Three years of data is used to provide a more accurate reflection of the losses, smoothing out the impact of any exceptionally bad or good year for losses.
Both actual and expected losses are divided into a primary and an excess portion in what is called a split rating method. Primary losses are designed to be an indicator of loss frequency (the number of losses) and are used at their full value in the mod formula. Excess losses are an indicator of loss severity (the amount of each loss) and are weighted in the formula so that they are less important. The emphasis of loss frequency over loss severity in the formula reflects the fact that loss frequency is a more actuarially significant indicator of risk and can be improved through proactive loss control programs.
The primary amount of each actual loss is the first x dollars of each claim, where x is determined by the split point that applies to the state and effective date. Excess losses—the amount of each loss that’s more than x—measure severity. Very large losses are also capped at levels that vary by state. This minimizes the impact that any single claim can have on your premium. In approved states, medical-only claims figures are reduced by 70 percent.
In most NCCI and some independent states, the split point is currently undergoing a multi-year transition from to better correlate with claim inflation. The process of transitioning to the new split point began in 2013, with an increase in the split point from $5,000 to $10,000 in most states. In 2014, the split point increased to $13,500 in most states. In 2015, the split point increases to $15,500 plus an adjustment for claim inflation. The split point will continue to increase with claim inflation in 2016 and beyond.
Expected losses are calculated using your payroll data by state and class code and applying the Expected Loss Rate (ELR). The ELR is provided by each state’s rating bureau. These figures are also broken down into expected primary losses and expected excess losses. Understanding your company’s mod and the data used to obtain it helps you identify ways to minimize your workers’ compensation premium.