97-03: Missouri WC Schedule Rating Plan Guidelines
To: Missouri Workers' Compensation Insurers
From: Chlora Lindley-Myers, Supervisor, Property & Casualty Section
Re: Missouri Workers' Compensation Schedule Rating Plan Guidelines
Date: May 1, 1997
The Missouri Department of Insurance has allowed insurers to use schedule rating plans for voluntary-market workers' compensation policies since January 1, 1994, at which time Missouri's new competitive rating laws went into effect. While schedule rating has helped foster vigorous competition during the transition from the old administered pricing system to the new competitive pricing system, both the number of and size of the schedule credits currently being offered are beginning to cause concerns. Rather than prohibit the continued use of schedule rating altogether, the Department has decided instead to require insurers to adhere to certain procedures when granting debits and credits, and to limit their maximum size; under this Bulletin, the maximum permissible size of these premium adjustments will be reduced to 50% beginning August 1, 1997, and gradually reduced thereafter to 25% by the year 2000.
In theory, a schedule rating plan is a method of adjusting the normal premium applied to a risk (e.g. rate x payroll) in order to account for readily identifiable factors having a bearing on the probability or severity of future losses and other risk factors not accounted for by other rating adjustments. While insurers have other methods by which an actuary can adjust the premium charged to an insured based on an insured's previous loss history - such as through the use of experience modification factors - schedule debits or credits are theoretically applied by an underwriter at the time the premium for the policy is quoted, independent of any prior loss experience.
Under the prior administered pricing system, the Department authorized insurers to use schedule rating to adjust their approved manual rates. This authorization ended in 1987 after market conduct examinations revealed a lack of compliance by various insurers with the Department's requirements that insurers retain supporting documentation in their files for the debits and credits assigned to individual employers.
With the legislatively-mandated change to a competitive workers' compensation market in 1994, the Department decided to again permit the use of schedule rating as a way to enhance competition. The Department is generally pleased with the results; clearly, the application of schedule rating has been a major factor in reducing the premiums charged to employers since competitive rating began.
However, concerns have been voiced about specific aspects of the current implementation of schedule rating. These concerns have come from the Department's market conduct examiners and from a variety of carriers, including the largest carriers in the market and small, niche-market carriers. The Department has identified the following reasons for imposing some limitations on the use of schedule rating at this time:
- Monitoring the Degree of Competition in the Market: Section 287.945 of
the new competitive rating provisions requires the Department to monitor the degree of
competition in the voluntary market. One way the Department does this is to collect rate
and supplementary rating information from insurers under Section 287.947 and
regulation 20 CSR 500-6.950. While this information has allowed the Department to track
the general downward trend in filed manual rates, the credibility of this data is reduced
by the fact that some carriers are granting premium credits in excess of 50%. In order to
properly gauge the current level of market competition, the Department has concluded it
needs to have additional information on the extent of the use of debits and credits
reported to the NCCI (as is done in other states).
- Stabilizing the Market: Another reason to put limits on schedule rating is to
help stabilize fluctuations in the market which result from the "insurance
cycle". Missouri's workers' compensation market is currently quite healthy, with the
lowest loss ratios in the past two and a half decades and profitability levels continuing
to rise. However, largely because of the health of the market, carriers are exhibiting the
historical tendency to use schedule credits primarily as a marketing (i.e.
"pricing") tool for agents, rather than as a tool for underwriters to accurately
rate an individual employer's business operation. The Department feels it's appropriate to
require insurers to exercise more underwriting discipline in the granting of schedule
debits and credits. The procedures that follow would do this by gradually limiting the
maximum size of any debits and credits and by requiring documentation to prove that the
employers who receive these credits are entitled to them based on objective evidence and
well-articulated underwriting criteria, rather than excessive marketing zeal. The
Department believes such an approach will help the state maintain a healthy voluntary
workers' compensation market for the foreseeable future, a market which avoids the extreme
fluctuations of the insurance cycle seen in the past.
