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BASIC TECHNIQUES FOR WORKERS COMPENSATION. Presented by Richard B. Moncher, Protegrity Services Andrew J. Doll, General Casualty 2001 CAS Seminar on Ratemaking Las Vegas, Nevada March 13, 2001 WCP - 16. SESSION OUTLINE. Overview of WC NCCI Filing Overall Rate / LC Level Change

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BASIC TECHNIQUES FOR WORKERS COMPENSATION

Presented by

Richard B. Moncher, Protegrity Services

Andrew J. Doll, General Casualty

2001 CAS Seminar on Ratemaking

Las Vegas, Nevada

March 13, 2001

WCP - 16


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SESSION OUTLINE

  • Overview of WC

  • NCCI Filing

  • Overall Rate / LC Level Change

  • Class Rate / LC Changes

RICH MONCHER:


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SESSION OUTLINE

  • Other Bureau Ratemaking

  • Expenses

  • Loss Cost Multipliers

  • Company Pricing Programs

  • Current WC Market

ANDY DOLL:


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WC RATING PROCEDURE

Exposure x Manual Rate = Manual Premium

Manual Premium x Experience Mod

= Standard Premium

- Premium Discount = Net Premium


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Example:

Loss Cost = 1.60 Expenses = 0.40

Rate = 1.60 + 0.40 = 2.00

2000 Payroll = 1,500,000

Exposure = Payroll / 100 = 15,000

2000 Manual Premium = Rate x Exposure

= 2.00 x 15,000 = 30,000


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Example (cont’d)

2000 Payroll = 1,500,000

2001 Payroll = 1,800,000

20% increase in payroll

If same $2.00 Rate, then

2001 Manual Premium = 18,000 x 2.00 = 36,000

36,000 / 30,000 = 20% increase in premium


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ADVANTAGES OF PAYROLL

  • Inflation Sensitive

  • - Payroll up Premium up

  • Tracks with Indemnity Benefits

  • Verifiable / Auditable

  • - Less potential for fraud

  • Readily Available


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WC DATA BASES

  • Financial Aggregate Calls

  • - Annual Data at Year End

  • - Statewide & Assigned Risk

  • WC Statistical Plan - Detail By Class

  • - Payroll & Losses

  • - Five Evaluations


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FINANCIAL AGGREGATE CALLS

  • Purposes

  • - Overall Rate/Loss Cost Level Change - where overall means statewide, voluntary or assigned risk

  • - Trend Analyses - changes in historical loss ratios


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FINANCIAL AGGREGATE CALLS

  • Experience

  • - By Policy Year

  • - By Calendar-Accident Year

  • Data Elements

  • - Std Earned Premium at DSR Level

  • - Std Earned Premium at Company Level

  • - Net Earned Premium

  • - Benefit Costs: Indemnity/Medical/Total

  • - Payments (Paid Losses)

  • - Case Reserves

  • - Bulk & IBNR Reserves


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Expiration

Date

Policy

Year

1999

Effective

Date

1/1/99

12/31/99

12/31/00

(1st report)

12/31/01

(2nd report)

VALUATION OF FINANCIAL DATA POLICY YEAR


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Expiration

Date

Accident

Year

2000

Effective

Date

1/1/99

1/1/00

12/31/00

(1st report)

12/31/01

(2nd report)

VALUATION OF FINANCIAL DATA ACCIDENT YEAR


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RATEMAKING: THE BIG PICTURE

  • Start with historical (premium and loss) data usually one to two years old

  • Use analysis and judgment to estimate the ultimate losses by adjusting historical losses

  • Adjust the premium (excluding expenses for loss cost states) from historical data to simulate the (pure) premium currently in place


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RATEMAKING: THE BIG PICTURE

  • Divide ultimate losses by simulated premium to obtain loss ratio.

  • Trend loss ratio to effective period.

  • Check if current rates / loss costs are adequate. If trended loss ratio is close to 1.0, then no rate / lost cost change may be needed. Otherwise, revised rates / loss costs are needed.


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Does current premium level provide

adequate funds for future benefits?


