Workers’ Compensation: A Three-Headed Dragon for Employers

Workers’ Compensation insurance has become a hot topic, as several recent changes have made this business expense more costly and cumbersome. Companies are facing three primary challenges:  
1.       HARD MARKET – higher pricing from insurance carriers

2.       INCREASED (NCCI)  RATES – percentage growth varies by state

3.       EXPERIENCE MODIFIER RULE CHANGES  – adjustments in the primary-
                   excess split point could increase experience modifiers & related costs 

For the last 8 years, most businesses have experienced a ‘soft market’, with decreasing insurance rates and increased capacity. In that marketplace combined ratios reached a 10-year high of 117% in 2011, their worst level in 10 years. With significantly less profitability, insurers have reacted to reverse this trend by increasing pricing and reducing available capacity.
David H. Long the CEO of Liberty Mutual, one of the largest providers of workers’ compensation in the world, said that the national rate “increases in the second quarter [of 2012] were in line with increases seen in the first quarter – up about 9 percent.” He also added that “much more is needed for us and the industry to become profitable in that line [workers’ compensation].” Similarly, a survey conducted by the Towers Watson Group found that the ongoing commercial insurance price increase is the largest in eight years, with workers’ compensation and commercial property experiencing the largest price adjustments.


The vast majority of states have approved significant Workers’ Compensation rate increases for 2013. For example, the construction industry rate increase for my home state of Arizona is 6.4%, with an overall increase of 4%. Similarly, Colorado will see a 5.2% overall increase, while Florida and Iowa will experience increases of 6.1% and 7.9% respectively.


As you have likely heard from your broker or risk manager, NCCI has changed the experience rating formula – thus potentially altering employers’ experience modifiers (also known as an E-mod or Ex-mod) and directly affecting workers’ compensation premiums. The primary-excess split point, which is the claim amount at which the burden is lessened in regards to your E-mod, will be increased over a three year transition period. Beginning in 2013, it will move from $5,000 to $10,000, and then increase incrementally to $13,500 in 2014, and $15,000 in 2015. The key rationale for this change pertains to claims inflation and the fact that NCCI did not previously shift the split point to mirror actual claims data. It has been over two decades since the last split point update, whereas the cost of claims has more than tripled during that time frame.

How this will affect your organization depends on whether you have an above or below average number of losses under the split point. If the majority of your claims are less than $5,000 (the current split point) you will likely see a decreased E-mod. Conversely, if many of your claims are greater than $5,000 you should expect an increased E-mod. In a nut-shell, this new rule change will result in a wider range of E-mods, extrapolating them from the average (1.0). Experience modifiers greater than 1.0 (aka – debit mods) will likely increase, causing higher premiums. Conversely, experience modifiers less than 1.0 (aka – credit mods) will likely decrease, causing lower premiums.


In summary, the Workers’ Compensation market is hardening considerably. With the additional impact of increased NCCI rates in many states, and E-mod rule changes, challenges will persist for the foreseeable future. The only way to secure protection from this three-headed dragon that is Workers’ Compensation is to have a plan to reduce and control claims exposures, thus minimizing the effect of these new rules and rates.  Now is the time to have a proactive strategy with a team, of either in-house or outside experts that will keep a strong focus on safety, claims management and your return to work programs.

J. Michael Schmidt, CRM, CIC, CLCS is a Certified Risk Manager and Insurance Broker for Hub International Insurance and can be reached at or on Twitter: @SafeWorkProgram