Workers’ Compensation: The New “Split Point” EMR Formula Change for 2013

1. Workers’ Compensation: The New “Split Point” EMR Formula Change for 2013 Sonja J. Guenther, ALCM, ARM, CIC, CRM Sr. Vice President, Willis of Colorado

2. NCCI • The National Council on Compensation Insurance • - Administrator for 39 States/400 Carriers • - Collects Statistical Data • - Provides Actuarial Formulation for Advisory Rates • - Produce Experience Modification Factors • - House Industry Classification Expertise • - Administer Rules/Regulations on: - ownership - experience rating - premium audit rules

3. The “Split Point” Change to the Experience Mod Factor/Rate (EMR) Formula • CURRENTLY: • The first $5,000 of each loss/injury is the “PRIMARY” portion of the loss in the experience modification calculation • That first $5k is weighted the heaviest in this mod factor formula • Goes right to the “bottom line” of your EMR • All dollars over $5k are considered the “EXCESS” portion of the loss. • These dollars have weights/ballasts placed against them to lessen the dollars and “cushion the impact of a large claim • $5,000 has been the split point for about 20 years

4. Why is NCCI Changing the Split Point? • NCCI States: • Medical Costs have tripled over the past 20 years • The current experience mod formula is not responsive to these medical loss costs • Makes the mod factor (EMR) less reliable/credible • Employers will increase their attention to safety/claims management with this change.

5. How will NCCI Implement this Change? • January 1, 2013 • NCCI will DOUBLE the split point dollars from $5,000 per injury to $10,000 per injury will be considered “primary” loss dollars (weighted the heaviest in the mod calculation). • January 1, 2014 • NCCI will again increase the split point primary dollars from $10,000 per injury to $13,500. • January 1, 2015 • NCCI will make a final adjustment to primary losses up to as high as $15,000 per injury. • NCCI will index the split point, annually, after that.

6. How Will This Change Impact My Mod Factor? • If NCCI tripled the primary loss dollars in every claim, without making any other actuarial adjustments to the formula, the average mod factor could have increased +11 points. (Based on Willis of Colorado limited samplings projected January-July, 2012 ). • NCCI will adjust the Expected Loss Rate (ELR) and Developed Ratios (D Ratios) along with weights and ballasts to offset the impact of the new formula. • These adjustments will vary widely, by state and industry class results.

7. How Will This Change Impact My Mod Factor? (cont.) • Results we are confident of: (source: NCCI notifications to policyholders, August, 2012) • EMRs Hovering Close to 1.00 • +5-point to -5 point adjustment • Ex: Those mods at 1.03 could see +2 to +5 point increase with formula change alone. • Ex: Those mods at .96 could see a -2 to -5 point decrease with formula change alone.

8. How Will This Change Impact My Mod Factor? (cont.) • With the new formula change: • The further from 1.00 your EMR is, the greater the swing in the formula adjustment • Ex: 1.36 mod could see a +8 point impact with formula change • Ex: .76 credit mod could see a -8 point impact with formula change • These are estimate only and the impact will vary by state and industry class.

9. GOT ANYTHING TO DO WITH SAFETY? • This is an actuarial formula change • Designed for insurance industry • Created for underwriting/premium assessment • No change was made for the past 20 years

10. Discourage the Practice of EMRs in the Bidding Practice Common Error Ratio of 30% on the EMR sheets Common Errors: - Not the employee of the policyholder - Not net of deductibles – (net-reporting states) - Claims reported into the wrong state data - Dollars never credited for 3rd party recovery - Data is combined with another employer that is unrelated/ownershp - Payrolls are estimated - Payroll data missing completely - Payrolls reported for audits in dispute - Payrolls for incorrect class code

11. Ways to Achieve a Credit EMR SAFETY, SAFETY,SAFETY • Deductible Plans • NCCI Net Reporting States: • Alabama Kansas • Colorado Kentucky • Florida Maine • Georgia Missouri • Hawaii New Mexico • Idaho (claims <$1k only) Oklahoma • Iowa South Carolina • Source: NCCI Basic Manual, 2010

12. Common EMR Trends and Ways to a Credit Mod • Verify Classifications with Your Agent • Beware of Shifting to a Lower-Rated Class – EMRs Rise • Claims Management (Don’t Pay Them Yourself to Avoid the Mod) • Communication: Carrier/Agent/Injured Worker • Adjust Reserves (8 mos./3 mos. pre-renl) • Relationship with Designa. Med. Provider • Invoke Statutes: Pos. Drug Test, Failure to Return to Work • Return to Work: Temporary • Progressive • Be Committed! • When Acquiring Companies or Selling Divisions of Your Own

13. .89 mod now uses $17,759 primary loss dollars 2013=$28,332 in primary loss dollars 2014= $35,332 in primary loss dollars 2015= $38,332 in primary loss dollars What will these higher loss $ do to the mod factor? Without D factor changes: +11 pts. • -

14. Tell a better story than the EMR • Brag on yourself • To Your Agent • To Your Carrier/Underwriter • On Your Website • Include Recent Safety Awards/State Awards • Compare Your Incident Rate to Industry • Show Your Lost-Time Injury Trends? (and DART rates) • Decreased by What % in the Past Year? • In the Past 3 Years? 5 Years? • Attach Carrier/Loss Control Letters About Safety Program • Involvement in Industry Associations, including leadership positions • Highlight what has happened in the past year!!!

15. The Rest of the StoryYou are more than an EMR • Established procedures • Return to Work Commitment • Claims Management Program • Compliance/Disciplinary Programs in Place and Utilized? • Team Accountability Programs • Employee selection and training • Drug/Alcohol Policies Pre/Post/Random • Pre-placement physicals • Buddy system for new hires • What are the topics you are training on? • Do they match your injury trends? • Share the frequency of your safety training • Consider the Behavior Modeling Program (“STOP”)

16. Questions???? • ANSWERS?