Upcoming Change to the Experience Modification Formula

November 10, 2016
Upcoming Change to the Experience Modification Formula

Granite Bay, CA – ALPHA Fund utilizes the Workers’ Compensation Insurance Rating Bureau’s (WCIRB) experience modification rating formula (Ex-Mod) as a tool to distribute risk within the group. The WCIRB is changing a component of the formula which may have a material impact on the calculation. What is changing is the primary threshold commonly referred to as the split point in the formula. This change is included in the Experience Rating Plan for 2017 and has been approved by the Insurance Commissioner for policies incepting on or after January 1, 2017. ALPHA Fund will be adopting this new method which will be effective on all new or renewal quotes on or after January 1st.

What is a split point?
In the experience rating process, an employer’s actual Workers’ Compensation losses are divided into primary losses and excess losses. Currently, the first $7,000 of each actual loss is considered primary and counts fully in an employer’s Ex-Mod, regardless of the employer’s size. This $7,000 limit is called the split point. Any part of the actual losses above $7,000 is considered excess and has less weight in the experience rating formula. Dividing actual losses into primary and excess components and weighting these components differently has the impact of giving more weight to claim frequency (loss prevention) in the experience rating formula and less weight to claim severity (loss control).

The Experience Rating Formula for 2017 will replace the current split point from the fixed $7,000 to a variable split which is determined based on the size of the employer’s payroll multiplied by the expected loss rate by class code. Moving to a variable split point is intended to create a more equitable experience rating for smaller employers, improve accuracy of the Ex-Mod result and reduce extreme fluctuations related to “shock loss” events. Under the new formula, once the variable split point is set for an employer the entire amount of the primary actual loss will be used in the calculation, and there will no longer be an excess portion of the actual loss in the calculation.

How is the split point determined for an employer?
The split point is based on the total expected losses for an employer. The table for split points (primary threshold) is provided in the WCIRB January 1, 2017 Regulatory Filing, Table II – Credibilities and Primary Thresholds.

Here’s how the new split point works. If an employer’s split point is set at $45,000 and the total actual loss is $85,000, only $45,000 will be used in the Ex-Mod calculation and the balance of the $85,000 claim (or $40,000) will be excluded from the formula.

This plan is intended to place even more emphasis on frequency over severity when calculating the Ex-Mod. What this means for employers is that more than ever before, a robust safety and loss prevention program is essential so as to reduce claim frequency, as frequency has now become the driver of the experience modification factor.
The change from a one-size-fits-all split point of $7,000 to a variable one will be a fairly significant change for some employers. ALPHA Fund will be carefully reviewing the overall average impact of this Ex-Mod formula change in the Pool as we begin to calculate renewal Ex-Mods using 12/31/16 valued losses and will incorporate the net impact of the formula change into the calculation of base rates for the upcoming fiscal year.

ALPHA Fund will begin the calculation process for the upcoming renewal Ex-Mods the first week in January. We will be releasing each Participant’s Ex-Mod as it is completed, so as to get the information into your hands and included in your budget process as soon as possible.

Questions regarding the upcoming changes to the ALPHA Fund Ex-Mod can be directed to Michele Reager, Director of Underwriting at michele.reager@alphafund.org and 916.266.5235.

Posted in Uncategorized