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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
  • 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
  • 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
  • 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

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
  • 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
  • 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
  • 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
  • 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
  • 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 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?
  • 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: Split-Plan Overview

Wednesday, February 10