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Rate Reform: Split-Plan Overview. Wednesday, February 10. Objectives:. Re-introduction to split-rating plan - Reason for rating change - Split-Plan Example - Potential Benefits Review split-plan parameters currently being considered - Primary/Excess Split Points (single vs. multi)

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Rate reform split plan overview

Rate Reform: Split-Plan Overview

Wednesday, February 10


  • Re-introduction to split-rating plan

    - Reason for rating change

    - Split-Plan Example

    - Potential Benefits

  • Review split-plan parameters currently being considered

    - Primary/Excess Split Points (single vs. multi)

    - Use of Credibility

    - Medical only claims

  • Define next steps and 2010 deliverable dates

What is the importance of an accurate experience rating system?

  • Should produce a premium that best reflects the employers exposure

  • Should use a premium calculation based on sound insurance principles and the employer’s own data

Key risk factors to consider for an accurate rating plan system?

  • The cost of a specific accident is statistically less predictive than the occurrence of an accident

    • - The greater importance should be that an accident occurred

  • As a result, greater weight should be given to the frequency of claims than to accident severity

  • - Employers with higher frequency of claims will generally have higher future workers compensation claims cost.

  • - However, a small number of costly claims should not be ignored

How does a split-rating plan recognize these risk factors system?

  • A split-experience rating plan uses a measure of both frequency and severity to assess employer risk

  • Uses a per claim split point to distinguish primary and excess losses

    • - Primary – represents claim frequency

    • - Excess – represents claim severity

  • More emphasis is put on the primary loss bucket (frequency) while still recognizing the costs of a claim

  • Other benefits of implementing a split rating plan
    Other benefits of implementing a split-rating plan system?

    • Better accuracy in determining individual employer premiums based on the risk they present

    • Less volatility from one significant claim

    • Greater incentive to prevent workplace injuries

    • More consistency with the rating plans in other states

    Rating plan example
    Rating plan example system?

    Consider two employers:

    - Employer A

    - 1 loss of $175,000 in the 4 year experience period

    - Employer B

    - 10 losses totaling $175,000 in the 4 year exp. period

    Generally speaking, which risk would you expect to produce lower future costs?

    Split rating plan example
    Split-rating plan example system?

    • The current rating system would view these employers as having the same risk

      • Employer A and Employer B would both have the $175,000 applied to their experience equally

      • Under the split-rating plan, with a $10,000 split point, employer B would receive a higher EM than employer A

      • Employer A would have $10,000 applied to primary losses and $165,000 to excess losses

      • Employer B would have $100,000 applied to primary losses and $75,000 to excess losses

    Preliminary split plan structure
    Preliminary split-plan structure system?

    • Experience period

      - Same as current (oldest 4 of last 5 calendar years)

    • Expected loss calculation

      - Expected loss rates will be separated into primary and excess buckets

      - Primary expected loss: Ep = ELRp * payroll/100

      - Excess expected loss: Ee = ELRe * payroll/100

      - Total expected loss: E = Primary + Excess

    Preliminary split plan structure1
    Preliminary split-plan structure system?

    • Actual loss calculation

      • Ratable losses will include the same costs as today with the exception being the maximum single loss (MSL) point and medical only claims

        • MSL point: $175,000 for all employers

        • Medical only claims:

          • Exclude costs from the experience calculation up to a dollar threshold

          • Will include transition rule impacts (medical reserves)

            - A per claim dollar amount will be established as a split point

      • Primary loss = sum of all ratable losses below the split limit.

      • Excess loss = sum of all ratable losses above the split limit.

  • Credibility calculation

    - Separate credibility weights will be applied to both primary and excess losses

    • Greater credibility will be given to primary losses

  • Split rating plan preliminary formula
    Split-rating plan preliminary formula system?

    • Zp = Primary Credibility

    • Ze = Excess Credibility

    • Ap = Actual Primary Loss

    • Ae = Actual Excess Loss

    • Ep = Expected Primary Loss

    • Ee = Expected Excess Loss

    • E = Ep + Ee

    Split plan parameters in development
    Split-plan parameters in development system?

    • Defining appropriate split point(s)

      - Impacts of using a single split point vs. multiple-split points by size of risk

    • The calculation of actuarially appropriate credibility values

      - Primary and excess credibility values

      - Credibility based on years of operation

      • An employer with one year of experience may receive less credibility than another with 2, 3 or 4 years of experience

    • Treatment of medical-only claims

      - Appropriate threshold to exclude from the experience calculation (e.g. $1,000)

      • This encourages reporting of all medical claims and costs

    Performance measures
    Performance system?measures

    • It is critical to define key performance measures associated with testing and analysis.

      - The results should produce similar performance across any segment of employers.

      - This similar performance will indicate that we are charging employers an appropriate premium level relative to the risk they bring to the system.

    • Determining employer impacts

    • Stability of the rating plan

    • Ease of use/understanding for employers

    Where do groups fit into the new split rating plan
    Where do groups fit into the new split-rating plan? system?

    • The primary focus in developing the split rating plan is to allow BWC to accurately rate individual policies

    • The performance of groups under the new rating plan will be analyzed once this goal is achieved

    Rate reform split plan overview1

    Rate Reform: system?Split-Plan Overview

    Wednesday, February 10