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Workers Compensation Experience Rating Workshop

Workers Compensation Experience Rating Workshop. Presented by Bill Wilson, CPCU, ARM, AIM, AAM Director, Big “I” Virtual University. Premise. “What we have to learn to do, we learn by doing.” Aristotle. Claim shown as $924,000… should have been $24,000

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Workers Compensation Experience Rating Workshop

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  1. Workers CompensationExperience RatingWorkshop Presented by Bill Wilson, CPCU, ARM, AIM, AAM Director, Big “I” Virtual University

  2. Premise “What we have to learn to do, we learn by doing.” Aristotle

  3. Claim shown as $924,000… should have been $24,000 Claim closed the day after the stat card cut-off date Carrier applied a new higher mod in violation of a statute Cost to Insured $30,000 $16,000 $199,957 Impact

  4. Preface • Theoretical considerations • Practical applications • “Real life” examples • Symbols Appendix document Take note Exercise 3

  5. What You Will Learn • Introductory concepts • Sources of information needed • How to decipher the worksheet • How to calculate a mod • How to check a mod • How to monitor a mod • Miscellaneous considerations 3

  6. What WCER IS • It compares an insured’s actual loss experience to that expected for an “average” risk of the same type. • It is used to predict future loss experience. • It provides an incentive for loss prevention. 6

  7. What WCER Is NOT An agent asks: “How can NCCI justify a debit mod when the account has been profitable? How can you explain to an insured who has a 43% loss ratio during the three-year experience period that he has a 1.25 mod and a 25% surcharge in the assigned risk pool?”

  8. What WCER Is NOT

  9. Introduction • The Concept of Experience Rating • Eligibility for the WCERP • Experience Period • Experience Used and Ownership Changes

  10. The Concept of ER Actual Losses Mod = ------------------------ Expected Losses • Formula tempered by credibility • Formula stabilized to prevent fluctuations 6

  11. Eligibility for the ERP • Minimum Basic Manual Premium • TOTAL premium developed in last 1-2 years of experience period = $9,000;OR • AVERAGE premium developed in last 3 years of experience period = $4,500 • Eligibility and exceptions vary by state • Caveat…monitor closely 7

  12. Experience Period • 3 years of experience ending one year prior to policy effective date. For example, the mod for a policy effective on 01/01/14 would be based on policy years 2010, 2011, and 2012, omitting 2013. • Can use up to 3 ¾ years • Can use only 1 year if insured for at least 2 consecutive years and meets the minimum premium requirement (e.g., $9,000) 7-8

  13. ExerciseEligibility for WCERP MANUAL PREMIUMS ELIGIBLE? ------------------------- ----------- RISK 2010 2011 2012 2013 20142015 ---- ---- ---- ---- ---- ---- ---- A 5700 4500 6800 9200 YesYes B 8200 6000 2600 4300 YesNo C New 4700 5300 NoYes Total premium last 1-2 years = $9,000 Average premium last 3 years = $4,500 7

  14. Experience Used • All current and past operations within the state, including those discontinued or self-insured (interstate rating uses experience from most non-monopolistic states) • All business of the insured under common majority ownership (see “Combination of Entities” in the WCERP manual) 8

  15. In general, the purchaser of a business “buys” the mod unless ALL of the following conditions are met: Material change in ownership Reclassification of governing class code Change in process and hazard Material change in ownership = Complete change, OR Interest < 1/3 before, OR Interest < 1/2 after Ownership Changes 8

  16. ExerciseOwnership Changes Rule 1 Rule 2 Rule 3 Change ---> Material Governing Process/ Ownership Class Code Hazard Change? Change? Change? NEW MOD --------- ---------- -------- ------- Entity #1 No No No *1.23 Entity #2 Yes No No ** Entity #3 Yes No No *1.23 Entity #4 Yes No No *1.23 Entity #5 No No No *1.23 * Use mod of purchased business or recalculate if experience can be broken out ** Recalculate, else mod of purchaser applies 8

  17. Sources of Information • WCERP Worksheet • Stat Cards • Loss Runs and Closed Claim Reports • Final Audit Reports • WCERP Manual 10

  18. WCERP Worksheet • Kennamer Karpentry • Where errors are usually found • Column 1…class codes • Column 4…payroll • Column 7…claim data • Column 8…claim reserves • Column 9…actual incurred losses (These all come from the stat card.) 10

  19. Stat Cards • Filed on all WC policies even if not experienced rated • Important Deadlines: • 01/01/14 Policy Inception Date • 07/01/14 Stat Card Cut-Off Date (Claim Valuation Date) • 09/01/14 Stat Card Due Date • 11/01/14 Mod Promulgation Date • 01/01/15 Policy Renewal Date • “Aggravated Inequities” rule 10

  20. Loss Runs & Claim Info • Available from carrier or outside service such as www.mylossruns.com or www.lossrunner.com • Request “as of” (stat card valuation) date if possible • Includes info on claims, claimants, class codes, paid losses, and reserves 11

