XMod Formula Update – WCIRB Discusses Results With New Webinar

California WCIRB Webinar Discusses XMod Formula Update For 2019 

California’s WCIRB presented a great webinar yesterday on the effects of the XMod formula update. Check out this article I wrote last year for more on the XMod formula update.    

Please note that the WCIRB has always been more than helpful in all my dealings with them. The presentation and Q&A session from the webinar were excellent.   The formula in the graphic in this article has nothing to do with Workers’ Compensation – unless you want to divide something by zero. 

Wikimedia Public Use License – Palmtree3000

The formula looks easier to understand for the prudent reader.  One question that came up was where are the charts that have the XMod risk bands. One of the most covered points was the $250 deductible increasing the number of medical only claims reported when compared to the file lost time claims. Comparable figures were recorded in 2014 before the new medical only changes. 

The medical only changes were the first $250 of any claim never makes it into the XMod formula.   

Yes, I decided to listen to the whole 40 minutes which included 8 – 9 minutes of questions. The slides from the WCIRB presentation are here.    

The new formula depends more on the size of the employer than in the old formula. As I mentioned earlier the prior formula variables have essentially been moved to a chart of loss ratios per size of the company and the loss ratios. 

One of the most interesting parts of the new XMod formula is that excess losses are not imported into the formula. The excess losses are the losses above a split point which was previously $7,000.  

According to the WCIRB: 

What is a split point?
As part of the experience rating process, an employer’s actual workers’ compensation losses are divided into actual primary losses and actual excess losses. Prior to 2017, the first $7,000 in losses for each claim was considered primary and counted fully in an employer’s X-Mod. Any losses above $7,000 were considered excess and had less weight in the experience rating formula. This $7,000 split point, or primary threshold, had not changed since 2010. Dividing losses into primary and excess components and weighting these components differently had the impact of giving more weight to claim frequency in the experience rating formula and less weight to claim severity.

Since the Actual Primary Loss value under the variable split point plan can be significantly higher than the existing $7,000 fixed split point, will experience modifications, on average, increase?
No. While the variable split point plan represents a fundamental change in the values used to calculate experience modifications, there is no expectation that experience modifications for California employers as a whole will change.

Notice the end of the definition – as a whole 

How is the “size” of an employer determined for the purpose of the experience rating calculation?
The new formula uses expected losses as a measure of employer size. Expected losses are calculated based on the reported payroll for all policies in the experience period and expected loss rates by classification (per $100 of payroll) approved by the Insurance Commissioner that are applicable to that year’s experience modifications.

One of the negative implications presented by the WCIRB involves the employers with no losses. These very safe employers are going to have a slightly higher XMod.  Penalizing the safest employers probably was never a foundation of any Mod system – until now. I am not sure how much of an increase the safest employers will see in 2019. 

In my humble opinion, we will not see the final results of how premiums are affected until 2022. This will give the new XMod formula update time to work through all of the policies currently in the system. 

This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.