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The WCIRB’s Proposed Experience Rating Formula, Effective January 1, 2017, Diminishes Employers’ Incentive

An integral part of the cost of workers’ compensation is the experience modification. It gives the employer the incentive to manage its cost through measurable loss control and claims management practices. The proposed experience rating formula developed by the Workers Compensation Insurance Rating Bureau (WCIRB), effective 1/1/2017, will diminish the measurability of cost savings.
In 2012 the WCIRB introduced a new Primary Threshold (Split Point or Actual Primary Loss) of $7,000 for all claims in the experience rating formula. The proposed 2017 experience rating formula has 94 Primary Thresholds ranging from $4,500 to $75,000. The smallest experience rated employer will be issued a Primary Threshold of $4,500 the largest will be issued a Primary Threshold of $75,000, based on total expected losses within the experience period.
In 2012 the WCIRB introduced 2 new values, replacing the old W and B values, to the experience rating formula, Credibility Primary (Cp) and the Credibility Excess (Ce) values. From 2012 to 2016 the Credibility Excess (Ce) remained fairly consistent starting at zero for the smallest employers and gradually increasing to .78 for the largest employers. The proposed 2017 experience rating formula makes the Credibility Excess (Ce) value zero for virtually all experience rated employers, which will decrease the incentive for employers to be proactive in reducing claim costs.
Once a claim goes over the proposed 2017 Primary Threshold, any increase in the claim will not have an effect on the experience modification. More importantly, any decrease, down to the Primary Threshold, will not reduce future experience modifications.
Example: An employer’s 2017 Primary Threshold is $11,000 and a single claim’s Actual Loss (Paid + Reserves) is $30,000. If the claim is reduced to $15,000, there will be no decrease in future experience modifications. There will be no decrease in the future experience modification unless the claim is reduced below the Primary Threshold of $11,000.
The measurability of cost savings will be diminished and employers will have less incentive to reduce reserves that are over the Primary Threshold. Small to medium size employers will have much less incentive while large employer will have more incentive because the Primary Thresholds go up to $75,000.
Example: An employer is willing to provide temporary modified work for an injured worker knowing that any possible reduction in reserves will provide a measurable reduction in future experience modifications. However, if the claim will never fall below the Primary Threshold, there will be no reduction in future experience modifications which diminishes their incentive to provide temporary modified work for injured employees.

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