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Contracting Classification Premium Adjustment Program

Some states (not Indiana) have a Contracting Classification Premium Adjustment Program (CCPAP). It provides discounts to contractors who pay higher than average wages.;

The Contracting Classification Premium Adjustment Program (CCPAP) provides premium credits in the form of a specific discount to employers who pay higher than average wages to employees classified within the contracting class codes. The CCPAP discount is the percentage decrease that an insured receives from its carrier on a policy containing contracting classification codes. The discount is calculated based on the hourly rate of employees who are covered by these codes.

The CCPAP calculation is similar to the Experience Rating program. The rating organization, like the ICRB, gathers the data, reviews for data integrity, calculates the discount, and distributes the factor to the carrier.


Features
  • State-approved program designed to vary an employer's workers compensation premium by way of a premium credit based upon the employers average wage level.
  • Eliminates redundant credit caused by the up-front credit received by the experience rated insured as a result of “high payrolls.”
  • As of 2012, 18 states (not Indiana) have a premium credit program for contracting classifications:
    AK, CA, CT, DE, FL, HI, IL, MA, MD, MO, MN, NE, NM, NY, OK, OR, PA, VA


High vs. Low Wage Payers Studies
Several NCCI studies have concluded that total payroll is an equitable exposure base for workers compensation premium determination. The studies also conclude that high wage paying employers do not subsidize medium or low wage paying employers, as has been alleged in some states. These conclusions would support that CCPAPs are not necessary to achieve equity. However, for political reasons, the programs are still in place.

The studies are:
    • Total Payroll/High Wage Payers by Ronald Retterath, NCCI Digest, Vol VI, Issue III, September 1991
    • Report on Premium Credit Programs completed in 1995 for the Virginia Commission
    • Premliminary 2002 update of the 1991 study, on NCCI website dated May 14, 2003

Excerpt from the 2002 update:
"The 2002 update to the 1991 study focused on average claim costs or loss severity to determine if inequities exist between high wage payers and low wage payers. The experience rating plan recognizes the differences between individual insureds. The insured’s actual loss values are split into primary and excess components. The actual primary losses reflect claim frequency and are fully reflected in the calculation, while the actual excess losses are weighted with expected excess losses. Therefore, the differences in actual claim frequency between individual risks are quite effectively reflected in the experience rating modification."


Report on Premium Credit Programs
The following are excerpts from NCCI's Report on Premium Credit Programs completed in 1995 for the Virginia Commission. The Commission engaged NCCI to review and analyze the benefits to employers of introducing a premium credit program to reflect differences in wage rates among employers within a single classification.

"Regardless of how premium is allocated, the underlying claim costs are the same; therefore, the total level of collected premium must be maintained. This implies that, if the high-wage paying employers receive a premium credit, then the low-wage paying employers will be required to pay higher premiums."

"Currently, all states except Washington use total payroll as the exposure base in calculating workers compensation premium."

"...some groups believe there is an inequity inherent in the use of total payroll as the premium basis... There are reasons, however, that such an inequity may not exist. First, the experience rating system will dampen the impact on premiums of the higher wages..." Also "...there is a tendency for higher wages to correspond to higher claim costs."

"...the premium credit program actually provides a dual credit to the insured as a result of paying high wages. In addition to the direct credit resulting from the program, a high-wage paying employer also benefits from having a lower experience mod than low-wage paying employers (all other things being equal). Several states have viewed such a "dual credit" as an inequity and have implemented adjustments to account for it."

"From an actuarial viewpoint, insureds that consistently experience large loss ratios, regardless of their wage levels, should not receive credits."

Review of States
"...the presence of the program has had no significant effect on the size of Missouri's contracting residual market. The insureds in the program had significantly lower loss ratios than insureds not in the program."

"In Florida, the insureds in the program actually had higher loss ratios than the insureds not in the program, even before the premium credit was applied. The conclusion in Florida is that the wage needed to be eligible for the program is too low."

"Thus, the Massachusetts data seems to indicate that payroll, in conjunction with the experience rating program, has been a very reliable predictor of claim costs for high-wage paying companies. This conflicts with the fundamental argument for a premium credit program, which is that benefits do not correlate with payroll at high-wage levels."

Note: The study compares the average maximum effective wage to the minimum threshold wage needed to receive a credit. Applying this comparison to Indiana, the benefit schedule effective 7/1/99 provides a maximum weekly benefit of $488. The hourly wage necessary to reach this weekly benefit is about $18.29 ($488 / .667 / 40 hours). Therefore, $18.29 per hour wage rate would be the minimum threshold wage that would be justified by the Indiana indemnity benefit schedule.

Conclusion
"There is no actuarial or statistical evidence to support (or oppose) a premium credit program in Virginia. One conclusion, however, is certain: If a premium credit program is introduced in Virginia, employers in the program will pay less for their workers compensation insurance, and employers not in the program will pay more. A premium credit program does not change or decrease the underlying costs of the system. The program will not improve workplace safety or reduce claim frequencies or costs."

"The proponents of a premium credit program should also bear the burden of proof that such a program is actuarially justified and provide the data on the effect such a program would have on Virginia employers."

"...without evidence that such a program is warranted, a premium credit program could provide an unfair economic advantage to employers in the program and an unfair economic disadvantage to employers not in the program. While some states have implemented programs and even have stated that a premium credit program is required to "equalize" workers compensation rates, we are not aware of any actuarial or statistical evidence underlying the implementation of these programs in other states."

"Given the lack of statistical or actuarial evidence to support the need for a premium credit program in Virginia...NCCI does not believe such a program can be justified for Virginia. Accordingly, NCCI is not proposing such a program for Virginia."


Typical Process of a Program
Most CCPAPs require additional work efforts with specific time requirements from carriers, insureds, and rating organizations. Listed below is the typical process:
  1. Review committee establishes and monitors classifications subject to program.
  2. Carrier or rating organization identifies and notifies insureds who may qualify for the program and keep proof of mailing.
  3. Insured completes application of wages paid and hours worked by classification and submits to rating organization.
  4. Rating organization computes credit, if any and sends copy of worksheet to carrier.
  5. Carrier applies credit factor to policy or endorses policy that factor will be applied.
  6. Carrier verifies insured still qualifies for credit factor upon audit of policy.
  7. Carrier reports credit factor per the Statistical Plan.

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The material in this document has been prepared and shared for informational purposes only and should not be relied upon as legal advice on any particular situation.