Insurance companies typically calculate workers’ compensation premiums based on the size of a company’s payroll and the type of work the company performs. Most companies’ premiums are also adjusted by applying an experience modification, which is expressed as a percentage. This modification adjusts the premium up or down depending on the company’s workers’ compensation claims history and is part of a merit-based system designed to provide employers a financial incentive to reduce work-related accidents.
Insurance companies determine the experience modification by comparing actual losses with expected losses. Once a year, every workers’ compensation insurer sends information on all its claims to the WCIRB, the State’s non-profit association that calculates experience modifications for eligible companies. Each year, the WCIRB publishes a company’s experience rating worksheet with a summary of the payroll and claims (incurred and estimated) reported by the insurer and the experience modification.
Two aspects of the experience modification calculation are worth noting. First, what is the time period for calculating actual losses and expected losses? The data used to calculate an experience modification is tied to the start date of a policy 
(“rating effective date”). The time period starts four years and nine months prior to the policy start date and ends one year and nine months prior to the policy start date. The WCIRB provides the example that if the rating effective date is January 1, 2018, the experience period is April 1, 2013 to April 1, 2016.
Second, how are the monetary values of losses determined? The way the WCIRB calculates losses changed recently. In 2017, the State adopted a new method to review the cost of losses. Under the former “fixed split point” method, the first $7,000 in losses for each claim “counted” toward an experience modification, regardless of the size of the employer. Any remaining amounts of losses were considered “excess” and a portion of those losses were included in the experience modification. Under the “variable split point” method adopted January 1, 2017, experience modifications are calculated based on claim frequency instead of claim severity. The split point used for calculating expected losses may now range from $5,500 for very small employers to $70,000 for very large employers. According to the WCIRB, this new methodology enhances the accuracy of experience modification calculations because not all companies are treated similarly as they were under the fixed split point method.
For more information on workers comp issues, contact Drew E. Pomerance today.
