A number of clients have asked about the upcoming changes to the NCCI experience rating plan (“e-mods”). In this brief, I’ll give an overview of the changes to the e-mods, how they are changing, and how it may affect two classes of client stakeholders – insurers, and self-insured groups.
How are E-mods Changing?
Going forward, losses from lost-time claims larger than $5,000 will be weighted more heavily in the formula that determines an employer’s e-mod. This effect will be strongest among small lost time claims – ($5,000 to $15,000 claim size). As a result, to the extent that employers are successful at preventing lost time claims, they will see their e-mods go down. On the opposite side of the coin, those employers that are less successful than their peers at preventing these claims will see their e-mods increase. The change in the e-mod formula is designed to be revenue neutral, meaning that premium increases to some employers will be offset by premium decreases to other employers. NCCI is transitioning into this formula over a three year period.
NCCI decided to implement this change because they found that those employers with the lowest e-mods (under 0.90) had much better loss ratios even after application of the e-mod credit; those employers with the highest e-mods (over 1.10) had much worse loss ratios even after the e-mod debit. The goal of the NCCI experience rating plan is to have all risks have equal expected loss ratios after the application of e-mods, making each employer equally desirable from an insurance company standpoint. The change described above is a big step towards accomplishing that goal.
This change means that expected profitability for insurance policies is much less affected by the e-mod of the insured employer. Insurance company underwriters and decision makers should not rely as heavily on the e-mod of the employer to help them decide whether to underwrite that particular employer.
This change means that the risk management / safety focus of self-insureds should be on preventing all lost time claims, regardless of size. After all, the fewer lost-time claims an employer experiences, the less likely the employer will experience a large (over $250K) lost time claim. Just 1 or 2 large lost time claims will significantly affect the profitability of most self-insurance programs.