Back in September we blogged NCCI's pending changes in experience rating plans. While initially proposed for this fall, the new implementation schedule (contained in NCCI Circular Letter E-1402) does not even begin until January 2013, at which time 18 states will kick off the program. The other 21 states will follow throughout the year, with Utah being the last, in December. We have more than a year to figure out the implications of raising primary losses from $5,000 first to $10,000 and eventually to $15,000 and even higher. The rules are going to change and, as is so often the case, there will be some winners and some losers.
Rating's Black Box
In the course of retooling the black box that is experience modification, NCCI's actuaries will set the numbers that determine exactly how the new plans will operate. To date, there has been no word on the D ratio - the percentage of total losses that are expected to fall below the primary split. This will be the key factor in analyzing the implications of the new rating plans.
No matter where this number is set, one thing is certain: employers with higher than expected losses will see their experience mods go up higher than under the current system; at the same time, employers with lower than expected losses may see their mods drop even lower than under the current rules. NCCI pledges that the new plans will be revenue neutral: overall premiums will remain the same. [Legislative approval in each state would be required if the new rating plans resulted in increased premiums.]
One important feature of the new system is its dynamic nature: unlike the current rating plan, where the primary loss split point remained at $5,000 for over 20 years, the split point going forward will rise as losses rise.
What does all this mean for experience-rated employers? It's important to understand exactly how the new system will work. Sticker shock awaits those who ignore the implications of escalating primary losses. The Insider will do its best to alert employers to the details of the new calculations, along with a user-friendly walk-through of the entire experience rating process. No, it's not our idea of fun, but with billions in insurance premium on the table, it will certainly be worth the effort. Stay tuned.