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California Experience Rating Changes on the Horizon for 2017

Property & Casualty

Mar 14, 2016

4 minutes

Effective January 1, 2017, the WCIRBs proposed variable split point experience modification formula will replace the current single split point formula.

Effective January 1, 2017, the WCIRBs proposed variable split point experience modification formula will replace the current single split point formula. Currently, the first $7,000 in losses for each claim is considered primary and counts fully in the Ex-Mod. The remaining losses for each claim are considered excess and have less weight in the rating formula. The variable split point formula was approved by the California Insurance Commissioner as part of the January 1, 2016 Regulatory Filing. The WCIRB plans to file the 2017 experience rating plan values for the Insurance Commissioners approval in June 2016.

The revised variable split point formula will be based on the size of an employers payroll. Instead of the single split point of $7,000, the primary threshold will range from $4,500 to $75,000 and will be based on the total expected losses for that employer within the entire experience period. Claim amounts up to the determined variable split point will be used fully in the experience modification. For example, if an employers variable split is $50,000 and a claim is valued at $45,000, the entire amount of the claim will be considered primary. Any claim values above the split point will NOT be used in the Ex-Mod formula (zero weight is given to claims in excess of the variable split point). As a result of this change, there will be more than 90 different thresholds.

The WCIRB indicates the new formula will benefit smaller employers since it reduces the volatility arising from the impact of a single large claim. The variable split point formula is actuarially more accurate and improves the performance of the experience rating system. As a result, the new formula will be simplified.

How will employers be impacted?

The WCIRB expects net movements of experience modifications above/below key thresholds such as 100%, 125% and 200% are expected to be less than 1%.
Modifications over 200% for small risks will be significantly reduced
The variable split will generally be less volatile

More sensitive to claim frequency
Less sensitive to large claims (severity)

Example Employer with a variable split of $11,000 has five $500 claims and one $25,000 claim would have an Ex-Mod of 119% compared to the current formula resulting in an Ex-Mod of 111% (see chart). However, take the same employer with five $500 claims and one $150,000 claim and the Ex-Mod stays at 119% using the variable split compared to the current formula that would result in an Ex-Mod of 141%

2017 Changes to Experience Rating

Summary of Differences

Current Fixed Split Plan	2017 Variable Split Plan
One split point for all sizes of employers	Split point varies based on the size of the employer (total expected losses)
Split point = $7,000	Split points from $4,500 to $75,000
1 split point + 1 table of D-Ratio values for each classification code	Approximately 90 split points, each with a unique table of D-Ratio values
Large impact of a single claim on smaller employers	Impact of large shock loss is generally reduced
Weight given to claims in excess of $7,000 ranges from 0.00 to 0.78	No weight given to claims in excess of the variable split point
Complicated formula	Potential to simplify formula to 3 variables
Claim frequency is weighted more heavily than claim severity	Even more weight given to claim frequency and less to claim severity