Employers and business owners should pay attention to significant upcoming changes to workers’ compensation regulations in 2024. The National Council on Compensation Insurance (NCCI) is introducing alterations to the experience modification rating (EMR) system that will impact your insurance premiums. Our comprehensive review of the NCII’s changes will help you understand and adapt to the new landscape.

An Overview of Upcoming EMR Changes

The NCCI regulates the workers’ compensation system in 36 states. The revised formula will roll out with the District of Columbia and West Virginia and conclude in Rhode Island on Aug. 1, 2024. While the formula itself will remain unchanged, modifications in certain fundamental components will more accurately account for cost variations between states.

Two specific modifications are being implemented:

• A transition from a nationwide primary/excess split point to one that is specific to each state and the implementation of state-specific split points
• A revision of the calculation method for state accident limitations

Although the fundamentals of the experience modification factor (EMF) rating formula and methodology remain unaffected, lesser changes could raise or lower employer premiums.

The revision aims to accurately represent each state’s average claim costs and align with other state-specific variables. The NCCI states the revisions will enhance plan performance with:

• Improved accuracy and predictability of EMF
• Fairer inclusion of primary and excess losses in states with different cost structures
• Enhanced performance of the EMF in states with significant variations in claim costs compared to the national average
• EMF with reduced sensitivity to larger outlier claims while maintaining predictive accuracy
• Consistent calculation of each employer’s expected number of claims, resulting in a more equitable distribution of credibility to each employer’s loss history
• Updated credibility parameters that promote fairness among employers
• Streamlined calculations by removing unnecessary complexities

EMF Rating’s State-Specific Split Points Explained

The split point is a critical factor in calculating the workers’ compensation experience rating formula. It represents a specific dollar threshold that separates each claim into two distinct components:

• Primary: involves expenses below the split point for each claim
• Excess: comprises expenses above the split point for each claim

The experience algorithm assigns significant importance to primary costs while only giving partial weight to excess costs. To illustrate:

Threshold: $15,000

Claim: $50,000

Categorization: $15,000 primary cost; $35,000 excess cost

When calculating the EMR, primary losses carry more weight compared to excess losses. Consequently, primary losses have a more significant influence on the EMR.

The EMF Rating D-Ratio Measurement

This calculation is utilized to estimate the anticipated percentage of losses that fall below the split point. Currently, the split point is consistently applied in states where NCCI is responsible for rate-setting services. However, the average D-ratio within a state is influenced by the split point and the average claim costs unique to that state. Consequently, a uniform split point results in a considerable disparity in average D-ratios across states.

The objective of the proposed approach is to create a uniform D-ratio of 40% for all states by introducing a state-specific split point. This adjustment guarantees that the split point aligns more accurately with each state’s average claim cost. Consequently, adjustments made to experience ratings will result in a fairer distribution of primary and excess losses among states with varying cost levels.

For example, the proposed plan suggests individualizing split point values based on claim severity. Instead of a standardized split point value of $18,500 for all states, higher split point values like $25,000 may be assigned to states with above-average claim severity while states with below-average claim severity may have a split point value of $15,000.

EMF Rate State-Specific Point Values

The application of state-specific point values, which consider the varying costs across individual states, seeks to enhance the accuracy of calculating EMR by prioritizing actual employer loss experiences.  This adjustment is expected to yield improved and more comparable plan performance in states where claim costs significantly differ from the national average.

It’s crucial that the EMR reflects these cost variations, like how loss costs and rates vary by state. Adjusting the split point to account for these cost differences is a significant step toward aligning performance across states, resulting in a more accurate and reliable EMR compared to applying a nationwide split point.

To manage changes in claim costs and maintain consistency with other factors influencing experience rating, the split point value will be modified in conjunction with the annual loss cost and rate filings for each state. This adjustment will be based on an assessment of annual variations in severity between the average loss date during the initial implementation year and the current year.

The impact of these modifications will vary for each state, resulting in higher EMRs for certain businesses and lower ones for others.

The Approach for EMR State Accident Limitations

The state-per-claim accident limitation (SAL) aims to mitigate the impact of major claims on the EMR. Claims that are exceptionally large outliers usually don’t accurately represent future loss patterns. The SAL adopts a state-level approach that targets the top 5% of lost-time claims, specifically those falling within the 95^th percentile. This strategy is to address the most substantial claims and ensure they’re properly accounted for.

The revised SAL definition results in lower capitalization across all states. This adjustment makes EMR less responsive to exceptionally large outlier claims while still maintaining their ability to ensure accurate prediction of future loss trends.

Employers Affected by the Regulation

These changes will have an impact on all states under the governance of NCII, including Alaska, Alabama, Arkansas, Arizona, Colorado, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Iowa, Idaho, Illinois, Kansas, Kentucky, Louisiana, Maryland, Maine, Missouri, Mississippi, Montana, Nebraska, New Hampshire, New Mexico, Nevada, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Vermont and West Virginia.

Independent bureau states, such as North Carolina, Indiana, Michigan, Massachusetts, Minnesota and Wisconsin, are currently evaluating the proposed modifications by NCCI. These states will inform their adoption decisions once they’ve decided.

Employers in states like New York, Pennsylvania, Delaware, New Jersey and California, which operate with distinct experience rating plans, won’t be affected by these modifications.

Organizational Impacts from NCCI’s EMR Changes

It’s anticipated that the proposed revisions won’t have a significant impact on statewide premiums. Additionally, the overall average adjustment to EMR in each state isn’t expected to be affected by these proposed changes.

The impact of adjustments at the individual employer level may vary and can be offset by changes in the frequency of losses and routine updates to the rating criteria. It’s anticipated that most employers will undergo variations in their EMR of less than +/-5%. This suggests that certain employers may experience an increase in their insurance premiums.

We’re Here to Help Understand Upcoming EMR Changes

The proposed modification to the experience rating modification calculation aims to improve the effectiveness of the experience rating plan and foster greater uniformity across states. The changes will be implemented for experience rating modifications that have rating effective dates on or after the expected loss cost and rating filing effective date of each state, which begins on or after Nov. 1, 2023. If you have questions about how this could impact your workers’ compensation, connect with a member of our team.