Lexington, KY - Kentucky employers could be facing significant increases in their workers compensation premium. And they may not even be aware that the increases are coming.
The National Council on Compensation Insurance (NCCI) is a nationwide organization that collects and analyzes workers' compensation insurance information. The NCCI provides insurance carriers guidance on insurance rates and loss potential.
Employers should realize that the NCCI is adjusting the calculation of its Experience Modification factor, a mandatory rating for employers that meet a state's insurance premium eligibility criteria. In Kentucky, the premium criteria is $5,000.
The Experience Modification rating factor is calculated utilizing a split rating system that takes into consideration accident frequency and accident severity. An employers individual claim history is compared to industry averages, and then either a debit or credit rating factor is assigned to the individual insured. Currently, any claims under the $5,000 threshold are considered "primary" and weighted 100 percent in the formula. Any dollar amount over the $5,000 threshold is considered excess and not weighted as heavily.
The $5,000 threshold in Kentucky has not changed in 20 years. But in 2013, the NCCI is instituting a new threshold that may severely impact the Experience Modification factor of Kentucky employers.
In October, the threshold will jump to $10,000, followed by increases of $13,500 in 2014 and $15,000 in 2015.
Here is how the increases could impact Kentucky employers.
In November of 2011, the average claim in Kentucky was $8,787, according to NCCI. Currently, the first $5,000 of the average loss would be weighted at 100 percent; the remaining $3,787 is partially weighted. But in October of this year, with the threshold increasing to $10,000, the entire $8,787 claim would be weighted at 100 percent.
These threshold changes will not only make it much more difficult for Kentucky employers to achieve a favorable NCCI Experience Modification factor rating. But since the rating is such a critical factor in calculating a worker's compensation insurance premium, Kentucky employers stand to pay thousands or even tens of thousands of dollars in increased worker's compensation insurance premiums.
Construction companies are particularly vulnerable to the consequences of the rating change. They are oftenrequired to have a 1.00 Experience Modification rating to even enter a job worksite; owners and general contractors utilize the Contractors Experience Modification factor as a qualifying requirement. Contractors with an Experience Modification factor in excess of 1.00 are often disqualified from bidding. Increase workers compensation costs coupled with decreasing revenues could prove devastating to local contractors who continue to struggle and recover from difficult economic times.
To prepare an accurate short term budget, employers should obtain their Experience Modification factor at least six months prior to the expiration date of their policy and have an insurance professional verify the accuracy of the factor. It should be pointed out that Experience Modification systems are an effective long term budgeting and risk management planning tool for protecting future modification factors.
To successfully offset the costs associated with medical inflation and the potential increase in costs associated with the NCCI's adjusted Experience Modification rating methodology, businesses should develop a proactive plan that implements a wide variety of preventative risk management strategies and cost containment controls for claims that are made.
Rob Hoenscheid is executive vice president of Roeding Insurance Group in Lexington.