the weight and ballast values to increase equity across employers
  
• The elimination of complex calculations where no value is added

Where is the item being filed?

Item E-1409 is being filed in all NCCI states (including AK, AL, AR, AZ, CO, CT, DC, FL, GA, HI, IA, ID, IL, KS, KY, LA, MD, ME, MO, MS, MT, NE, NH, NM, NV, OK, OR, RI, SC, SD, TN, TX, UT, VA, VT and WV). It will be recommended to the following independent bureau states for their consideration: IN, MA, MN, NC and WI.

How will these changes impact premiums?

These changes are expected to be premium-neutral in total. The overall average experience rating modification in each state is not expected to be impacted by these changes. Initial fluctuations at the individual employer level may be offset by changes in loss experience and routine updates to rating values. Ultimately, this update to the Plan is expected to result in overall improved performance of the Plan and increased equity across individual employers.

Are these changes expected to move experience rating modifications further from unity (1.00)?

For any given employer, the experience rating modification may increase, decrease or stay the same. Overall, the proposed changes to the experience rating modification calculation are expected to produce Plan performance that is both improved and more comparable across states.

Do these changes affect the participation of independent bureaus that participate in interstate experience rating? No. All of the proposed changes fit within the existing Plan framework (that is, a statewide split point). Interstate experience rating will continue without disruption regardless of whether other bureaus decide to adopt similar changes to their own experience rating values and methodologies

Rating Value Changes

What is a split point?

The primary/excess loss split point divides the losses from each historical claim into two layers: primary losses (those beneath the split point) and excess losses (those above the split point).

For example, if the split point is $15,000, a claim totaling $50,000 would contribute $15,000 to the primary layer and $35,000 to the excess layer. Primary losses receive a greater weight than excess losses in the experience rating modification formula. Because of this, primary losses have a greater impact on the experience rating modification.

The split point is currently a countrywide value ($18,500) that is updated with each state’s annual loss cost/rate filing to reflect changes in countrywide claim costs.

How is the split point changing?

A key improvement of the proposed Plan changes is increased recognition of differences in state cost levels through a state-specific split point. Under the current Plan, the split point is based on a common level and does not vary across NCCI states.

For example, instead of the current split point value of $18,500 applying to all states, under the proposed Plan, a state with higher-than-average claim severity may have a split point value of $25,000, while a state with lower-than-average claim severity may have a split point value of $15,000.

What is the benefit of a state-specific split point?

When NCCI evaluated the performance of the current Plan across various states, it became apparent that additional recognition of state severity differences was an opportunity for improvement.

The use of state-specific split point values that reflect individual state cost differences is intended to better align across states the weight given to actual employer loss experience in the experience rating modification calculation. In turn, this is expected to produce improved and more comparable Plan performance in states with claim costs that vary significantly from the countrywide average.

Will the new split point value continue to be updated each year?

Yes. To keep up with changes in claim costs and preserve alignment with other experience rating parameters, it is anticipated that the split point value will be indexed concurrently with each state’s annual loss cost/rate filing. This is consistent with all other rating values used in the calculation of the experience rating modification.

What is the state per claim accident limitation (SAL)?

The SAL is the maximum dollar amount from any one claim that may impact the experience rating modification. For example, if the SAL is $200,000, then any claims with incurred losses above that amount would be limited to $200,000 for the purpose of calculating the experience rating modification. Currently, the SAL is calculated as the state average cost per case times 25. The SAL can also be derived at 10% times the state reference point (SRP), where SRP is calculated as the state average cost per case times 250.

The SAL is intended to curtail the impact that extremely large outlier claims have on the experience rating modification because these dollars are not expected to be predictive of future loss experience beyond a certain point.

How is the SAL changing?

The SAL will be calculated using the 95th percentile of lost-time claims for each state. This new methodology is expected to result in lower limits in all states, making the experience rating modifications less sensitive to large outlier claims without sacrificing predictive accuracy.

Why is it desirable to have the SAL be more consistent across states while the split point is being proposed to vary by state?

In short, the values have different purposes. The SAL is used to curtail the impact of large claims on the experience rating modification because large outlier claims are generally not expected to be predictive of future loss experience. The use of a state-level 95th percentile results in an SAL that is expected to impact the largest 5% of loss-time claims. On the other hand, the split point is meant to segment the dollars associated with each claim into primary and excess layers—dollars beneath the split point enter the primary layer, while those above the split point belong to the excess layer. The proposed split points are established so that they result in approximately the same share of total loss dollars being allocated to the primary layer across states. In this sense, the updated split points are more consistent across states as well.

Are there any changes to the other single-claim or multiple-claim limitations?

The USL&HW per claim accident limitation is being updated to reflect the 95th percentile of lost-time claims belonging to F classifications. Similar to the SAL change, this new methodology is expected to result in a limitation that is more stable over time.

The state multiple-claim accident limitation will continue to be calculated as twice the corresponding per claim accident limitation. The disease loss limitation will continue to be calculated using a multiple of the approved per claim accident limitation as detailed in the Plan.

No other accident limits are changing at this time.

What is the G value?

The G value represents state average claim severity (in thousands of dollars). Its primary use is in the determination of an employer’s expected claim count, which serves as the basis for the credibility assigned to its primary and excess loss experience. The G value is updated with each state’s annual loss cost/rate filing.

How is the G value changing?

The calculation of G will be revised to reflect accident limitations and the 70% reduction of medical-only losses (per the experience rating adjustment [ERA]), where applicable.

In the calculation of an employer’s expected claim count, the employer’s expected losses are divided by the G value (average claim severity). Because expected losses already reflect ERA and accident limitations, this change in how G is calculated makes for a more consistent calculation of each employer’s expected claim count. In turn, this is expected to result in more appropriate credibility being assigned to each employer’s loss experience.

What are the credibility parameters?

The W and B values influence the degree to which an employer’s actual losses impact the experience rating modification. The W and B values are determined by a set of 10 credibility parameters, and these parameters have not been updated in over two decades.

How are the credibility parameters changing?

The proposed credibility parameters underlying the W and B values have been recalibrated to increase equity across employers.

What about the premium eligibility threshold? 

 To qualify for experience rating, an employer’s subject premium must meet or exceed the state’s minimum eligibility amount. This Plan update proposes no change to the current premium eligibility threshold indexing methodology

This Work Comp Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Design © 2023 Zywave, Inc. All rights reserved.