Experience rating is a system that benchmarks an individual employer against others in its industry based on that employer’s historical claim experience. This comparison is expressed as a percentage, called an experience modification or X-Mod, which is applied to an employer’s workers’ compensation premium. Typically an X-Mod greater than 100% increases the cost of the employer’s workers’ compensation premiums, while an X-Mod less than 100% decreases the cost.
Application of the X-Mod is mandatory for all eligible employers, and the formula for calculating X-Mods is approved by the California Insurance Commissioner. The Workers’ Compensation Insurance Rating Bureau of California (WCIRB) administers the experience rating system and produces X-Mods for rated employers.
Following several years of research and outreach, in 2015 the WCIRB proposed changes to the experience modification formula that were adopted by the Insurance Commissioner and will become effective on
January 1, 2017.
Experience Rating Facts
- Experience rating provides a financial incentive for workplace safety
- It is a comparison of an employer’s loss history to that of similar companies that are of similar size
- The number of claims (frequency) and the cost of those claims (severity) impacts an employer’s experience modification
- Part of the California Code of Regulations and approved by the California Insurance Commissioner
- Required for businesses that meet the eligibility threshold
- Approximately 120,000 employers are experience rated in California
What is a split point?
As part of the experience rating process, an employer's actual workers' compensation losses are divided into actual primary losses and actual excess losses. Today, the first $7,000 in losses for each claim is considered primary and counts fully in an employer’s X-Mod. Any losses above $7,000 are considered excess and have less weight in the experience rating formula. This $7,000 split point, or primary threshold, has not changed since 2010. Dividing losses into primary and excess components and weighting these components differently has the impact of giving more weight to claim frequency in the experience rating formula and less weight to claim severity.
Why was it necessary to change the current experience rating formula?
The fixed $7,000 split point has been used in the calculation of experience modifications since January 1, 2010. California’s pattern of frequency and severity has changed over time and a fixed split point was no longer producing optimal results. A variable split point achieved greater efficiency than the $7,000 fixed split point.
What is the expected outcome from the variable split point plan?
While there is no expected overall premium impact, the variable split point plan places greater weight on claim frequency than on claim severity. Employers that have greater claims frequency than the average for their industry will have higher experience modifications under this new plan.
Will the variable split point plan change how employers qualify for experience rating?
No. The variable split point plan governs the calculation of an experience modification not the determination of eligibility for experience rating.
Under the variable split point plan, will experience modifications with only one loss during the experience period continue to be limited?
Yes. Experience modifications with only one loss in the calculation will continue to be limited to no more than 25 points above the loss free rating percentage.
Since the Actual Primary Loss value under the variable split point plan can be significantly higher than the existing $7,000 fix split point, will experience modifications, on average, increase?
No. While the variable split point plan represents a fundamental change in the values used to calculate experience modifications, there is no expectation that experience modifications for California employers as a whole will change.
Why is the experience rating formula changing?
The variable split approach improves the performance of the Plan for all sizes of employers and reduces the Plan’s volatility, particularly for smaller experience rated employers. Rather than adjusting the current fixed $7,000 split point to reflect inflation since it was last updated in 2010, WCIRB research indicated that varying the split point based on the employer size performed better than a one-size-fits-all approach.
Will losses above the split point (“excess losses”) have any weight?
No. Under the 2017 formula, loss amounts above the split point will no longer be used in the experience modification calculation. 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.
How is the “size” of an employer determined for the purpose of the experience rating calculation?
The new formula uses expected losses as a measure of employer size. Expected losses are calculated based on the reported payroll for all policies in the experience period and expected loss rates by classification (per $100 of payroll) approved by the Insurance Commissioner that are applicable to that year’s experience modifications.
How does this change impact small claims?
Small claim amounts below the primary threshold will be used at their full value. Claim amounts in excess of the threshold will not be used.
Will the large loss cap of $175,000 still apply?
The 2017 Plan still includes a $175,000 maximum loss value, but it will largely be irrelevant because only losses up to the primary split points (which are all less than $175,000) are used in the experience modification formula.
Will the experience rating form change?
Is there a way I can calculate what an experience modification will be under the new Plan?
The experience rating form—commonly referred to as the ratesheet—will not change much. A new field will be added to show the split point value used in the calculation.
Experience Modification can be estimated with the WCIRB Experience Modification Estimator which uses 2017 experience rating values proposed to the Insurance Commissioner and allows you to see the potential impact of the new formula.
What happens when a policyholder doesn’t cooperate with a final audit?
We will attempt to publish an experience modification excluding the unaudited payroll, but using all of the reported losses. The Experience Rating Plan does not allow the use of estimated or unaudited payroll in the experience modification calculation. When an insurer reports estimated payroll to the WCIRB due to the failure of an employer to cooperate with the audit, we send a letter to the policyholder to inform them of the potential impact and encourage them to cooperate with the audit. If we do not receive the audited payroll within 60 days, we will attempt to publish an experience modification excluding the unaudited payroll, but using all of the reported losses.
What if the exclusion of payroll results in the employer no longer qualifying for experience rating?
For 2017, the Insurance Commissioner approved a change that will allow debit experience modifications that exclude unaudited payroll to be issued even if they do not meet the eligibility threshold, provided the policyholder was experience rated in the immediately preceding year.
When an experience modification excludes unaudited payroll, is it really a reflection of potential future losses?
It is a financial incentive for the policyholder to cooperate with the audit. The WCIRB’s ability to produce accurate experience modifications, expected loss rates and advisory pure premium rates is dependent upon accurate audited payroll reporting. The change adopted by the Insurance Commissioner effective January 1, 2017 will help towards that aim.
How can I tell if an experience modification excludes unaudited payroll?
On the experience rating worksheet, there is an “E” designation next to the experience modification to indicate that the rating excludes unaudited payroll. The policyholder also receives a notification from the WCIRB that their experience modification excludes estimated payroll but includes any losses.
What if the policyholder later decides to cooperate with the audit? Would you revise the experience modification once you receive audited payroll?
Yes. When the insurer submits a unit statistical report (USR) correction with the audited payroll to the WCIRB, the current and two immediately preceding experience modifications are subject to revision in accordance with the Experience Modification Corrections–Effective Dates rule in the Experience Rating Plan.