Based on a little research that I've been doing, it looks like a lot of Texas employers are going to be getting some really unpleasant surprises in their experience modification factor calculations, starting July 1, 2015.

Regular readers know I've been writing a fair bit about the changes NCCI has made in their experience rating formula. Basically, NCCI has been implementing increases in how much of each individual claim gets fully counted in calculating experience modifiers. Until recently, only the first $5,000 of each claim counted fully--everything over this was discounted. But that changed in 2013, and the "split point" has been significantly increased in steps. At the moment, the first $13,500 of each claim gets fully counted. Next year, it goes up to the first $15,500 of each claim.

Now, Texas, until recently, wasn't really an NCCI states. Texas outsourced and licensed manuals from NCCI but kept the $5,000 set point. That's going to change, starting July 1, 2015, when Texas officially starts using the NCCI experience rating plan manual rules.

And rather than implement the higher set point in increments, according to the Texas Register(official publication of the Texas Secretary of State) "NCCI and staff recommend
implementing the proposed changes in their entirety, as opposed to transitioning the implementation over time."

So for Texas employers, the set point will just jump from $5,000 to $15,500. That means, for Texas employers that have any claims in the past three years that were greater than $5,000, their experience mods are going to jump. 

We've already written about how we've seen a considerable increase in the number of employers contacting us who are desperate to reduce their experience mod because it's shot up over that magic 1.00 threshold. Texas employers are about to learn the hard way about the effect of this change, and they won't even get the changes implemented in increments--they get the full shot all at once.

Get ready to hear some screams from Texas employers sometime around the middle of next year, as these new experience mods start being promulgated.

I keep returning to the subject of experience modifiers, because for so many of our clients in the construction or staffing industries, experience modification factors are vitally important in two ways. First, of course, they directly impact Workers Compensation insurance premium charges (a 1.25 e-mod means a 25% surcharge while a .75 mod means a 25% discount) but also because more and more of their customers and potential customers are using the experience mod calculation as a benchmark for even quoting on work.

The way this works is a client says, "to bid on this project, your experience modifier must be 1.00 or lower". They may set the bar slightly higher sometimes, say, at 1.05, but you get the idea. This rating factor that was developed for the purpose of adjusting insurance premiums is now being used as the be-all and end-all determination of workplace safety. And it's a bad, misleading measure.

It's also becoming the "perfect storm" for a lot of companies because of two changes in the insurance industry: a change in the NCCI rating formula and decreases in manual rates in many states.

I've written before about the new formula that's been devised by NCCI to calculate experience mods--the main difference is that more of each claim is being fully counted in the formula. In the prior formula, everything above the first $5,000 of each claim was discounted. Now, that "set point" has been raised, in increments, so that now the first $13,500 of each claim is counted (increasing next year to $15,000).  This means that the historical loss data used to compute a company's X-Mod has increasing impact on the mod calculation, if there are any losses in excess of $5,000 apiece.

But the second element that is driving modifiers up is that, in many states, manual rates have been declining in recent years.

Now, that's typically touted as good news for employers. Here in my home state of Illinois, for instance, politicians have been hyping the decline in manual rates as proof that recent 'reforms' have paid off for employers.

That's not really such an obvious truth--insurers have lots of ways to keep premiums high even when manual rates decline. But what hasn't been hyped so much is that when manual rates decline, so too do the "Expected Loss Rates" that are used in experience mod calculations--and those declines aren't such good news for employers.

Expected Loss Rates, or ELRs, are the way NCCI calculates what they think losses should have been for the average employer of your type and size in your state. They compare that to what's been reported for your past losses to calculate your experience mod.

So here's what's happening, thanks to these two unrelated changes. The change in the rating formula means that your historic losses have greater impact on your mod, while the decline in ELRs means your historic payroll info has less impact than it used to. So everything else being equal, with the very same prior loss and payroll data, your experience mod is likely taking a big jump.

So at the very same time that more and more customers are using the experience modifier as a make-or-break factor in bidding on work, behind-the-scenes changes in insurance rating and manual rates are pushing up modifiers, making companies look less safe than they used to be, even when you control out changes in losses.

Worse yet, these X-Mods are shutting out perfectly safe companies from bidding on new projects.

We're getting more and more calls from clients asking us to review their experience mods, to see if something can be done to reduce a suddenly disastrous mod calculation that threatens to put the client out of business. Often, we can find ways to reduce these mods. Often, but not always.

I'm not sure what the solution is, other than getting the word out that an experience modifier is not a fair or reliable benchmark for workplace safety, and that these technical changes made by the insurance industry have significantly re-set the mod formula and tilted mods higher for many employers without there being any change in their safety record or operations.

Here's an interesting article from Business Insurance about how Illinois construction companies have not seen a decrease in Workers Comp premiums, even though there have been highly touted reductions in insurance rates in recent years.

This illustrates something I have written about before--just because manual rates go down, it doesn't mean the actual premiums paid by employers do the same. For one thing, this reduction in manual rates has coincided with a change in the NCCI experience modification factor formula. So even as manual rates decline, many employers have seen sharp increases in experience mods that more than offset any rate decreases.

