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Last week, the WCIRB submitted a regulatory filing to the California Department of Insurance proposing a number of changes to the Insurance Commissioner’s regulations. See WCIRB Submits Regulatory Filing for details. Among the proposed changes is a recommendation to amend the experience rating formula to replace the fixed primary and excess split point with a variable split point based on an employer’s size.

What are primary and excess losses and why change the formula?
When a workers’ compensation claim is used in experience rating, the value of the claim is divided into a primary amount and an excess amount. Currently, the first $7,000 of a claim is considered primary and is used in its entirety in the experience rating calculation. The amount above $7,000 is considered excess, and not all of it is used as there is little predictive value in using these additional loss dollars in the calculation. The WCIRB has published an Education on Demand video exploring the concept in more detail. See the video in the Learning Center on the WCIRB website or click on the following link: Module 4: Experience Rating Calculation.

As part of our ongoing effort to enhance the accuracy of the Experience Rating Plan, in 2014, the WCIRB began researching alternatives to this one size fits all $7,000 split point. Working with our various committees and working groups, we identified an opportunity to enhance the accuracy of the Experience Rating Plan by implementing a variable split point based on an employer’s size (based on expected loss rates). Under such a plan, smaller employers would have a lower split point while larger employers would have a higher split point.

The proposed variable split plan increases the accuracy of the experience rating formula and reduces the impact of large "shock" losses on an employer’s experience modification. In addition, the new structure of the plan can allow the formula to be simplified in future years making it easier to understand and apply.

Posted 12:28 PM

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