Deciphering Your Experience Rating Worksheet
Like many businesses, your company may be eligible for experience rating under your workers compensation policy. If your firm is subject to experience rating an experience modifier will appear on your policy.
An experience modifier is a numeric factor that is multiplied by your premium. The modifier may be less than, equal to, or greater than 1.0. A modifier that is less than 1.0 will result in a credit (premium reduction) while a modifier that is greater than 1.0 will result in a debit (premium increase).
Experience modifiers are calculated by a workers compensation rating organization. This should be the NCCI if your company conducts business in an NCCI state. Otherwise, your modifier will likely be calculated by your state's workers compensation rating bureau. No matter what organization issues your modifier, it should provide a worksheet that explains how your modifier was determined. The modifier is calculated based on a three-year history of your payroll and losses. This information is provided to the rating organization by your insurer.
This article, and a subsequent one, will explain the NCCI's Experience Rating Worksheet. While worksheets used in non-NCCI states may differ somewhat from the NCCI's, they typically contain the same types of information.
The NCCI Experience Rating Worksheet is divided into sections. This article will focus on the summary section (found at the top) and the data contained first six columns. A second article will explain the remainder of the worksheet.
The top portion of the worksheet consists of an account summary. This section includes the following information:
- Risk Name Your company name
- Risk Identification Number A 9-digit number assigned to your company by the NCCI
- Rating Effective Date The date your modifier takes effect. This is usually the same as your anniversary rating date.
- Production Date The date your modifier was calculated
- State The state in which you operate if you do business in one state only. Will show "interstate" if you operate in multiple states.
The main worksheet is divided vertically into three sections, one for each year included in the experience rating period. Each section summarizes the premium and loss information for the year indicated. The data is arranged so that the oldest information is at the top. For instance, suppose that your 2015 modifier was calculated based on data from January 1, 2011 to January 1, 2014. The data for the period January 1, 2011 to January 1, 2012 will appear at the top. It will be followed by data for the following year (2012 to 2013). Data for the most recent year (2013 to 2014) appears at the bottom.
For each of the three years the worksheet lists the policy number and the policy effective dates. Also included is a 5-digit carrier code. This code is assigned by the NCCI. It identifies the insurer that issued the policy.
Class Codes, Payrolland Expected Losses
The worksheet is arranged so that your classification codes, payroll and expected loss data appear on the left side of the page. Claim information (addressed in Part Two of this article) appears on the right side.
The table below shows the type of information that appears in the first six columns of the worksheet. The first column (Code) indicates the classification codes assigned to your business. In this example there are two class codes, 8810 (Clerical Office Workers) and 8742 (Outside Salespersons).
The second column lists the Expected Loss Rate (ELR). The ELR is a dollar amount calculated by actuaries. It is based on premium and loss data for all employers in your industry group. The ELR is the dollar amount that your insurer anticipates spending on losses per $100 of payroll. For example, if the ELR is .10, then your insurer expects to spend ten cents on losses for every $100 of your payroll.
Expected Primary Losses
Expected losses are calculated by multiplying the ELR times your payroll (divided by 100). In the above example, Expected Losses for code 8810 are calculated as follows:
.10 X 3,500,000/100 = 3500
Here's the calculation for code 8742:
.25 X 1,800,000/100 = 4500
Primary Versus Excess Losses
Only a portion of large losses you incur are used for experience rating. This is to prevent a single large loss from severely impacting your experience modifier. Most states have established a threshold (such as $15,000) that separates primary losses from excess losses. The amount of a loss up to the specified threshold is the primary loss. The remaining loss is the excess loss. Depending on the type of claim, all of the primary loss but only a portion of the excess loss may be used for experience rating.
To determine the primary portion of your expected losses, actuaries have developed a factor called the Discount Ratio (D-Ratio). Primary expected losses are calculated by multiplying the discount rate times your expected losses. When primary expected losses are subtracted from total expected losses, the result is the excess expected losses.
Here are the calculations of Expected Primary Losses for the two class codes shown above:
Code 8842: .38 X 3500 = 1330
Code 8742: .32 X 4500 = 1440
As explained in Part Two of this article, your experience modifier is calculated by comparing your actual losses to your expected losses.