Menu Close

Effective January 1, 2013, the California Workers’ Compensation Experience Rating Plan – 1995 (Experience Rating Plan) was updated to reflect new experience rating values to be utilized in the calculation of experience modifications effective on or after January 1, 2013. The new values include expected loss rates, which are updated every year, and revised primary credibility and excess credibility values, which are updated every few years. As a result, some employers will receive lower experience modifications than otherwise would have been the case, and some will receive a higher experience modification. Additionally, experience modifications for individual employers change from year to year based on a variety of factors such as changes in payroll, changes in claims, and overall changes within the employer’s industry classification.

The need for regular updates to experience rating credibility values was one of the findings of the Insurance Commissioner’s 2008 Experience Rating Task Force. Since then, the WCIRB has routinely reviewed Experience Rating Plan credibility values to ensure that the experience rating system operates fairly and efficiently. As the payroll and claims experience of California experience rated employers evolves, so too must the credibility values in order to maintain the Experience Rating Plan’s actuarial balance. The last change to credibility values was in 2010.

At the core of experience rating is a comparison of an employer’s actual claim costs to the average claims costs expected for the experience period of all employers of similar size and industry classification. As part of this comparison, the experience rating formula takes into consideration how much weight is applied to the actual claims experience of an individual employer. The weight, or credibility, in the experience rating formula is intended to reflect the statistical reliability of the employer’s past claims experience as a predictor of future claims experience.

High credibility means that more of an employer’s actual experience is used in the experience modification calculation. For larger employers, actual claims experience is predictive of that employer’s potential future claims experience; therefore, larger employers have higher credibility values. The experience of small employers does have some predictive value in determining the potential for future claims, however, their claims experience can be volatile and can be more a function of chance. As a result, small employers are assigned lower credibility values in the experience rating formula.

In 2012, the WCIRB proposed, and the Commissioner approved, changes to the credibility values based on an actuarial analysis of the most current individual employer loss and payroll experience available at the time. Consistent with this most recent experience, the credibility assigned to most employers’ actual claim history increased slightly effective January 1, 2013.

The adopted January 1, 2013 changes in credibility values are modest, and their impact on 2013 experience modifications is also modest. To estimate the impact of the proposed changes in credibility, the WCIRB re-computed the historical experience modifications for over 100,000 experience rated employers using the new credibility values. Based on this analysis, the WCIRB estimates that approximately 64% of all experience modifications will be impacted by 3 percentage points or less by the changes in credibility values and approximately 90% will be impacted by 10 percentage points or less.

In other words, for most employers, all else being equal, somewhat greater weight is being given to their own claim experience. Employers that have better than average experience will generally receive a lower credit experience modification in 2013 than they would have received in 2012. Conversely, employers that have poor experience will generally receive a higher experience modification.

Changes in experience modifications due to the changes in the underlying Experience Rating Plan credibility values do not increase the amount of total premium collected in the workers’ compensation system as the increases and decreases in experience modifications will generally offset each other in the aggregate.