The impact of experience rating on small employers: Would lowering the threshold for experience rating improve safety?

Frank Neuhauser, Center for the Study of Social Insurance, Berkeley, U.S.A.

Abstract

Objective: In the United States, 80% of employers are excluded from experience rating for workers' compensation insurance because they are considered too small to have credible experience. This study evaluated whether expanding experience modification to cover smaller employers would substantially reduce occupational injury claims.

Methods: Using data on the experience of all insured employers in California from 1993 to 2006, researchers used regression discontinuity (RD) to evaluate whether smaller employers that become experience-rated for the first time (because their premium just exceeds the threshold) have different claim rates and cost per claim then otherwise similar employers who remain just below the premium threshold.

Results: Newly experience-rated small employers report 8% to 12% lower claims incidence rates than matched employers that are not experience-rated. The safety effect remains for at least three years after initial application of experience rating. There is no evidence that the effect is driven by suppression of claim reporting.

Conclusion: Expanding experience rating to cover smaller employers would reduce occupational injuries substantially at those workplaces. However, policy-makers need to consider the costs imposed on employers related to higher variation in premium rates. Many smaller employers pay additional premiums that are greater than their actual losses simply because they are experience-rated.

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