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PREMIUM ON-LEVEL FACTORS

Adjust historical premium to current rate / loss cost level based on subsequent rate / loss cost changes

PY 1999 Premium = $100M

1/1/2001 Loss Cost Change = - 5.0%

PY 1999 Premium at Current Loss Cost Level = $95M


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LOSS ON-LEVEL FACTORS

Adjust historical losses to current benefit level based on subsequent benefit (law) changes

PY 1999 Medical Losses = $100M

1/1/2001 Medical Fee Schedule Change = 10% savings

PY 1999 Medical Losses at Current Benefit Level = $90M


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}

Benefit Costs

Trend

Payroll

Filing

Data in

Filing

Time

Eff Date

  • Trend Factors

    - Compares movements in indemnity and medical benefits to movements in payroll

    - Applied to loss ratio =

    (Adjusted losses) / (Adjusted premium)


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LOSS EXPERIENCE INDICATION

  • Estimate ultimate losses at current benefit level.

  • Estimate premium at current loss cost level.

  • Divide these losses by these premiums to obtain loss ratio.

  • Trend loss ratio to average accident date of effective period (PY 2002).


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LOSS EXPERIENCE INDICATION

  • If loss ratio > 1.0, then more premium is needed. So, loss costs need to be increased for PY 2002.

  • If loss ratio < 1.0, then less premium is needed. So, loss costs need to be decreased for PY 2002.


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WC STATISTICAL PLAN

  • Purposes

    - Classification Relativities

    - Industry Group Differentials

    - Experience Rating

    - Retrospective Rating

    - Research


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WC STATISTICAL PLAN

  • Experience by Policy

  • Classification Details

    - Exposure / Premium / Experience Mod

    - Individual Claim Records

    Indemnity / Medical

    Case Incurred Values

    By Injury Type (Fatal, PT, etc.)


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OVERALL CHANGE TO INDUSTRY GROUPS

  • Overall change is distributed to industry groups and then to individual classes

  • Manufacturing

    • Textiles

    • Cabinets

    • Automobiles

  • Miscellaneous

    • Trucking

    • Logging

    • Surface coal mining

  • Contracting

    • Plumbing

    • Roads

    • Houses

  • Office & Clerical

    • Clerical office employees

    • Outside sales

  • Goods & Services

    • Restaurants

    • Retail sales

    • Nursing Homes


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MANUFACTURING INDUSTRY GROUP CHANGE

Analysis shows that:

  • Overall (statewide) change is +10%

  • Manufacturing industry group experience is 10% worse than statewide. So,...

Mfg Industry

Group Chg

Statewide

Change

Industry Group

Differential

-

=

x

1

= (1.10) (1.10) - 1

= 1.21 - 1

= 21%


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VALUATION OF WC STATISTICAL PLAN DATA

3rd

Report

Valuation

4th

Report

Valuation

1st

Report

Valuation

2nd

Report

Valuation

5th

Report

Valuation

Policy

Effective

1/1/96

7/1/99

7/1/00

7/1/01

7/1/97

7/1/98


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DISTRIBUTION OF INDUSTRY GROUP CHANGE TO CLASS

  • Unit Reports

  • Relativities (between classes)

    - Five years of WCSP data

    - Current loss cost / rate (adjusted)

    - Adjusted national experience for class



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INDEPENDENT BUREAU VS. NCCI FILING ACTIVITIES

California

Massachusetts

Minnesota

New Jersey

New York

Pennsylvania/Delaware

Texas


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LOSS COSTS - WHY?

McCarran-Ferguson Debate

Antitrust Concerns

Ease of Developing Final Rates

Note: Twenty years ago, all states were rate states. Now, almost all NCCI states are loss costs.


