NCCI is filing loss costs, rates, and Expected Loss Rates (ELRs)1 extended to three decimal places for all classifications, starting with filings made next filing season in July 2025 with effective dates of January 1, 2026, and subsequent.
Key Takeaways
- What the initiative does:
- Enhances ratemaking precision by increasing the number of decimal places for loss costs, rates, and ELRs from two decimal places to three decimal places
- Insurance premiums will still be conveyed to policyholders in dollars and whole cents2
- Classification codes in the Office and Clerical Industry Group will generally benefit the most from this enhanced precision
- Classification Code 8810 (Clerical Office Employees NOC), which is applicable to many employers, is included in the classifications expected to benefit from this change
- What it doesn’t do:
- Make changes to ratemaking methodologies or the underlying processes of estimation and projection
- Impact the premium level on a statewide or industry group basis
- How it came about:
- NCCI completed thorough assessments of ways to enhance the precision of loss costs, rates and ELRs, which affirmed this initiative as the most effective solution with minimal disruption
- Affiliated carriers and independent bureaus provided input and insights that helped refine the initiative
- NCCI scrutinized factors such as stakeholder business operations, NCCI system integration and compatibility, internal and external data reporting requirements, and data consistency
- While NCCI recognizes the substantial effort that will be required from stakeholders, this initiative is a necessary investment in modernizing and sustaining the health of the workers compensation system
The Issues, Their Cause, and the Proposed Resolution
Over an extended period, loss costs, rates and ELRs, collectively referred to as "rates" throughout the remainder of this article, have decreased across all NCCI states.3 Several factors have contributed to rate decreases:
- Advancements in workplace safety have put downward pressure on the occurrence and severity of workplace injuries
- The payroll exposure base has consistently grown more rapidly than the occurrence of claims in the workers compensation system, reflecting a sustained decrease in frequency over time
- More recently, the COVID-19 pandemic and its impact on accelerating the shift to remote work, coupled with notable increases in wages in certain sectors, have further contributed to the decline in workers compensation rates
- These rate reductions have been particularly evident in classification codes related to the Office and Clerical Industry Group, which may reflect the increased ability of this sector to transition toward remote and hybrid work
Exhibit 1 illustrates that the reduction in average premium levels has been notably more pronounced in the most recent decade compared to the preceding decade.
These positive developments for both workers and employers have created new ratemaking challenges for classification codes with exceptionally low rates, referred to as “small-rate codes” throughout the remainder of the article.
Exhibit 2 shows a substantial increase in the number of classification codes within the Office and Clerical Industry Group with pure premiums of 0.05 or less for 2024.
Small-rate codes are not able to change by refined amounts. For instance, if a classification code’s current rate is 0.04 and its indicated change is –15%, the unrounded indicated rate would be 0.034 (= 0.04 x (1 – 0.15)). However, the rate would round to 0.03, resulting in a -25% change (= 0.03 / 0.04 – 1), because rates are currently limited to two decimal places. This example underscores the need for more precise adjustments than the current system allows. Introducing a third decimal place to the rates enables more refined changes, such as a 0.034 rate.
Another benefit of adding a decimal place to the rates is that it lowers the limit of the smallest attainable rate from 0.01 to 0.001. Currently, the smallest theoretically attainable rate is 0.01. Upon reaching this limit, a significant constraint arises—classification codes associated with a 0.01 rate cannot be lowered further in a two decimal system without going to 0.
It is important to recognize that it is equally likely for a classification code’s rounded rate to be higher or lower than its unrounded indicated rate.4 Additionally, the proposed resolution is expected to be premium neutral on an industry group and statewide basis. This is because NCCI ratemaking aims to achieve the targeted industry group and overall statewide rate changes and this initiative has no impact on the targeted rate changes. Ratemaking calculations will continue to achieve these targets upon implementation of the initiative.
Scope and Impact
Small-rate codes primarily reside in the Office and Clerical Industry Group and exist in all NCCI states. Also noteworthy is that the Office and Clerical Industry Group generally contains the most payroll across industries in a typical state. Within the Office and Clerical Industry Group:
- More than 33%5 of classifications exhibit a loss cost of 0.10 or lower
- Classification Code 8810 stands out as having a loss cost of 0.10 or lower in 31 out of 38 states, constituting approximately 26% of the Office and Clerical Industry Group’s pure premiums6 across all NCCI states
- Classification Code 8810 is the second largest classification code by premium volume across all NCCI states
Thus, small-rate codes are not necessarily small premium codes.
Exhibit 3 shows that the average rate for Code 8810 has decreased by approximately 73% over the past 20 years.
Stakeholder Considerations and Feedback
NCCI considered three potential resolutions to the issue:
- Expanding the decimal by one or two places
- Modifying the exposure base to payroll per $1,000 or $10,000
- Modifying the exposure base to limited payroll
To assess the feasibility of these options, NCCI conducted a thorough evaluation and sought input from affiliated carriers and independent bureaus in order to garner feedback on the potential resolutions. Insurance literature on the topic generally regards changing the exposure base as a challenging task,7 a sentiment echoed by our internal assessment and the stakeholders consulted. An analysis of employing payroll limitations revealed that it alone was insufficient to address the issue. Our internal and external feedback also suggested that extending the decimal place on rates by one position would be the most straightforward and easily implementable solution.
NCCI recognizes that this change may require considerable effort from stakeholders, because it may necessitate the complex task of updating legacy systems. However, it is an essential investment in modernizing and sustaining the health of the workers compensation system.
While setting insurance rates requires projecting future costs, the focus of this initiative is distinct from estimation and forecasting. This initiative does not change the underlying methodologies for calculating rates. Rather, it aims to enhance the precision of workers compensation insurance premiums by allowing finer adjustments,8 particularly addressing challenges with small-rate codes in the current environment.
Rates extending to three decimal places are quite common and familiar, as seen with gasoline prices, electricity rates, and tax rates. Therefore, increasing decimal precision in workers compensation insurance is not unchartered territory. Just like these examples, insurance premiums may still be conveyed to policyholders in dollars and whole cents.
Summary
In July 2025, NCCI will begin filing loss costs, rates, and ELRs to three decimal places for filings with effective dates of January 1, 2026, and subsequent. These adjustments will enable more refined changes in loss costs, rates, and ELRs, enhancing the precision and responsiveness of workers compensation rates across all classifications. The initiative was collectively deemed best in terms of ease of implementation and ability to resolve the issue. The initiative does not pertain to risk estimation or projection. Instead, it aims to address current limitations in rate setting to improve precision in determining workers compensation insurance premiums.
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