RISK MANAGEMENT IN THIS ISSUE: >> Background >> Why HB 13-1025 was Needed >> Would Your Company Benefit From a $10,000 Deductible? >> What is the Split Point? HO U SE BILL 13-1 0 2 5 S IGNE D INTO L AW B Y G O V E RNO R HI CK E NL O O P E R HB 13-1025, which was signed into law in April, 2013 by Governor Hickenlooper, ties the maximum allowable Workers’ Compensation small deductible in Colorado to NCCI’s split point †. Essentially, this means that the small deductible will now increase from the current maximum of $5,000 (for mod calculation reduction) to $10,000 effective July 1, 2013, to $13,500 for the 2014 policy year, up to $15,000 plus additional inflation for the 2015 policy year with increases every subsequent year to match claim inflation. only be able to reduce that same claim by about a third ($5,000 of the approximate $15,000) leaving $10,000 or so in the experience mod calculation. Because ongoing claim inflation causes a $5,000 deductible to have constantly diminishing effectiveness over time, there is a need to index this maximum deductible to inflation. Background House Bill 13-1025 does not implement deductibles at an unprecedented level because Kansas and Missouri already allow net deductibles of at least $20,000 to be applied to losses to reduce mod calculations. Hawaii and New Mexico currently allow up to $10,000 small, net deductibles for mod calculations. Effective with the passage of SB 218 in 1991, Colorado became a net-of-deductible reporting state. This means that for the past 22 years, employers in Colorado had the option of selecting a small deductible of up to $5,000 to reduce the loss values that are used in the calculation of their experience mods. Van Gilder has been instrumental in working for Colorado employers through our efforts to both originate and pass SB 13-1025. Van Gilder’s contributed to the writing and promoting of this new statute through our involvement in Colorado’s Workers’ Compensation Coalition. † Under this system, employers benefit from the financial savings from their deductibles, carriers benefit from having to pay less on claims, and employees benefit because of the added incentive for safer work conditions since employers are more likely to place a higher priority on safety when losses have an immediate financial impact. Why HB 13-1025 was Needed If an employer had selected a $5,000 deductible in 1991 and they had a $5,000 claim, the deductible would have removed the entire loss ($5,000) from their experience mod calculation. Since 1991, the average Workers’ Compensation Claim size has nearly tripled (and this is the driving reason behind NCCI’s increase in the split point) and therefore that same $5,000 claim in 1991 would now cost approximately $15,000. Since the maximum small deductible hadn’t increased to reflect the 22 years of claim inflation, that $5,000 deductible would Would Your Company Benefit From a $10,000 Deductible? Many employers are now able to reduce their net costs of Workers’ Compensation by 20-25% by simply changing the way they purchase insurance! RISK MANAGEMENT Van Gilder provides quantitative deductible analyses which help clients determine the most beneficial deductible levels on a state-by-state basis for long term insurance savings and optimal cash flow. Our deductible analyses project net savings / (costs) resulting from: 1) up-front deductible discounts, 2) deductible expenses and 3) future premium reductions due to reduced experience mods. We also offer net present value cost projections of available deductible options based on our clients’ weighted cost of capital or required internal rate of return. Due to the recent changes in Split Point † and additional deductible options, Van Gilder’s Risk Analysis Department was recently able to show a client how they could reduce their net cost of workers’ compensation by nearly 30% simply by following our advice to change to their optimal deductible level. Please see your Van Gilder Representative if you would like a deductible analysis to help you determine your optimal deductible level. † What Is the Split Point? The split point delineates primary loss dollars from excess loss dollars for an individual loss. For at least 20 years prior to 2013, the first $5,000 of each loss, the primary loss portion, entered the mod calculation at 100%. Loss dollars above the first $5,000 for an individual claim, the excess loss portion, enter the calculation at a reduced percentage represented by the weight factor. The weight factor typically ranges between about 4% and 65% and is based on the amount of expected losses for a particular insured. The lower the expected losses, the lower the weight factor and vice versa. NCCI changed the split point to $10,000 in 2013 for most NCCI states. This amount will continue to increase in the future to reflect inflation. If you have any questions regarding the impact of this bill on your company, please contact your Van Gilder representative. 303.837.8500 | 800.873.8500 | www.vgic.com