An experience rating compares an employer’s actual losses for a three-year period against expected losses for the same period. Actual losses will not only include paid losses, but also the established reserves. The employer’s premiums are increased or decreased based on that risk’s variation from the average risk.

NCCI (National Council on Compensation Insurance) is the largest experience-rating bureau. Based out of Boca Raton, Florida, this organization manages statistics and promulgates ratings for most of the United States.

Some states do not subscribe to NCCI experience rating manual including:

New Jersey, and Pennsylvania do not subscribe to NCCI.

Texas and New York have independent experience rating plans, but are subject to interstate ratings.

Other states are Monopolistic states which include North Dakota Ohio, Washington and West Virginia.

Intrastate ratings: If an employer only has exposure in one state, a single-state rating will be developed.

Interstate ratings: There are 41 states (including the District of Columbia) that combine data to produce one rating to be applied to the entire multi-state exposure.

Texas allows carriers to promulgate their own ratings subject to the Texas experience rating plan.

The period used in developing a rating is the first three years of the past four policy years. The “lag” year is always the year that is just expiring. The reason for the lag year is that the losses for that year are not fully developed by the time the experience rating is calculated. The experience-rating period can be increased to 3 ¾ years to account for short-term policy periods and variable policy renewal dates.

Expected losses are derived from the employer’s workers’ compensation classifications and their respective payrolls. Every manual classification has an assigned expected loss rate. Each state has their own expected loss rates and are revised periodically. Expected losses are derived by multiplying every $100 of payroll by the expected loss rates (ELR).

Actual losses (also known as incurred losses) include the paid losses as well as reserves for each claim. Reserves are monies set aside for the future cost of the claim. The basis of the reserves are subjective, and the practice of establishing the amounts can vary widely between a carrier, their respective offices, and individual adjusters. Actual losses should not include expenses such as attorney fees, vocational nurse assessments, or medical bill reviews.

The experience rating worksheet will list all claims over $2,000 individually. Claims under $2,000 will be grouped together showing one aggregate number for losses.

The Insurance carriers for your past insurance policies submit data to NCCI using Unit Statistical Reports.

Unit Statistical Reports:

Unit Statistical reports are produced for every workers’ compensation insurance policy and include the payroll information and actual incurred loss information.

There are three reports submitted for each policy. The first report is submitted 18 months from inception date of the insurance policy. The second and third reports are submitted 12 months and 24 months after this date respectively. Example:

Policy Period=January 1, 2018 to 2019

First Report=July 1, 2019

Second Report=July 1, 2020

Third Report=July 1, 2021

The date the unit statistical report is submitted is called the: “Critical Value Date”

If a claim is open when the data is submitted, the reserve established on the claim will be used in the calculation of the rating. If the claim subsequently closes after the critical value date, it may be too late and the reserve may be used. Therefore, it is imperative to ensure claims are closed or reserves mitigated prior to this date.

The primary way to revise a rating is to have the data on unit statistical reports “corrected”. If the data going into the rating is not correct, the rating being produced will not be correct.

Approximately 90 days prior to an employer’s anniversary date, NCCI assembles all the unit statistical data submitted that would be connected to the risk Identification number of the individual risk/employer.

NCCI produces the ratings and sends one copy of the experience rating worksheet to the employer and one copy to the insurer of record.

The Rating Effective Date is located in the top right corner of the worksheet

The Rating Production Date is found in the bottom left corner of the worksheet

Experience ratings are constantly being revised. Therefore, it is important to note the effective dates and production dates of each worksheet.

Active Rating Time Periods

For each employer, the current and past two worksheets are “active” meaning they can be updated or revised.

Subrogation

When an injury is caused by a negligent third party a claim should be filed to recover losses from the third party. The workers’ compensation carrier can subrogate their losses from the third-party recovery. If a carrier receives subrogation recovery, each “active” worksheet the claim affects should be revised to reflect the subrogation recovery.

Denied Claims

If a claim is deemed non-compensible, either by the carrier or by a court order, each “active” worksheet that the denied claim affects should be revised to remove the loss.

Clerical Errors

Errors can include duplicated claims, claims for the wrong employer, missing policy periods, or incorrect payroll figures.

Loss Limitations

There are several loss caps that should be applied including, Employer’s Liability Claims, Multi-Claim Loss Limitations, and State Maximum Loss Limitations.

Critical Value Date

The date the data is sent to the rating bureau (see Unit Statistical Reports section) is called the, “Critical Value Date”. Actual losses should be valued eighteen months from inception of the policy period and no sooner than three months prior to your anniversary date. It is very important to know the critical value date for each open claim. If the claim is open at the time the data is submitted, the reserved losses will be used in the calculation of the rating. If the claim is closed before this date, only the closed claim losses should be used.

Self-Insured Data

If an employer was self-insured and then switches to an insured program, the data can be used on the current experience modification rating.

Non-Affiliated or Insolvent Carrier Data

If an insurer is not affiliated with the rating bureau or is insolvent and no longer submitting data, the policy experience is generally missing on the worksheet. A special process is utilized to include the data.

Ownership Changes

If a firm purchases or sells all or part of another company (stock or asset purchases), the data can be transferred to the new owner. A multi-step process is used to secure ownership change rulings and data transfers.

Some states have a rule that allows a revision of a rating if the reserves placed on claims were inappropriate or capricious. If the reserve amounts are enough to move the rating five-points, there could be a case to request a revision of the loss. In addition, there are times when a carrier may file a correction to remove the reserves on a claim when it is discovered the claim closed within a short period of time of the critical value date.

Unit Statistical “Correction” Reports

The primary cause for revision of experience ratings is the submission of correction reports. Upon receipt of correction reports, NCCI will revise an experience rating. The receipt of data can trigger an automatic revision of a rating.

ERM-14 Forms

If an ownership change occurs, either the seller or buyer can submit an ERM-14 form to NCCI. Upon receipt of this form, NCCI will issue a ruling on the combinability of the exposure. If there is over a 50% change in ownership, the data should be transferred to the purchasing company.

Once the ruling is made by NCCI, the current rating of the purchasing company will be revised to include the acquired company’s experience. In the event the seller continues business operations, their rating will also be revised to exclude the transferred data.

ERM-6 Forms

This form is used to submit data for self-insured or non-affiliated exposure. Some states allow insolvent insurance carrier data to be submitted using the ERM-6 forms.

The current carrier must submit the ERM-6 form to NCCI and must include a consent letter along with the request.

Follow-up with NCCI

Follow-up on any revision request is critical. It is not unusual for NCCI to produce several interim revisions of a rating until the final corrected rating is produced.