The Major Impact of Proposed EMR Changes
October 20, 2014 – Everyone who is involved with Workers Compensation Insurance is very familiar with the Experience Modification Rate (EMR). This article is to advise you about some possible changes that will be made to the EMRs, and how these changes could financially impact your company. For those of you in the construction industry it may even impact your ability to bid on new work.
Why is there an EMR? The National Council on Compensation Insurance (NCCI) states that the EMR is intended to reduce the frequency and severity of workers compensation losses through economic incentives. Their position is quite simple: the financial penalty associated with the higher EMR encourages employers to reduce the frequency and severity of claims by instituting safety programs, accident prevention procedures and return to work plans all aimed at preventing accidents and getting the employee back to work when there is an accident.
Though many Loss Control professionals disagree with the practice of viewing a contractor’s EMR as an indicator of their safety record, it is a long-standing practice in the industry. To further elaborate on this matter, Larry Melocik of Melocik & Company in Baltimore, MD, explains: “It’s like your automobile insurance. If you have a clean record, you’ll probably get discounts on your insurance ‘what they call a ‘Credit MOD.’ But if you have accidents, they add surcharges, and that’s called a ‘Debit MOD’ because they’re adding onto the base rate to determine your premium.”
This debit and credit scenario is how the economic incentive I discussed earlier works. Credit those with good claim records and debit those with bad claim records. The NCCI position is that the financial impact of the debit will push those with claim frequency to implement a more effective safety program.
Here is where this becomes a problem for many companies. Very often, an Owner or general contractor will only use the EMR to qualify the prospective contractor’s safety record when viewing the qualifications of the contractor they are looking to hire. The 1.0 modifier is considered a neutral mod because in the actual math, it is neither a debit nor a credit. Therefore, many believe that is the cutoff and will disqualify contractors because they have modifiers over the 1.0. In their minds the debit modifier is a sign of a poor safety program.
However, losses are not the sole reason for a modifier to rise. The EMR is payroll sensitive, so if payroll drops, the modifier may go up with no other changes. In addition, a drop by the State in the Expected Loss Rate (ELR) will also impact the EMR and cause many of them to rise. These are just two items that may impact your modifier but are not directly tied to your safety program.
This leads us to the potential changes coming to EMR calculation in Texas. Since Texas has decided to become an NCCI state, the changes recommended by NCCI to how an EMR is calculated will impact our modifiers. NCCI is recommending that there be a change to the Primary EXCESS Split in the experience rating process. A major component of the EMR calculation is the experience rating process. Each loss is divided into a primary and excess portion. The current Primary Split Point number is $5,000. As an example, in a $15,000 loss the first $5,000 is primary and is counted at 100% and $10,000 is considered excess and only a percentage weight is given in the calculation to the excess number.
Yes, this does mean that primary losses are given more weight than excess losses because they are considered an indicator of frequency. The rationale behind this is that “severity follows frequency”. So if they can impose the higher penalty on these smaller, more frequent claims, and stop frequency they will also stop severity. NCCI has announced that it will be recommending the Primary Split Point be changed from $5,000 to $15,000. This would mean that now the first $15,000 of every loss will be primary and will counted at 100%.
What does all of this mean?
We have done a quick, nonscientific analysis on the current modifiers of some of our clients and obtained some information from various Insurance blogs to determine potential impact. With no other changes other than to change the Primary Split Point, this is what may happen to your EMR.
|Current EMR with a $5,000 Split Point||New EMR with a $15,000 Split Point|
On July 28, 2014 The State Relation Executive for NCCI advised us:
“We are currently working with the Texas Department of Insurance (TDI) to determine exactly what changes to the Experience Rating Plan will be recommended. It is possible that a revised split point would be implemented, but only in conjunction with changes to multiple formula elements. Negotiated mods are also on the table for discussion. Nothing will occur before 6/1/15. That I can say for certain.”
So as of today there is no certainty as to what will happen. However, as your Risk Management consultants, we wanted to make you aware of these potential changes so you can prepare for the future.
In anticipation of these possible changes, we encourage you to implement a comprehensive safety program that will encompass both better safety protocols and a return to work program. With these programs in place, you will be in a better position to argue that the modifier is not a true reflection of your safety program.
Please feel free to contact our Safety and Loss Control and Human Resources professionals at IBTX for assistance and guidance in these matters at 800.880.6689. IBTX will continue to monitor this situation and keep all of our clients aware of the changes as they are implemented.