For the past three years, employers have reaped the benefits of workers' compensation legislation passed in 2004 (Assembly Bill 227 and Senate Bill 228) as well as that passed in 2005 (SB 899). The result of this legislation has been a dramatic drop in overall loss costs and, consequently, in workers' compensation insurance premiums. In some class codes, employers have realized premium reductions up to 70 percent of what they were just four years ago.
Overall loss costs also become the basis for expected loss rates, which are the benchmarking factors in the Experience Modification Calculations issued by the Workers' Compensation Insurance Rating Bureau (WCIRB). With expected loss rates decreasing an average of 26 percent across all class codes, employers whose loss experience has held constant or even dropped slightly are still facing higher experience modifications because the standard against which they are judged reflects lower expected losses.
California utilizes an experience rating system as a means to equitably share the cost of risk across industry groups and provide a financial incentive for employers to reduce their workers' compensation losses. The two primary factors used to determine the experience modification are the actual payroll and claims for an employer over the previous three policy periods and the expected loss rate. An individual company's payroll and claims is known as an employer's experience, and the expected loss rate is the expected average loss rate within the industry for every $100 in payroll for similarly sized employers in their particular industry (class code). The best way to view this is to look at the expected loss rate as the denominator and an employer's experience as the numerator. Since the expected loss rate is going down across all class codes, in order to maintain the current experience modification, an employer's losses (the numerator) will have to go down proportionally to the expected loss rate, otherwise the experience modification will increase. This is particularly frustrating for employers with very good safety records where their losses have not increased but rather decreased slightly or stayed fairly level. The decrease in experience did not compare to the decrease in the expected loss rate for their class code, and the end result is a higher experience modification.
As mentioned earlier, the actual losses across all industry groups have declined since 2003. The expected loss for the combined years of 2004, 2005 and 2006 is 43 percent lower than for the three previous years of 2001, 2002 and 2003.
What this essentially means is regardless of industry, an employer's losses should be lower now than they were just four years ago. On its Web site, the WCIRB says increases in the experience modifications have been mostly offset by decreases in the pure premium rate and actual premiums charged by insurance carriers. It is true the pure premium rates as of Jan. 1 have declined by 15 percent as compared to the rates posted on Jan. 1, 2007; however, with increasing disability benefits and other expected proposed legislative changes, these reductions are not expected to continue. Combine this with the current reduction in the expected loss rates, and it may mean significantly higher premiums for some employers.
Increases to the expected loss rates are not expected anytime soon. If ultimate losses continue to decline as expected, there will be no statistical basis for the WCIRB to alter its current predictions as they relate to calculating the expected loss rate. As such, it is important for employers to take a look at their losses for the current policy year, as well as the previous three, to see if there are any opportunities for reducing or mitigating those exposures. Some key elements to helping reduce losses are the implementation of a return to work program, diligent use of the Medical Provider Networks, regular safety meetings and periodic open claim file reviews. These types of programs are critical to achieving and maintaining a low experience modification and ultimately keeping it at better-than-industry average, regardless of changes to the expected loss rate.
Cruz is assistant director of the Risk & Loss Advisors division of Barney & Barney LLC.