- Avoiding Unfair Discrimination: Section 287.950 of
the new competitive rating statutes provides that rates in a competitive market shall not
be excessive, inadequate or unfairly discriminatory. Under this provision, pricing
differentials are allowed to the degree they reflect differences in expected losses or
expenses with reasonable accuracy. The Department believes this degree of accuracy can be
achieved through well-articulated written standards in schedule rating plans which are
logically related to differences in exposures and differences in expenses, and to the
extent they are applied to individual risks with a high degree of consistency.
- Encouraging Safety and Loss Control: Finally and perhaps most importantly, the Department hopes that setting guidelines for schedule rating will help encourage employer efforts in the area of safety and loss control. In theory, employers who implement safety and loss control programs which reduce their losses will benefit from these programs through the lower premium charges which result from lower experience modification factors. In practice, however, many employers are ineligible for experience rating because they are too small, and many of those who are eligible don't understand the relationship between their lack of adequate loss control and the higher premiums which result, say, three years later. When used properly, schedule rating avoids these shortcomings by clearly delineating what safety and loss control actions an employer can take to see an immediate reduction in his workers' compensation premium.
For the reasons listed above, the Department has decided to issue the following guidelines for the use of schedule rating plans. Please note that while there are several similarities to the standard schedule rating plan set forth by the NCCI in its Experience Rating Plan and to the Department's prior regulation, there are also many differences.
- Use of Workers' Compensation Schedule Rating Plans Is Discretionary: A Missouri
workers' compensation insurer may modify the workers' compensation premiums for individual
risks by utilizing a schedule rating plan if the plan conforms to the guidelines of this
Bulletin. However, the use of such plans is at the insurer's option and is not mandatory.
- The Schedule Rating Plan Should Be Sufficiently Detailed and Loss-Related: In the
past, debits and credits have been applied based on extremely vague employer
characteristics, such as "Management Cooperation"; while such an approach
clearly gives insurers a great degree of flexibility, it can also be abused as a mere
marketing tool and can be discriminatory. These drawbacks can be greatly reduced by having
a written plan which provides more detail as to which loss-related behaviors will warrant
a debit or a credit. For example, while a characteristic defined merely as
"Management Cooperation" would be considered too vague under these guidelines, a
characteristic labeled "Management Cooperation with the Insurer" which allows
separate credits for prompt claims reporting, cooperation with accident investigations,
prompt and accurate payroll reporting, and compliance with loss-control recommendations
would be sufficiently detailed and loss-related. The Department's Property & Casualty
Section will monitor each plan filed after August 1, 1997 and will comment on those plans
which it believes do not meet this standard.
- The Decision to Apply a Debit or Credit Should Be as Objective as Possible: In
addition to having vaguely defined categories for premium adjustments, many times a plan
is deficient because the decision regarding whether to award a credit or apply a debit is
not linked to specific facts which can be objectively verified; this has the potential of
becoming discriminatory. For example, having a category labeled "Medical
Facilities" with a credit/debit range of + or - 5% will not explain why an employer
received a 5% credit (especially if file documentation is also lacking). However, if the
same category gave a 2% credit for having a nurse on site, and a 2% debit for being more
than five miles from a hospital, etc., the Department would be more confident that the
plan was being applied objectively and in a non-discriminatory manner. Therefore, the
description of the category should be related to factors which can be objectively
In order to help assure that debits and credits are based on objective information, schedule rating plans should require individual worksheets to be completed by underwriters or field personnel on each risk eligible for schedule rating. Such worksheets should, at a minimum, set forth the name of the employer, the name of the "evaluator", the date the worksheet is completed, the potential debits and credits available under the plan, a method (e.g. a check box) indicating whether an employer is subject to the debit or credit, and spaces, where necessary, for additional explanations or comments.
- The Schedule Rating Plan Should be Applied Uniformly: Clearly, a plan can be
accused of being discriminatory if it does not apply equally to all similarly-situated
employers. The simplest way for a carrier to assure this is to file one plan and have it
apply to all of its Missouri insureds. Any lesser degree of applicability must be
thoroughly explained in writing to the Department when the plan is filed.