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COMPONENTS OF A RATE

Losses

Loss Adjustment Expenses

Expenses and Profit

Loss Assessments


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EXPENSE COMPONENTS

Production - commissions, premium collection, underwriting

Taxes, Licenses, and Fees - various premium taxes, bureau and filing fees

General - overhead, audits, general administration

Profit and contingencies - combined with investment income



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EVALUATION OF THE NEEDS OUTSIDE OF THE LOSS COST

Items always Outside the Loss Cost

Production

Taxes, Licenses, and Fees

General

Profit and Contingencies

Items sometimes Outside the Loss Cost

Loss Adjustment Expenses

Loss Based Assessments

Items rarely Outside the Loss Cost (MN)

Trend

Loss Development beyond 8th report



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HOW TO ACCOUNT FOR ITEMS OUTSIDE THE LOSS COST

The Loss Cost Multiplier (LCM)

Factor to multiply loss costs by in order to load in insurer’s expense and profit

Must also consider other items not included in the Loss Cost

Loss Cost x LCM = Rate

Insurance companies must file LCMs for approval in loss cost states

Also known as a Pure Premium Multiplier


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DERIVATION OF A LOSS COST MULTIPLIER

State A: Loss Cost includes Loss, Loss Adjustment expense, and Assessments

State B: Loss Cost includes Loss and Loss Adjustment expense

State C: Loss Cost includes Loss

In all three cases, loss includes full trend and loss development


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DERIVATION OF A LOSS COST MULTIPLIER

Portion of Standard Premium

State

A B C

Expenses .275

Profit .025

Total of Items to Load on Loss Cost .300

Indicated Loss Cost Multiplier 1.429

= 1/(1 - Load Needed)


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DERIVATION OF A LOSS COST MULTIPLIER

Portion of Standard Premium

State

A B C

Expenses .275 .275 .275

Profit .025 .025 .025

Loss Assessments (% Prem) .020 .020

Loss Adj. Expense (% Prem) .080

Total of Items to Load on Loss Cost .300 .320 .400

Indicated Loss Cost Multiplier 1.429 1.471 1.667

= 1/(1 - Load Needed)


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DERIVATION OF THE LCM ALTERNATIVE APPROACH

Prior methodology assumes that all items included in the LCM are related to Premium

Loss Adjustment Expenses and Assessments may not have a stable relationship to Premium

An alternative approach for states that require a loading for “loss related” items is:

1 + Loss Related Items (% Loss)

LCM =

1 - Premium Related Items (% Premium)


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ADDITIONAL CONSIDERATIONS FOR THE LCM

Administered Pricing vs. Competitive Rating When to use a LCM?

Evaluation of the Bureau Loss Cost Filing Do you agree with the various assumptions? How does your book compare? Is there additional, more current info?

Consideration of the Company’s experience How does your experience compare? Are there changes to consider? When will you be implementing a change?


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MANUAL RATE IS STARTING POINT FOR DETERMINING COST OF WORKERS COMPENSATION INSURANCE

Additional Factors

Prospective Experience Rating

Premium Discounts

Deviations

Schedule Rating

Retrospective Rating

Dividend Plans

Deductibles (Small and Large)


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PROGRAMS THAT CAN BE USED TO BETTER REFLECT INDIVIDUAL RISK CHARACTERISTICS

Experience Rating - mandatory tool that compares actual and expected losses

Premium Discounts - by policy size; reflects that relative expense is less for larger insureds

Expense Constant - reflects expense gradation for smaller insureds

Deviations - filed by companies (LCM or rate) to reflect anticipated experience differences

Schedule Rating - reflects characteristics not reflected by experience rating

Dividend Plans - means to reflect favorable experience; similar to schedule or retro rating


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PROGRAMS THAT CAN BE USED TO REFLECT ACTUAL LOSS EXPERIENCE CHARACTERISTICS

Retrospective Rating - premium depends on the experience generated by the insured during the time the policy is in force

Large Deductibles - similar to retrospective rating, but can often allow for cash flow benefits to the insured


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WORKERS COMPENSATION CLIMATE AND THE ROLE OF THE ACTUARY CHARACTERISTICS

Industry results deteriorating on calendar and accident year bases

Rates / Loss Costs changes vary by jurisdiction, from decreases to increases

Changes are not reflective of deterioration in results

Actuaries must be aware of changing environments, how pricing tools are used, and how that will impact results

Actuaries must communicate findings with management


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