L&I individually adjusts the base rates for premiums using an experience factor, which L&I calculates annually for each business. The experience factor is a prediction of how a business's future claim costs will compare to their risk classifications. For example, if a business’s claim cost costs are likely to be higher than other businesses in their risk classifications, L&I will assign an experience factor greater than 1.
L&I incorporates a business’s experience factor into the calculations for payments into different funds or accounts. This step in the rate calculations is described as experience rating.
A business’s experience factor also affects their employees’ premiums.
Benefits of experience rating
- Protects fairness in the system by charging premiums proportional to expected future costs.
- Creates an economic incentive for employers and workers to prevent accidents.
What it means to predict future performance: a baseball analogy
Which of the following baseball players do you believe would have the better batting average in the future? Assume that the average player has a career 0.250 batting average.
- Player 1 has a batting average of 0.500 after 6 career appearances at bat.
- Player 2 has a batting average of 0.300 after 3,000 career appearances at bat.
The better answer is Player 2. Here’s why Player 2 is more likely to have the better batting average in the future:
- The chance of the average player having a 0.500 or higher batting average in six appearances at bat is 16.94% or about one-sixth of the time. So, just by luck, an average player could easily have a 0.500 or higher batting average in 6 appearances at bat.
- The chance of an average player carrying a 0.300 batting average or higher for 3,000 at-bats is almost zero.
- Player 2's vast experience should be given a lot of weight as a predictor of their future batting average.
- Player 1's limited experience should be given little weight because an average player could easily have had the same or better experience.
Experience rating for premiums is based on weighting
When businesses have more experience, L&I gives more weight to their costs for prior claims when predicting their future claims' costs. The specific weighting used in calculations is based on actuarial studies.
Experience Rating Questions & Answers
- Enough claim data to make accurate and stable statistical forecasts. For this we need to include a longer period of time in the experience period.
- Recent claim experience. The nature of the work performed by an employer, the technologies used on the job and the safety programs in place all change over time. Older claim data may not reflect the current workplace hazards.
- It is difficult to estimate the cost of a claim soon after injury. It takes time for claims to be reported and further time before we can estimate the ultimate severity of the injury. Because the accuracy of the estimated claim costs increases over time, it is important to have claim data that is old enough that the estimated costs are reasonably accurate.
The actual cost of a death claim varies greatly depending on the number and ages of the survivors, not the hazards of the workplace. To improve the prediction of future expected losses, the actual fatal claim cost is replaced with the average fatal claim cost in the experience rating calculation. The average is computed over all Washington State Fund death claims during the three year experience period. By using the average death claim cost, all employers with death claims are charged an amount reflecting the seriousness of these injuries. This is also done in other jurisdictions, such as California.
There are three criteria that should be considered in selecting the experience period:
The selected experience period is a compromise between the three criteria above. Three years is long enough to provide sufficient claim data in the calculation. The period is old enough that the costs of individual claims can be estimated, but the data still reflect the recent activity of the firm. This is also the common practice used in other states.
Your account manager can provide you with the calculation of your experience modification factor. Your account manager's phone number is on your quarterly report. You can also call 360‑902‑4817 for general information or to be directed to your account manager.
Currently we only consider 3 years of experience in the calculation of the experience modification factor. In order to give firms credit for more than 3 years of compensable-claim-free experience we would need to consider more than 3 years of experience in the Experience Rating Plan. We may change the plan in the future to consider additional years of experience.
The compensable-claim-free discount is based upon a employer's expected losses, not the number of employees.
For experience rating it is standard industry practice among workers' compensation insurers to use a employer's expected losses to determine the weight assigned to the employer's past actual claim experience. For example, an employer may have many employees, but these employees may be classified in low hazard occupations. The expected losses for this employer would still be low, so less weight would be given to their good loss experience when calculating their premium rates.
One of the purposes of the experience rating plan is to use a firm's past actual losses to help estimate their future claim costs. Studies show that firms that have had larger compensable claims in the past are likely to have larger claim costs in the future. Permanent Partial Disability, and other larger compensable claims, are included in the experience rating calculation to improve the accuracy, and therefore the fairness, of the rates. A more accurate rating system is more fair because the premiums assessed for each firm will reflect the future costs that firm is expected to bring to the workers' compensation system.
Credibility is the weight assigned to a firm's actual losses and (100% minus Credibility) is the weight assigned to a firm's expected losses when calculating the employer's credible actual losses. The greater the credibility, the more weight is given to the firm's actual losses in the calculation of the experience modification factor.
L&I does not use a premium threshold. As long as your firm has reported worker hours during the 3-year experience period, you will be experience rated.
No, L&I does not use an assigned risk plan.
The Experience Period is the oldest three of the four fiscal years before the effective date of premium rates. For example, the 2019 rates were effective on January 1, 2019, so the Experience Period for Rating Year 2019 runs from July 1, 2014 through June 30, 2017.
A claim will affect your premiums for 3 calendar years:
Affected Premium Years
|July 1, 2014 to June 30, 2015
|2017, 2018, 2019
|July 1, 2015 to June 30, 2016
|2018, 2019, 2020
|July 1, 2016 to June 30, 2017
|2019, 2020, 2021
|July 1, 2017 to June 30, 2018
|2020, 2021, 2022
|July 1, 2018 to June 30, 2019
|2021, 2022, 2023
|July 1, 2019 to June 30, 2020
|2022, 2023, 2024