In Florida, workers’ compensation rates are calculated using a formula involving manual rates specific to job duties and classification, payroll, and an experience modification factor (mod). The National Council on Compensation Insurance (NCCI) uses a complex formula to calculate the mod for eligible employers. The idea is to spread the cost of loss through members of a group likely to experience similar losses. For fairness, NCCI uses each company’s actual payroll and loss data over a 3-year period. Companies who do not qualify for a mod, or who have had average loss experience break even at a 1.00 mod and pay the average.
Companies with higher loss histories receive higher mods and thus pay more in premium. And since the cost of a specific accident is statistically less predictable than the frequency, NCCI has long given greater weight (and penalty) to accident frequency than to accident severity through a split-point rating approach for costs. However, a change to this process is on the horizon.
Historically, NCCI divides losses into primary and excess portions, with a longtime split point with a $5,000 cap. (The primary costs are weighted at 100 percent in the mod formula for lost-time claims; any amount over that is allocated to excess and weighted at a lower percentage.) A company with several small losses creates a higher mod than a company with a single, larger loss even if the total loss dollars are the same.
NCCI has proposed changing that primary loss cap beginning in 2013, the first such change in 25 years. The anticipated change (if approved) is expected to more than triple the current cap by 2015.
This gradual increase over 3 years is intended to compensate for the increased claims amounts over the past years. While the optimum goal for employers will still be zero accidents and a mod of 1.00 or lower, the change is expected to bring an immediate and significant mind-shift about the impact of losses. By 2015, when the phase-in is complete, approximately $17,000 in claims costs will be factored into mods at 100 percent. This amount will be indexed for inflation for years after 2015. The result is premiums for companies with higher-than-average losses will increase, while companies with better-than-average losses will be reduced.
These changes emphasize the value of loss control return-to-work programs. If employers improve their loss experience, then they can improve their mods, which will reduce their premiums in the long run. For employers who are not mod-eligible, improving loss experience can still save money by lowering claims costs. And given today’s soft market, better loss experience can also help with insurability.