The formula that helps set workers’ compensation insurance premiums in California is about to change in a move intended to create parity for smaller employers.
Beginning Jan. 1, the state will move from a fixed $7,000 claim split point to a variable split point based on a company’s size. There will be about 90 split points ranging from $4,500 to $75,000. Employers with larger payrolls will have higher split points than will smaller employers in the same industry.
The switch has raised questions about whether it penalizes larger employers. Regulators, however, say the change will be “premium-neutral.”
Under the existing formula, that first $7,000 of a claim counted most heavily against an employer’s “experience modification,” or X-Mod. The X-Mod compares an employer’s loss history to that of companies in the same industry. An X-Mod higher than 100% results in higher premiums. With the changes coming, more weight will be given to claim frequency rather than claim severity.
About 120,000 employers in California are experience-rated, representing nearly 90% of workers’ compensation premiums in the state. California is the first state to move to a variable split point.
The change was adopted after the state’s Workers’ Compensation Insurance Rating Bureau concluded varying the split point based on a company’s size “performed better than a one-size-fits-all approach.”
In an FAQ on its website, the WCIRB said losses above the split point will no longer be used in calculating a company’s X-Mod. “Excess losses, which represent the severity of claims, can vary widely based on factors that may not be under the control of the employer. The variable split point plan places increased weight on the frequency of claims, which is a better predictor of future claims and may be more controllable by the employer,” it said.
In other words, with a variable split point, an employer with one $50,000 claim could see a lower X-Mod than a similar-sized employer in a similar industry with 10 $5,000 claims.
That shift to claim frequency vs. claim severity is meant to encourage a greater employer focus on safety.
On the other hand, the new formula will be tied to an employer’s payroll, so larger companies will see higher split points, serving as further incentive to reduce the number and even severity of claims.
(Click here for the WCIRB’s X-Mod estimator to see how the new formula might affect your company’s experience modification.)
Steve Doss is a CCIG Vice President. He can be reached at firstname.lastname@example.org or 720-212-2047.
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