WCIRB: Experience Rating an Effective Safety Incentive

All states, at some level, have subscribed to a workers’ compensation experience rating system to help evaluate and properly price to workers’ compensation exposure of a given risk.  The secondary purpose in states like California and others is to penalize a given business for debit experience modifications as they are caused by unsafe working conditions.  This mechanism allows enties such as CalOSHA to “police” those that are safe or not in California through the use of  inspections, fines and stop work orders.

Specifically, any employer with a greater than a 1.25 mod in California is part of the California “High Hazard Consultation Program”.

https://www.dir.ca.gov/dosh/calosha.htm

Some business models provide the compliment of services that assimilate that of a Professional Employer Organization (“PEO”), but fall short.  These other business models have one employer (versus two), have a transfer of labor (versus none) and do not use client-specific experience modification factors in understanding proper charged premiums or safety concerns.

Any “Employer of Record” on an outsourced basis that does state specifically that they are a coemployer (PEO) can cause confusion.  “Staffing”, “Long-Term Staffing”, “Payrolling”, “Employer of Record” and “EOR” are all terms that describe business models that are not coemployment, have nothing to do with coeomployment, yet are oft confused with coemployment.

Wednesday, April 5, 2023

WCIRB: Experience Rating an Effective Safety Incentive

Experience rating serves as an effective incentive for California employers to provide safe workplaces, according to a new study by the Workers’ Compensation Insurance Rating Bureau.

“Newly rated employers tend to have a larger decline in claim frequency over three years after their first X-mods than employers of similar size in the same industry that do not become experience-rated,” the WCIRB said. “The results indicate an impact of the initial qualification for experience rating that is directionally consistent with the intended incentive of experience rating to improve workplace safety.”

The WCIRB also said it found a statistically significant decrease in future claim frequency when an employer’s experience modification, or X-mod, changes from a credit to a debit. 

Experience rating is a merit-based system that primarily aims to create a financial incentive for safe workplaces, the WCIRB said. Experience modifications compare the claims history of an employer to the average expected claims history of similarly sized businesses in the same industry. An X-mod lower than 100% — a credit — indicates better-than-average experience, while a mod greater than 100%, or debit, denotes worse-than-average experience. A credit mod typically reduces premiums an employer is charged while a debit tends to increase the cost of work comp coverage.

While the goal of experience rating was to incentivize employers to reduce injury rates, the WCIRB said there is limited research validating the efficacy of experience rating to promote safety. The WCIRB said its analysis focused on what happens when an employer becomes experience rated for the first time, as well as what happens when an employer sees an X-mod jump above 100%.

“The ‘shock’ of the first X-mod may cause newly rated employers to pay close attention to how this first X-mod affects their workers’ compensation insurance premiums,” the WCIRB said. “Employers with a first X-mod over 100% would likely see an increase in their premiums due to their worse-than-average claims history for their industry. Therefore, this study hypothesizes that these employers might pay greater attention to safety or implement some safety programs to reduce future workplace injuries and lower their X-mods."

At the same time, a rating that jumps over 100% might prompt employers to be more sensitive to workplace safety. It might also affect the perception of the business as an unsafe place to work, the WCIRB said.

The WCIRB’s analysis of about 8,000 employers — 5,309 newly rated and 2,644 non-experience-rated — found employers that were experience rated for the first time had a larger decline in claim frequency compared to employers that weren’t experience rated.

“Qualification for experience rating led to a larger decline (-17%) in claim frequency for newly rated employers relative to non-rated employers of similar size and industry in the first year of experience rating,” the WCIRB said. “The impact on claim frequency persisted for the study period, three years after the first X-mod was issued.”

The WCIRB also said its analysis found 14,757 employers that had an X-mod increase were less likely to have a claim when compared to 226,177 employers whose rating was flat or decreased.

“During the first year of the X-mod change, employers with a credit-to-debit X-mod increase had a 2% larger reduction in the likelihood of having at least one claim than rated employers of similar size and industry who have no change or other types of change in their X-mods,” the WCIRB said.

Credit-to-debit increases are also associated with overall larger declines in total claim frequency ranging from 3% in the first year to 8% by the third year following the increase.

The WCIRB also reports that its review of selected industries found construction employers appeared particularly sensitive to X-mod increases.

The WCIRB found experience rating increases helped reduce claim frequency for employers in construction, manufacturing and hospitality.

The decrease in claim frequency for construction industry employers in the first year after an X-mod increase was 8% greater than it was for similarly situated construction businesses whose rating was flat or decreased. For manufacturing and hospitality, the relative change in frequency was 2% greater for employers whose experience rating increased.

“Construction employers may be more sensitive to changes to a debit X-mod potentially because, although not a direct proxy for safety, experience rating is often linked to the bidding process of construction projects, as certain projects may require construction employers to have an X-mod below a specific threshold to be eligible to bid,” the WCIRB said. 

Finally, the WCIRB said it found medium-sized employers were most responsive to X-mod increases. Small employers with a payroll of $360,000 or less had a 2% relative decrease in frequency after an X-mod increase compared to employers of the same size with no increase in their X-mod. Large employers with a payroll of more than $880,000 had a 5% relative decrease in frequency, while the relative decrease was 8% for employers with payroll between $360,000 and $880,000.

“The analysis results are not surprising in that small employers may have limited resources to implement safety measures effectively after having a significant increase in their X-mods, and larger employers may be less responsive to X-mod changes, since they may already be using loss-sensitive rating plans, such as large deductible policy plans,” the WCIRB said.

The WCIRB report, “Does Experience Rating Help Keep Workers Safe?” is available here.

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