- The Schedule Rating Plan Must Be Filed with the Department: In accordance with
the provision of Section 287.947, workers' compensation insurers must file their schedule
rating plans with the Department not later than thirty days after the first day they go
into use. This Bulletin has an effective date of August 1, 1997 in order to give insurers
time to modify their existing schedule rating plans to conform to the Bulletin's
guidelines. All revised schedule rating plans should be filed with the Department by
September 1, 1997. Insurers having questions regarding compliance are invited to call, fax
or write the Department at the numbers listed at the end of this Bulletin. A company's
filings shall include, at a minimum, a TD-2 form, a $50 filing fee, the written terms of
the schedule rating plan itself, sample employer notification materials, and any
worksheets to be used in the plan's implementation.
The above requirements shall also apply to any subsequent modifications of those plans previously filed. Insurers are encouraged to include in their initial filing the maximum debit/credit levels and effective dates listed in item 10 on the next page, in order to avoid the need to re-file their plans each time a new effective date arrives.
- The Employer Should be Given Certain Notification by the Insurer: The insurer
shall inform the insured in writing, in sufficiently clear and specific terms, of the
basis for any schedule debit or credit applied. Insurance companies shall mail this
written notice within ninety (90) days of the policy's inception date or renewal date. If
the policy is subject to any changes in its schedule debits or credits upon renewal, the
insurance company shall notify the insured in terms sufficiently clear and specific of the
reasons for the changes.
- The Schedule Rating Process Should be Documented: A carrier shall retain a copy
of any written schedule rating notices mailed to an insured, and a copy of any worksheets
used to calculate any schedule rating adjustment. These documents shall remain in the
carrier's files related to that insured for not less than the period of the policy plus
two additional years. The Department's Market Conduct staff will review these documents as
part of the normal examinations in order to help the Property & Casualty Section
monitor the insurance industry's level of compliance with these guidelines.
- Initial Ratings Should, Where Appropriate, Be Subject to Modification: An insurer
may modify any individual premium adjustments made due to a schedule rating plan within
sixty (60) days of a physical inspection of an insured's premises. The insurer shall not
increase any schedule debit or decrease any schedule credit by more than 5% unless it can
prove that the insured misrepresented or omitted information that would have been
pertinent in determining the appropriate schedule adjustment. The insurer shall allow an
insured sixty (60) days from the revised billing statement date to pay any additional
premium that may result from the addition of a debit or removal of a credit.
To the degree that the insured can correct the reason for any schedule debit to the satisfaction of the insurer, the insurance company shall prorate the reduction of the schedule debit from the date the insurer receives the documentation for the correction.
- Effective Date of Schedule Debits and Credits: No schedule debit or credit shall
take effect until the evidence supporting the adjustment is in the appropriate policy file
or other files of the insurer.
- Maximum Debits and Credits: Schedule rating plans must allow for both schedule debits and credits, and must be limited to a total of no more than 50% of premium as calculated in item 11 below. The Department will require insurance companies to gradually reduce this 50% maximum adjustment level to a 25% maximum level according to the following schedule:
- Method of Calculating Debits or Credits: Insurance companies shall calculate the
amount of any schedule debit or credit in a multiplicative manner, after the application
of the experience modification, or any other adjustment factors (e.g. contractor credits,
ARAP, deductible credits), if any, but before the application of premium discounts and
- Reporting of Data to the National Council on Compensation Insurance: The total dollar amount of schedule debits and credits shall be reported to the Department's designated workers' compensation advisory organization (i.e. the NCCI, Inc.).
Questions or Comments
Insurance companies should send any questions or comments regarding this Bulletin,
including modifications to existing schedule rating plans to:
Jon Meyer or Karen Rimel, Workers' Compensation Product Analyst
Missouri Department of Insurance
P.O. Box 690
Jefferson City, MO 65102-0690
Telephone: (573) 751-3365
Fax: (573) 526-4839