RISK INSIGHT: Does the ARD Rule Elimination Impact Your Workers’ Compensation Policy?
Director of Education & Government Practice
Each year the Workers’ Compensation Rating Bureau (WCRB) releases the workers’ compensation rates for every class code with new rates becoming effective on October 1st of that year. Historically, the rates on any given workers’ compensation policy would change not on October 1st but at the time of that policy’s renewal. This Anniversary Rating Date (ARD) rule prevented an insured from moving their effective date in order to take advantage of possible rate reductions in the class codes applicable to their business. As of May 1, 2017, the ARD rule has been eliminated, which may create an opportunity for premium savings if an insured moved their effective date. However, there are several factors to consider when determining if this is a sound business decision for your organization.
Short-Rate Penalty Potential
Cancelling the existing workers’ compensation policy could result in a short-rate premium cancellation penalty. It is permissible for an insurance company to charge a 10% penalty to insureds who cancel a policy prior to the effective date. The return premium associated with a cancellation will be pro-rated based on the actual cancellation date, but the 10% penalty has to be considered when determining the overall benefit of moving the effective date.
In Wisconsin, most guaranteed workers’ compensation policies will include a dividend, provided to the insured after the expiration date of the policy. If coverage is cancelled and re-written with a new effective date, the dividend may change. This could have a positive impact if the dividend increases, but a negative impact if the dividend gets reduced. The insurance company on the policy being cancelled may have the ability to not offer the dividend if the annual policy period is not completed.
Impact on Experience Modification Factor
Changing the renewal date of your policy can also impact your experience modification factor. The experience modification factor calculation includes three years of loss experience and requires at least 36 months of data. If the insured has a short-term policy that is only six months, the experience modification factor calculation will include four periods of loss experience while the short term period is included in the calculation. If the insured has a poor loss experience period which should be falling off of the calculation, this poor experience period could be included in the experience modification factor calculation for a fourth year.
The experience modification factor could also change due to the change in the rates. The reduction in the rates will reduce the expected losses in the experience modification factor calculation. The calculation is a ratio between the expected and actual loss ratios. If the expected losses reduce and the actual losses stay the same, the ratio between the two will increase. This will result in an increase in your experience modification factor.
WCRB rates have reduced on average just over 8%, effective October 1, 2017. This might make the idea of moving your effective date attractive; however, the items discussed above need to be analyzed to ensure any short-term savings are not eliminated, or surpassed, in the long-term. Please contact your M3 professional if you would like to learn more about how the change to the ARD rule could impact your organization.