2013-2015 Changes to NCCI’s Primary-Excess Split Point

In 2011, the National Council on Compensation Insurance (NCCI) proposed a
change to the experience rating plan to increase the primary-excess split point over
a three-year transition period. The first stage of the transition took effect with each
state’s approved rate and loss cost filing on or after Jan. 1, 2013. This change has
also been adopted by several states which utilize independent bureaus.
Understanding the Primary-Excess Split
In the experience rating process, each loss is divided into a primary and excess
portion. In most states in 2014, the first $13,500 of every loss will be allocated as a
primary loss, with everything over and above considered an excess loss. For
example, a $9,000 loss has no excess value. On the other hand, a loss of $25,000
will have $13,500 in primary losses and $11,500 in excess losses. Primary losses
are used as an indicator of frequency, and are used in full in the mod calculation.
Conversely, excess losses receive partial weight in the mod calculation. This
means that primary losses affect the mod more than excess losses do. The rationale
behind assessing primary and excess loss amounts is that “severity follows
frequency,” or in other words, an organization that displays a continual pattern of
loss has an increased chance of a severe loss in the future. Thus, a company with a
large number of primary losses will have a higher mod than a company with the
same amount of losses split between primary and excess.
Changes to the Split Point
In July 2011, NCCI announced a proposal to raise the split point from $5,000 to
$15,000 over a three-year period to better correlate with claim inflation. The
process of transitioning to the new split point began in 2013, with an increase in
the split point from $5,000 to $10,000. In 2014, most states are increasing the split
point to $13,500. In 2015, the split point will increase to $15,000 plus an
adjustment for claim inflation, for an anticipated total of $17,000 or 17,500. The
split point will continue to be adjusted for claims inflation in 2016 and beyond.
These changes directly affect the 34 states and the District of Columbia currently
using the NCCI’s rating system. The independent rating bureaus of Indiana,
Michigan, Minnesota, New York, North Carolina and Wisconsin have also adopted

the change, and other independent bureaus (Massachusetts and Texas) may re-
evaluate their split points as well. The rating methods used by California,

Delaware, New Jersey and Pennsylvania differ widely from NCCI’s approach, so
similar changes in those states are not anticipated.
How Does This Affect My Organization?
In general, the split point increase tends to cause debit mods (those over 1.00) to
gain points and credit mods (those under 1.00) to decrease in points. Employers
who already have a fairly significant debit mod are most vulnerable to further
increases. However, the exact impact on your mod depends on a number of factors.
In 2013, approximately 75% of all mods stayed the same or decreased while the
remaining 25% increased. In subsequent years, the effects of the split point change
will be less dramatic. In all years of the change, employers may see their minimum
mod, or loss-free rating, decrease. It’s important to remember that NCCI’s goal is
to have the industry-wide average modification factor be 1.00. Along with the split
point change each year, NCCI adjusts other factors affecting the formula so that
the average mod across all employers does not change. Another minor change
which accompanied the 2013 split point change was an adjustment to the
maximum debit mod formula which caps debit mods based on state and employer
size. NCCI reports that the cap applies to only 2% of employers. As a result of this
change, small risks who reach the cap may have seen their mod increase while
larger risks may have seen their capped mod decrease.
Preparing for Change
Although no one knows exactly what a future mod will be until all payroll, losses
and rating values are available, we can work with you to project how your
organization’s mod—and premium—may be affected by these rule changes.
Monitoring the impact of the split point increase is especially important for
companies that are required to maintain a certain mod in order to bid on jobs or
contracts. It is essential to address and control losses and become familiar with
your loss profile so your organization can be proactive about these and any other
Effective Dates of New Split Points
The following states use NCCI or very similar rating methodology and therefore
have approved –or still may approve-the split point change to $10,000. The date
shown is when the $13,500 split point is expected to take effect, unless otherwise