Changes to NCCI’s Primary-excess Split Point

In 2011, the National Council on Compensation Insurance (NCCI) proposed a change to the experience rating plan to increase the primary-excess split point over a three-year transition period. The first stage of the transition took effect with each state’s approved rate and loss cost filing on or after Jan. 1, 2013. This change has also been adopted by several states that utilize independent bureaus.

Understanding the Primary-excess Split Point

In the experience rating process, each loss is divided into a primary and excess portion. The first $16,500 of every loss is determined as a primary loss, with everything above that point considered an excess loss. For example, a $9,000 loss has no excess value. On the other hand, a loss of $25,000 will have $16,500 in primary losses and $8,500 in excess losses.

Primary losses are used as an indicator of loss frequency, and their full value is used in the experience mod calculation. Conversely, excess losses receive only partial weight in the calculation, as one catastrophically large loss would otherwise lead to a substantial increase in the experience mod. This means that primary losses affect the mod more than excess losses do. 

The rationale behind assessing primary and excess loss amounts is that “severity follows frequency,” or that an organization that displays a continual pattern of loss has an increased chance of a severe loss in the future. As a result, a company with a large number of primary losses will have a higher mod than a company with the same amount of losses split between primary and excess. 

Changes to the Split Point 

In July 2011, the NCCI announced a proposal to raise the split point from $5,000 to $15,000 over a three-year period to better correlate with claim inflation. The process of transitioning to the new split point began in 2013, with an increase in the split point from $5,000 to $10,000. In 2015, the split point included an additional increase as a result of claim inflation, and the NCCI now makes annual adjustments to the split point based on inflation.

These changes directly affected the District of Columbia and the 34 states that use the NCCI’s rating system, and many of the remaining states’ independent rating bureaus have also adopted the change.

How Does This Affect You? 

In general, the split point increase tends to cause debit mods (those over 1.00) to gain points and credit mods (those under 1.00) to lose points. Employers who already have a fairly significant debit mod are most vulnerable to further increases. However, the exact impact on your mod depends on a number of factors. 

In 2013, approximately 75% of all mods stayed the same or decreased while the remaining 25% increased. However, the effects of the split point change have been less dramatic as changes have slowed.

It’s important to remember that the NCCI’s stated goal is to have the average experience mod factor be 1.00. Along with the split point change each year, the NCCI adjusts other factors affecting the formula so that the average mod across all employers does not change.

Preparing for Change 

Although no one knows exactly what a future mod will be until all payroll, losses, and rating values are available, Veritas Risk Management & Insurance Services can work with you to project how your organization’s mod and premiums may be affected by these changes. Monitoring the impact of the split point increase is especially important for companies that are required to maintain a certain mod in order to bid on jobs or contracts. It is essential to address and control losses and become familiar with your loss profile so your organization can be proactive about these and any other changes.