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BASIC TECHNIQUES FOR WORKERS COMPENSATION. Presented by Richard B. Moncher, NCCI, Inc. Andrew J. Doll, General Casualty 2000 CAS Seminar on Ratemaking San Diego, California March 10, 2000 INT - 4. COURSE OUTLINE. Overview of WC NCCI Filing Overall Rate / LC Level Change

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basic techniques for workers compensation

BASIC TECHNIQUES FOR WORKERS COMPENSATION

Presented by

Richard B. Moncher, NCCI, Inc.

Andrew J. Doll, General Casualty

2000 CAS Seminar on Ratemaking

San Diego, California

March 10, 2000

INT - 4

course outline
COURSE OUTLINE
  • Overview of WC
  • NCCI Filing
  • Overall Rate / LC Level Change
  • Class Rate / LC Changes

RICH MONCHER:

course outline3
COURSE OUTLINE
  • Other Bureau Ratemaking
  • Expenses
  • Loss Cost Multipliers
  • Company Pricing Programs
  • Current WC Market

ANDY DOLL:

wc rating procedure

WC RATING PROCEDURE

Exposure x Manual Rate = Manual Premium

Manual Premium x Experience Mod

= Standard Earned Premium

- Premium Discount = Net Premium

+ Expense Constant

slide5
Example:

Loss Cost = 1.60 Expenses = 0.40

Rate = 1.60 + 0.40 = 2.00

1999 Payroll = 1,500,000

Exposure = Payroll / 100 = 15,000

1999 Manual Premium = Rate x Exposure

= 2.00 x 15,000 = 30,000

slide6
Example (cont’d)

1999 Payroll = 1,500,000

2000 Payroll = 1,800,000

20% increase in Payroll

If same $ 2.00 Rate, then

2000 Manual Premium = 18,000 x 2.00 = 36,000

So, 20% increase in Premium

advantages of payroll
ADVANTAGES OF PAYROLL
  • Inflation Sensitive
  • - Payroll up Premium up
  • Tracks with Indemnity Benefits
  • Verifiable/Auditable
  • - Less potential for fraud
  • Readily Available
wc data bases
WC DATA BASES
  • Financial Aggregate Calls
  • - Annual Data at Year End
  • - Statewide & Assigned Risk
  • WC Statistical Plan
  • - Class Detail (Approx. 600)
  • - Payroll & Losses
  • - 18, 30, 42, 54, 66 Months after Effective Date
financial aggregate calls
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
financial aggregate calls10
FINANCIAL AGGREGATE CALLS
  • Purposes
  • - Overall Rate/Loss Cost Level Change
  • - Overall => Statewide, Voluntary, Assigned Risk
  • - Trend Analyses
valuation of financial data policy year
Expiration

Date

Policy

Year

1998

Effective

Date

1/1/98

12/31/98

12/31/99

(1st report)

12/31/2000

(2nd report)

VALUATION OF FINANCIAL DATA POLICY YEAR
slide12
Expiration

Date

Accident

Year

1999

Effective

Date

1/1/98

1/1/99

12/31/1999

(1st report)

12/31/2000

(2nd report)

VALUATION OF FINANCIAL DATA ACCIDENT YEAR

ratemaking big picture
RATEMAKING: BIG PICTURE
  • We start with historical data (premium and losses) usually one to two years old
  • We use analysis and judgment to estimate the ultimate losses by adjusting historical losses
  • We adjust the premium (excluding expenses for loss cost states) from the historical data to simulate the (pure) premium currently in place
ratemaking big picture14
RATEMAKING: BIG PICTURE
  • We divide estimated losses by simulated premium to see if current rates/loss costs are adequate
  • If losses / premium = 1.0, then we have exactly enough premium to cover losses.

