Once the WCIRB determines a business is eligible for experience rating its experience modification is calculated by comparing the actual losses to the expected losses. Actual losses are the medical and indemnity claim costs resulting from a work-related injury, that an insurance company has paid or expects to pay in the future. Expected losses represent a business's projected losses for the industry in which it operates. In other words, given its classifications and payroll, its expected losses represent the statistical average losses that a business of a similar size in the same industry is expected to incur. Given two businesses within the same industry, the larger the business, in terms of payroll, the more losses that business is expected to incur.
Experience Modification = Actual Losses / Expected Losses
It is relatively straightforward to predict the frequency and cost of workplace injuries for a large group of businesses by examining the losses incurred by those businesses in the past. Predicting whether or not a specific business within this large group of businesses will experience a workplace accident, however, is more difficult. This is especially true for small businesses. The statistical chance of incurring a workers' compensation claim for any single small business within a large group is small, and an experience modification based on this loss history is less reliable than it would be for a large business. For a small business that incurs a loss, the effect on its experience modification using a simple comparison of actual losses to expected losses would result in an unreasonably high experience modification for the year. This could result in greatly increased workers' compensation insurance costs. In simplest of terms, an experience modification compares actual losses to expected losses. In practice, some elements have been added to the experience rating formula to prevent extreme swings in experience modifications from year to year. To understand these elements, it is necessary to explain the experience modification calculation in some detail.
Actual losses are segregated into actual primary losses and actual excess losses. Effective January 1, 2017, an employer’s primary losses varies based upon the size of the employer as measured by the total expected losses used to determine eligibility for experience rating. There are over 90 different primary loss values ranging from $4,500 to $75,000. For experience modifications calculated between 2010 and 2016, the first $7,000 in losses for each claim were considered primary and used at full value in an employer’s experience modification. Any remaining amounts above the primary loss value were considered excess losses. The 2017 experience rating formula places full weight on the primary portion, with no weight given to the excess loss value. Prior to 2017, a portion of the excess loss value was used in the experience modification calculation which varied from zero for very small employers increasing to 78% for the largest employer. The credibility values used in the experience rating formula can be found in Table II of the Experience Rating Plan.
These factors are shown in the formula below, and are explained in the Experience Rating Form section.
Once issued, the WCIRB is permitted to revise an experience modification under a limited number of circumstances. The WCIRB is not permitted to revise an experience modification simply because a claim changes in value. Reasons for a revision to an experience modification include:
Certain types of claims, such as joint claims, subrogated claims, and death claims, impact the experience modification calculation differently from other types of claims. For details concerning these exception cases, see Part 4, Section V, Subsection C of the California Workers' Compensation Uniform Statistical Reporting Plan - 1995.
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