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Don’t be caught off guard by the NCCI Mod Changes in 2024
By Kevin Ring
The experience mod is an important piece of the pricing puzzle for most businesses purchasing workers’ compensation. For many companies, especially those in the construction and oil and gas industries, the experience mod is frequently used as a factor in the bidding process.
In the 36 states where the National Council on Compensation Insurance (NCCI) governs the rules of the workers’ compensation system, big changes are being proposed for 2024 and beyond. These changes will impact every experience-rated risk. While NCCI indicates the change will be “premium neutral” for the system overall, it will not be neutral for every business.
These changes will take effect on each state’s regular rate filing date on or after 11/1/23, beginning with DC and West Virginia on 11/1/23 and ending with Rhode Island on 8/1/24. Independent bureau states such as North Carolina, Michigan, Massachusetts, Minnesota, and Wisconsin that work closely with NCCI are evaluating this change and will announce in due time if they will adopt them. New York, Pennsylvania, Delaware, New Jersey, and California use very different experience rating plans and are not impacted by this change. Ohio, North Dakota, Wyoming, and Washington have state-run workers’ comp systems that will also not be impacted.
On the surface, the changes appear modest. Nothing about the experience mod formula is changing, and there is no fundamental change to the experience rating method. The changes are being made to make the mod better at its stated purpose – to use the past experience of an employer to predict future losses in an effort to price workers’ compensation policies appropriately.
So, what’s changing?
1.) Different split points in each state
In 2013, NCCI changed from a $5,000 split point to a process where they updated the split point each year based on the injury data they collected. While the split point has changed from year to year, it has been consistent across all NCCI states. Going forward, the new methodology will set a split point for each state based on the loss experience in that state.
What is the split point and why does it matter? NCCI uses a “split rating” methodology for their experience rating calculation. When using the dollars spent on employee injuries to predict the future, this method does not count all dollars equally. Currently, the first $18,500 of every employee injury is referred to as “primary losses” and counts 100% in the mod calculation. All the dollars over that amount are discounted, as they are not considered as useful a predictor of the future. Right now, $18,500 is the split point. This number is an important component of the experience mod calculation, and changes can impact an individual mod substantially, depending on the cost of injuries on the mod.
The proposed values vary substantially from state to state, ranging from $9,500 in Oregon to $38,000 in Louisiana. These values equate to roughly 40% of the average cost of lost-time claims in each state.
Setting the values on a state-by-state basis allows the experience mod calculation to be more effective than one number set nationally, which can be too low in some states and too high in others.
As with any change in the split point, these changes will result in lower mods for some businesses and higher mods for others. More on the impact of this change in a moment.
2.) Changes in the methodology for calculating state accident limitations
In every state, there is a per-accident cost cap that eliminates claim dollars above that cap when an injury is very expensive. If an employee suffered an injury that cost $1,000,000 and their state had a cap of $250,000, only the first $250,000 of that injury would impact the experience mod.
NCCI is changing how they determine these claim limits. The new methodology will reflect the 95th percentile of lost time claims for the state. This results in a lower loss limitation in every state (much lower in most cases), limiting the impact of “shock losses” on the mod.
NCCI has not published the final loss limitation values as of this writing, but the reductions are more than 50% in most states.
With the change in the split point, the impact of this change will vary by state. NCCI estimates that more than 80% of all risks will be impacted by 5 points or less up or down. Of course, the impact on individual businesses will be felt, good or bad, regardless of what the overall numbers say.
These percentages measure the difference in the mod, comparing the old method against the new one with the same data. If a business has a terrible year that rolls onto the mod at the same time these changes become effective, the impact could look far worse than it is. On the flip side, if a lousy year falls off and is replaced by an excellent year, it could create the illusion that these changes were more favorable for the mod than they were.
The final values used as part of this update will not be revealed until mid-2023 at the earliest, so it is impossible to make precise predictions about any specific experience mod.
Now is the time to talk to your insurance agent to discuss these changes and how they might impact your business in 2024. While it is too early to make a precise projection of how your experience mod will be impacted, talking with an expert sooner rather than later will help you prepare. No business owner wants a negative surprise and understanding these important changes will help you stay ahead of the pack.
Kevin Ring is the Lead Workers’ Compensation Analyst for the Institute of WorkComp Professionals, which trains, certifies, and mentors insurance agents to help employers reduce workers compensation costs. A licensed property and casualty insurance agent, he is the co-developer of a workers comp software suite that will help insurance professionals in working with employers.