And of course, there are lots of mechanisms for insurers to offset manual rate reductions in other ways, mainly by adjusting the use of Schedule Credit or Debits.  So a decrease in manual rates doesn't translate to an automatic decrease in premiums in the so-called Voluntary Market. And even in the Assigned Risk Plan, the change in the experience mod formula would more than offset the manual rate decrease for many employers.

Something to keep in mind when politicians hype the effectiveness of recent "reforms" in the benefits paid to injured workers.

The Oregon Department of Consumer and Business Services has released its latest studyranking the relative costliness of Workers Compensation insurance in all the various states.  The 'winner' this year, for most costly state, is California. And in our own experience, not only is California an exceedingly expensive state to buy Workers Compensation insurance, t is also a state where the regulatory and oversight mechanisms seem particularly poor, in terms of the redress and protection provided to employers in disputes over premiums, audits, classifications, and modifiers.

California goes its own way when it comes to Workers Compensation insurance, using its own rating bureau with its own distinctive manual of rules--and the biggest source of WC insurance is the State Compensation Insurance Fund, a state owned and operated WC fund that competes with private insurance. The combination of all these factors, really high premium rates and really crappy regulatory oversight, combined with a particularly high-handed State Fund means that employers in the Golden State have a really, really tough time of it. If you think your Workers Compensation insurance costs are a burden, just thank the business gods that you're not in California--unless you are, which in that case means you're really, really taking it on the chin.

This is one of those stories that pops up repeatedly, in different states at different times, but never seems to ever go away for long, because various states seem unable to resist the lure of cheaper Workers Comp alternatives without making sure adequate regulatory oversight is in place to avoid disaster down the road.

It's happened here in Illinois in the past, in Kentucky, and in other states that have allowed group self-insurance trusts for Workers Compensation coverage. Without effective oversight, some of these plans inevitably dig themselves into a hole from there is no escape. They underprice coverage, getting business in the short term, but eventually those long-tail WC claims eat them alive.

Then the former members of these trust start getting bills for huge amounts, as they are held responsible for their proportionate share of the huge shortfall of the fund to which they were once a member. It isn't fair, it's a huge and crushing burden to many small businesses, and those who created the problem--lawmakers and those who ran the trusts--typically avoid the painful fallout.

...the employers who exploit them, not so much, apparently. And in the process, of course, helps reward employers who hire undocumented laborers.

This article in the Insurance Journal explains that Florida officials have been touting the arrests of undocumented workers who used fake ID to get work (and thus get Workers Comp coverage). Apparently, those workers foolhardy enough to actually make a claim when injured at work were instead arrested.

According to the article, there have been way more cases against such workers than there have been against the employers who benefit from such exploitation. And the beauty of this all is that the system rewards employers who use such desperate workers, because if the injured workers are afraid to file claims when injured, the experience modification factors for these employers will stay low--lower than the modifiers of companies that play by the rules and hire legal workers.

For companies in construction trades in particular, keeping experience modifiers low is an increasingly critical matter--more and more, customers are insisting on experience modifiers at 1.00 or lower in order to even bid on projects. And the new NCCI experience mod formula is pushing a lot of smaller companies over that all-important threshold, with dire consquences.

So nice to know that Florida authorities are focusing their efforts on the poor desperate people who do the dangerous and difficult work, and not the shady employers who take advantage of them (and in the process, gain a huge advantage over honest employers.) 

North Carolina has stripped out a provision of a recent bill that would have precluded Workers Compensation benefits for undocumented workers. But, they promise, they will take up the idea at some future legislative gathering.

Sigh. So the bad penny of Workers Compensation law may yet return again. Because if undocumented workers are prohibited from actually being compensated when they are maimed or other injured at work, it means that those employers who hire them would get a big advantage over employers who employ legal workers.

If undocumented workers can't get compensated under the law, this means the experience modification factor for employers who hire them will end up significantly lower than the mods for law-abiding competitors. After all, if the worker who loses some fingers, or a hand, or has a should go out, can't actually make a claim, there's nothing to report for the experience modifier.So this ill-conceived "reform" would actually create a significant financial incentive for employers to hire undocumented workers.

Not exactly what the legislators of North Carolina likely had in mind. I suspect the sponsors of this provision were mainly interested in making sure that desperate people could more easily be exploited and injured by employers without financial consequence to those employers, and at the same time provide a convenient platform for political grandstanding and fundraising.

South Carolina also recently considered, and then abandoned, such a change in their law. But the idea keeps cropping up, and some benighted states have actually enacted such restrictions.

Given the current state of our politics, and the desire by certain lawmakers to curry favor with the most fanatic of our nativist crusaders, I am sure this idea will keep coming up for consideration. And if and when enacted, it will be an object lesson in unintended consequences, by rewarding employers who hire undocumented workers with financial gain.

As for all those shorn fingers, mangled toes, blown-out shoulders and backs of undocumented workers, well, that's really not the concern of certain politicians and their allies. They don't allow blood and body parts on the floors of most state legislatures, it might upset the delicate digestions of the lawmakers.