Beginning in September, companies across California will learn whether they will be paying more for workers’ compensation insurance next year.
For some doing business in the Golden State, it will be an unwelcome surprise. The increase could be significant.
The potential rate changes are due to a rule approved last year by California Insurance Commissioner David Jones. Beginning in 2017, the formula to determine an organization’s “experience modification,” the rate used to calculate workers’ comp pricing, will change.
The rationale for the change was to level the playing field for small businesses. Previously, the one-size-fits all formula had the potential to unfairly penalize smaller organizations. A few claims had a dramatic affect on their workers’ comp premiums, a consequence usually not seen with larger businesses.
For many, the new formula will likely result in little change in their workers’ comp premium. However, it’s likely that some large and small employers with a higher frequency of claims will see a dramatic impact.
What Is Experience Modification?
The experience modification (ex-mod) calculation is designed to provide employers with a financial incentive to reduce workers’ comp claims from employees.
The formula is based on how many claims a company has made over a three-year period. A rating of 1 or below entitles companies to a credit. A rating over 1 means an employer will have to pay more than a similar company in the same industry. A company’s rating is determined by a rolling-three year average.
According to the Workers' Compensation Insurance Rating Bureau of California (WCIRB), the experience modification is calculated by comparing actual losses to expected losses. Actual losses are the medical and indemnity claim costs resulting from a work-related injury an insurance company has paid or expects to pay in the future. Expected losses represent a business's projected losses for the industry in which it operates. The larger the business in terms of payroll, the more losses that business is expected to incur.
Experience Modification = Actual Losses / Expected Losses
For a detailed discussion of the new calculation, see Marsh & McLennan Agency's (MMA) recent analysis.
We Can Help
Want to know if your ex-mod is at risk of a significant change? A simple review of your ex-mod worksheet can help determine if you should anticipate an increase in your premium.
Find out what is in store for your workers’ comp costs by uploading your ex-mod worksheet for analysis or sending it directly to your MMA representative. MMA's experts will quickly assess your claims history and provide an analysis of how the new formula may impact your bottom line in 2017.
For the majority of employers, there will likely be only a modest increase or decrease. However, for firms that have a high frequency of claims, it’s smart to get ahead of the curve.