Proposed Experience Rating Plan Changes for 2010 and 2011
 Oct. 27, 2009

This past August the Workers’ Compensation Insurance Rating Bureau (WCIRB) submitted its recommendation for an increase in Pure Premium Rates to the Insurance Commissioner. That recommendation also proposed changes to the California Workers' Compensation Experience Rating Plan. The proposed changes are intended to simplify the experience rating system, improve its predictive accuracy and enhance its ability to provide a financial incentive for workplace safety. The changes are based on recommendations made by the Experience Rating Task Force, which was created by the WCIRB at the request of the Insurance Commissioner in 2007. If approved, proposed changes will become effective January 1, 2010 and January 1, 2011.

The underlying challenge of experience rating is to make it equitable for small and large employers despite the fact that losses and claims frequency are more
predictable for larger, more actuarially sound employers. Most large employers bear risk in either self-insured or deductible plans that don’t use the experience modification. For that reason, we’ll examine the proposed changes from the perspective of smaller employers.

The key changes include:

Primary and Excess Losses

Predicting whether or not a claim might occur is more statistically predictable than what the ultimate cost of the claim will be. For that reason, the experience rating
formula separates claim values into primary and excess amounts.

According to the WCIRB, the primary component of an employer's actual
historical losses is more closely related to claim frequency. It is a more reliable
related to claim severity and is less predictor of future claim experience. Primary losses are fully reflected in the experience rating calculation. The excess component of each claim is more closely predictive of future losses.

To simplify the segregation of loss experience in the experience rating formula, the WCIRB has proposed a "single split" approach whereby the first $7,000 of a claim's value is considered primary and any remainder up to the $175,000 (the limit for claim valuation) is considered excess. This approach simplifies the experience rating formula without impacting its predictive value. If approved, this change would become effective January 1, 2010.

The idea of placing a greater emphasis on frequency in the experience modification calculation was always an objective of the plan. After all, safety programs were
pre-loss risk control practices and could address frequency, but severity was more of a post loss issue and not something the employer could have much effect upon. Regardless, the changes proposed should achieve their goal of simplifying the
experience rating formula while still retaining the predictive value of expected losses. There is no unfair disadvantage in the revision for smaller employers.

Credibility Values

The credibility values in the experience
rating formula (referred to as "B" and "W" values), are intended to reflect the
statistical reliability of the employer's past experience as a predictor of future
experience. These credibility values vary based on the size of the employer as measured by the total average losses
expected to arise during the experience period for an employer of that size and industry classification.

The current "B" and "W" values have been in use for some time. Based on a review of the recent loss experience of experience rated employers, the WCIRB has
recommended the adoption of updated credibility values for 2010.

Changes to the credibility values recommended by the WCIRB when combined with changes to the primary and excess losses would appear to reduce the experience modifications for the majority of experience rated employers. This is certainly not a disadvantage to smaller employers.

Expected Losses

The Expected Loss Rate reflects the anticipated average cost of benefits, per $100 of payroll, for a classification. Each classification has an expected loss rate and this rate is the basis to which an employer's actual losses are compared for experience rating. The WCIRB is proposing using adjustment factors based on the experience of classifications grouped in accordance with the North American Industrial Classification System (NAICS). This enhanced methodology is anticipated to significantly improve the accuracy of the classification expected loss rates without impacting the overall average experience modification. If approved, this change will become effective January 1, 2010.

The proposed changes in this area are sound. They would recognize variations
reflective of each industry’s exposure to loss. For example, the industry expected losses on the whole for "four wall" industries like manufacturing are much less than the trucking industry. But, the present expected loss formula does not recognize this. The proposed changes would take this into account and make this part of the formula for developing expected loss rates. Additionally, the formula would still recognize the differences within the over CMTA 150 manufacturing classes. The changes would contemplate the expected losses for manufacturers as a whole, as well as, by class only to develop each class’s expected loss rate. This would not be a disadvantage to small employers.

There is a small two edged sword here. The expected rates really absorb loss.  A
company with average losses and a high expected loss rate will have a lower
experience modification than a similar company with average losses, but in a class with a low expected loss rate. The reality is that this will always be a challenge of a class based experience rating system.

As these changes are approved we’ll provide CMTA members with practical
information as to how they will apply to them individually.

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