If not, then we must make new rates / loss costs.

slide15
Does current premium level provide

adequate funds for future benefits?

premium on level factors
PREMIUM ON-LEVEL FACTORS

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

PY 1998 Premium = $100M

1/1/2000 Loss Cost Change = - 5.0%

PY 1998 Premium @ Current Loss Cost Level = $95M

loss on level factors
LOSS ON-LEVEL FACTORS

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

PY 1998 Medical Losses = $100M

1/1/2000 Medical Fee Schedule Change = 10% savings

PY 98 Medical Losses @ Current Benefit Level = $90M

slide18
}

Benefit Costs

Trend

Payroll

Filing

Data in

Filing

Time

Effective

  • Trend Factors

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

- Applied to loss ratio =

(Adjusted losses)/(adjusted premium)

loss experience indication
LOSS EXPERIENCE INDICATION
  • Estimate what the losses will be in 2001, and all the premium at the current 2000 loss costs
  • Divide the losses by the premium to see if we have enough premium to cover all of the losses
loss experience indication20
LOSS EXPERIENCE INDICATION
  • This Ratio of losses to premium is called the Loss Ratio
    • If there are more losses than premiums (i.e. the loss ratio > 1.00) then we need more premium, so we have to raise loss costs for 2001
    • If there are less losses than premium (i.e. the loss ratio < 1.00) then we have too much premium, so we have to lower loss costs for 2001
overall change to industry groups
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
manufacturing industry group change
MANUFACTURING INDUSTRY GROUP CHANGE

Analysis shows that:

  • Overall (statewide) change is +10%
  • Manufacturing industry group experience is 10% worse that statewide so,

Mfg Industry

Group Change

Statewide

Change

Industry Group

Differential

-

=

x

1

= (1.10) (1.10) - 1

= 1.21 - 1

= 21%

wc statistical plan
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.)

wc statistical plan24
WC STATISTICAL PLAN
  • Purposes

- Classification Relativities

- Experience Rating

- Retrospective Rating

- Research

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

VALUATION OF WC STATISTICAL PLAN DATA
distribution of industry group change to class
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

independent bureau vs ncci filing activities

INDEPENDENT BUREAU VS. NCCI FILING ACTIVITIES

California

Massachusetts

Minnesota

New Jersey

New York

Pennsylvania/Delaware

Texas

loss costs why

LOSS COSTS - WHY?

McCarran-Ferguson Debate

Antitrust Concerns

Ease of Developing Final Rates

Note: 15 years ago all states were rate states. Now, almost all NCCI states are loss costs.

components of a rate

COMPONENTS OF A RATE

Losses

Loss Adjustment Expenses

Expenses and Profit

Loss Assessments

expense components

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

evaluation of the needs outside of the loss cost

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

how to account for items outside the loss cost

HOW TO ACCOUNT FOR ITEMS OUTSIDE THE LOSS COST

The Loss Cost Multiplier (LCM)

Factor to multiply loss costs by 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 LCM’s for approval in loss cost states

Also known as a Pure Premium Multiplier

derivation of a loss cost multiplier

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

derivation of a loss cost multiplier37

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)

derivation of a loss cost multiplier38

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)

derivation of a loss cost multiplier alternative approach

DERIVATION OF A LOSS COST MULTIPLIER - 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)

additional considerations for the loss cost multiplier

ADDITIONAL CONSIDERATIONS FOR THE LOSS COST MULTIPLIER

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?

manual rate is starting point for determining cost of workers compensation insurance

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)

programs that can be used to better reflect individual risk characteristics

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

programs that can be used to reflect actual loss experience

PROGRAMS THAT CAN BE USED TO REFLECT ACTUAL LOSS EXPERIENCE

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

workers compensation climate and the role of the actuary

WORKERS COMPENSATION CLIMATE AND THE ROLE OF THE ACTUARY

Rates/Loss Costs continue to decrease in many jurisdictions, but starting to moderate

Market remains relatively soft, with continued use of pricing tools (schedule rating, dividends)

Industry results deteriorating on an accident year basis

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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