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Experience Rating Adjustment (ERA)

Effective 7/1/98, the Experience Rating Plan was adjusted to allow a 70% discount for medical only claims.; Paying small claims;

Effective 7/1/98, the Experience Rating Plan was adjusted in Item Filing E-1339 to accomplish three goals:

 

·        reduce the weight on medical only losses
·        increase the weight on excess losses
·        make the split of actual losses between primary and excess to be inflation-sensitive 

 

Medical only claims are reduced by 70%, so only 30% of these claims (both actual and primary) will be used in the rating calculation. The rating worksheet now separately shows injury type 6, which are the claims reduced by 70%.

 

Example:

 

$60,000 Medical Only Claim

 

Total

Primary (portion up to $16,500)

Excess (portion > $16,500)

Before ERA :

$60,000

$16,500

$43,500

After ERA (70% reduction):

$18,000

$16,500

$1,500


New rating factors were effective 7/1/98. The Expected Loss Rates (ELRs) and Discount Ratios (D-ratios) were slightly lower than those effective 1/1/98 to compensate for the reduction in medical only claims in the formula.

 

The Credibility Coefficients: Primary Credibility Ballast (B) and Weighting Value (W) were revised to increase credibility for excess losses. This increases the responsiveness to excess loss for the larger insured. In the formula, the revision increases the portion of actual excess losses.

 

A split between primary and excess losses for 2017 ratings is  $16,500. Losses under $16,500 go into the formula at full value. The split point will be evaluated annually, with changes, if any, to be effective with our January 1 rate filing. It had been $5,000 prior to 1/1/2013.  In the calculation for the Ballast value, the statewide average cost per claim is used.  

 

To Report or Not to Report: That Is the Question

by Tim Coomer
President, Specific Software Solutions, LLC

(used with permission)

 

Introduction
Prior to the introduction of the Experience Rating Adjustment (ERA), many insurance professionals advised their client companies to not report small medical only claims in states where this is legal.
*

 

The resulting impact on the company’s mod was often substantial. However, with most states now having approved ERA, is it ever advantageous to not report medical only claims?

 

The History of Not Reporting Losses
ERA introduced several changes in the experience rating process (see "Explaining the Experience Rating Adjustment"). Medical only claims (IJ Code 6) must now be reduced by 70% before computation of the mod. This significantly decreases the impact that these losses have on the mod and therefore diminishes the incentive to not report these types of claims. Insurance companies and NCCI want to obtain the most complete set of data possible pertaining to workers’ compensation losses. The methodology prior to ERA produced an unintentional motivation for not reporting medical only claims, thus decreasing the quality of data gathered. ERA has effectively reduced the incentive to pay these claims out of pocket. But several of our ModMaster 2000 subscribers have asked, "Is there still a situation where not reporting medical only claims makes sense?"

 

The Analytical Answer
Without ERA, it is easy to see that eliminating small medical only claims from the mod calculation results in premium savings that exceed the cost of the small medical only claim. However, when the claim is reduced by 70% for purposes of experience rating, it becomes much more challenging to identify. Whether the company is large or small, the determining factor becomes the growth of the premium. Based on several case examples we constructed, it appears that the growth in workers compensation premiums has to be greater than 50% per year to create a scenario where there is any benefit from not reporting medical only claims. Of course, this is only a rule of thumb we observed in our analysis. Results for a specific company may vary.

 

In summary, it appears that ERA is achieving its goal. Consequently, it is preferable to report all claims in a significant majority of situations.

 

Legal Issues

Indiana Statute IC 22-3-4-13 requires all employers to report within 7 days, "...any injury to an employee causing his death or his absence from work for more than one (1) day." Failure to comply with this provision is a criminal offense.

 

By the terms of the insurance contract (policy), Part Four, an employer must "Tell (the insurance company) at once if injury occurs that may be covered by this policy."

 

The ramifications of failing to report an injury to the insurance carrier are unclear, but violations of the terms of a contractual agreement may have negative repercussions.

 

See the attached Circular for additional information regarding the failure to report losses:

 

ICRB Circular 2008-12 Claims & Loss Data Reporting

 

 

 

Related Files

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.