California’s New Variable Split Point Experience Rating System

By Jeffrey Cavignac, CPCU, RPLU, ARM

Effective January 1, 2017, the Experience Modification Formula in California will change.  The experience rating formula is created by the Workers Compensation Insurance Rating Bureau (WCIRB or the Bureau) and approved by the California Insurance Commissioner.   Application of the Experience Modification is mandatory for all eligible employers.  The WCIRB administers the experience rating system and publishes Experience Modifications for rated employers.

Currently the formula splits losses in to “Primary” and “Excess”.  The current “split point” is $7,000 for all employers.  This means that any claims up to $7,000 goes in to the formula on a dollar for dollar basis.  Claims amounts greater than $7,000 (excess losses) are discounted.  The theory being that an employer should be able to control frequency, but may have little control over severity.

The new formula is designed to put an even greater weight on frequency.  It accomplishes this by imposing various “Split Points” depending on the size of the risk.  These new split points will now range from $4,500 to $75,000.  Under the new formula, 100% of the primary losses will factor in to the equation, while none of the excess losses will count.

The Bureau states that “there is no expectation that experience modifications for California employers as a whole will change.” Despite this, our anticipation and observation is that on average, employers with frequency of small to mid-sized claims will see an upward trend in the rating, while employers with high dollar losses will generally see a downward trend. Employers without claims should not be affected by these changes.  We will continue to monitor the actual impact of these changes as more ratings are released.

The following link from the Bureau goes into greater detail on the new formula.

We welcome any questions that you may have.