By R. Bruce Wright, CPCU
Safety Officers (the main audience for this newsletter) usually have some involvement in the insurance process at their systems, even if only in the claims reporting side of things, and many of you are even more involved than that. As a result, either by intent or by osmosis, most of you will have gained some knowledge of the insurance process and of WC rating techniques. With few exceptions, however, most readers of this article would not claim to be insurance experts, and may have “picked up” most of their insights informally in the course of dealing with others in the business.
For example, you probably know the effect that your WC experience modifier has on your final Workers' Compensation premium. You probably also know that the modifier is calculated for your company based on your actual claims experience. But do you know how your company's claims actually affect the modifier? Here is a short quiz to test your understanding. Please take a few moments and decide if the following statements are true or false.
- Claim severity doesn't really matter, only claim frequency hurts my experience modifier.
- This year has been a bad year for claims, so my experience modifier is going up when I renew.
- If I get a deductible, I can pay my own small claims and help my experience modifier.
If you answered true to all of these questions, you have been taken in by some of the most commonly believed myths among “civilians,” that is, those who are not insurance industry insiders. If you answered false to all three, you are probably more of an expert in understanding how your experience modifier is calculated than most readers of this newsletter!
If any of your answers were incorrect, that's okay, you can be certain that you are not alone. The purpose of this little quiz is not to point out how much you know or don't know about the mysterious experience modifier calculation, but rather to provide an opportunity to explain the concepts of how your system’s claims experience will or will not affect it.
Let's take the first question. While there is some truth to the notion that frequency is more significant than severity, as written this statement is false. Both frequency and severity affect on your company's modifier. When the experience modification factor is calculated, the first $5,000 of each claim is used. In addition, a weighting factor is applied to any loss amount over the initial $5,000 and the result will be added into the modifier calculation. So, a $20,000 claim will have a greater negative impact on your modifier than a $5,000 claim. On the other hand, it is also true that ten $2,000 claims will have significantly greater negative impact on your modifier than one $20,000 claim, even though the total dollars of loss are the same, since all of the loss dollars will go into the calculation, without any weighting factor being applied.
The second statement is also false. The claims that are occurring this year will not enter into your experience modifier calculation until 12 months after the policy expires. The reason for this is to give the most recent year's claims experience a chance to mature, to reach the stage of more reliable numbers. For example, the value of any particular claim will change as more information becomes available about the extent of the injury. For some injuries this may take several months to a year. In addition, some claims which may have occurred near the end of the policy period may not be reported until the early part of the next period. To avoid this problem and to deal with the need to tabulate results, the WC experience modification factor is based on a rolling average of the three years prior to the last completed policy year. So, the losses of this year are not seen in the calculation until the year after next!
The third question is almost a trick question. If you have chosen to carry a deductible (which is allowed in some states), the initial claims reporting and handling process does not change. You will still report the claim to your Workers Compensation carrier and they will adjust the claim in the usual manner. Then, after paying the claim, your carrier will bill you for reimbursement for the amount of your deductible or for the amount of the claim, if it is less than the deductible. The carrier is required by law to report all claims payments to the appropriate experience modification rating bureau. Now, some states do permit you to pay minor medical expenses (typically under $1,000) and then report the claim to your carrier as an "incident only" claim. In reality, the cost to your company of paying these claims directly is usually greater than the effect they would have on your premium by way of the experience modifier. By the way, if you are inclined to pay small claims directly, before you start doing so, make sure your state permits you to do this. The state can impose some severe penalties for violating reporting rules.
Now your WC experience modifier IQ should be up to par! 