  21. Final Audit Reports • Request from carrier or insured • Includes info on class codes, payroll, manual rates, etc. 11

  22. WCERP Manual • Order directly from NCCI for under $100 for one state (less for annual renewals)…customer_service@ncci.com • Includes information essential for checking, monitoring, and calculating mods…rules, ELRs, D-Ratios, “W” and “B” values, etc. 11

  23. General Information • Name of Risk • Risk Identification Number • State • Policy Effective Date • Page Number • Mod Promulgation Date 12

  24. Expected Loss Data • Class Code & Audited Payroll • Expected Loss Rate (ELR) • Expected Losses & Total Expected Losses • Discount Ratio (D-Ratio) • Expected Primary Losses & Total Expected Primary Losses • Expected Excess Losses

  25. Class Codes & Payroll • Classification Codes • Check for accuracy • Should be properly assigned to the risk • Payroll • Should be final audit figures • Should meet the definition of “payroll” in the manual or state statutes • Should be properly assigned and prorated between class codes • Should not be over- or under-stated 13

  26. ELRs • Expected Loss Rates (ELRs) are analogous to manual rate “pure loss costs” (no LAE) • Used to calculate Expected Losses for each class during the upcoming policy period per $100 payroll 13-14

  27. Expected Losses andTotal Expected Losses • Expected Losses represent “average” losses anticipated for each class during the upcoming policy period • Calculated from ELR and payroll for each class (see Column 5 formula) • Total Expected Losses are entered in Item D on the worksheet and used to determine “W” and “B” values 14

  28. D-Ratios • Discount Ratios (D-Ratios) represent an actuarial estimate of what percentage (%) of Expected Losses are smaller “primary” losses (i.e., under $5,000) • Used to calculate Expected Primary Losses for each class 14

  29. Expected Primary Losses and Total Expected Primary Losses • Expected Primary Losses represent the percentage (%) of Expected Losses anticipated to be less than $5,000 • Calculated from D-Ratios and Expected Losses (see Column 6 formula) • Total Expected Primary Losses are entered in Item E and Column 11 to directly reflect loss frequency (i.e., the entire amount of Expected Primary Losses goes into the mod calculation) 14-15

  30. Expected Excess Losses • Represent projected loss amounts in excess of “primary” losses • Calculated by subtracting Item E from Item D • Entered in Item C (see formula) and used in Columns 12 and 13 to reflect loss severity in the mod calculation 15

  31. ExerciseExpected Loss Data • Webber Enterprises…using the “blank” worksheet for Webber and the Sample Manual Tables from the Appendix, complete Steps 1-4 of the mod calculation process • Check your work against the “Webber Enterprises Solution” worksheet in the Appendix 15

  32. Actual Loss Data • Claim Data • Claim Status • Actual Incurred Losses & Total Actual Incurred Losses • Actual Primary Losses & Total Actual Primary Losses • Actual Excess Losses

  33. Claim Data • Claims ≤ $2,000 • Total number (“NO.”) of claims for policy year is shown in Column 7 and an asterisk (*) in Column 8 • Total amount of all policy year claims combined is shown in Column 9 • Claims > $2,000 • Specific claim # is shown in Column 7 for tracking, IJ and O/F codes shown in Column 8, and actual claim amount in Column 9 • If the claim exceeds the state “per accident” limitation(s), a pound sign (#) appears to the left of the amount in Column 9 • When totaling the claims for Item H, any such state “cap” is used, not the actual claim amount shown on the worksheet 16

  34. Claim Status • Injury (IJ) Identification Codes • See workbook listing…usually 1, 2, 5, 6, or 9 • IJ and O/F codes are shown only for claims above $2,000…otherwise only an asterisk (*) appears • O/F Codes • “O” = Open claim • “F” = Final settlement (closed claim) • Common errors • Reserve closed or lowered without stat card submission • Reserve amounts consistently excessive • Caveat…review 7-9 months in advance of renewal date! 16-17

  35. Actual Incurred Losses and Total Actual Incurred Losses • Actual Incurred Losses include both closed claims (paid) and open claims (reserved) and medical and indemnity payments • If a claim exceeds the state “per accident” limitation (see workbook), a pound sign (#) appears to the left of the amount in Column 9 • Total Actual Losses are entered in Item H on the worksheet 17-18

  36. Actual Primary Losses and Total Actual Primary Losses • Actual Primary Losses • Claims ≤$2,000…entire combined amount from Column 9 is shown in Column 10 • Claims > $2,000 but ≤ $5,000…entire amount of each individual claim in Column 9 is shown in Column 10 • Claims > $5,000…Column 10 entry is capped at $5,000 ($10,000 for “multiple claim” accidents) • Total Actual Primary Losses are entered in Item I and Column 11 to directly reflect loss frequency(i.e., the entire amount of Actual Primary Losses goes into the mod calculation) 18-19

  37. Actual Excess Losses • Calculated by subtracting Item I from Item H • Entered in Item F (see formula) and used in Column 13 to reflect loss severity in the mod calculation (though minimal for most insureds) 19

  38. ExerciseActual Loss Data • Webber Enterprises…complete Steps 5-8 of the mod calculation process (be careful in Step 5!) • Check your work against the “Webber Enterprises Solution” worksheet in the Appendix 19

  39. Mod Calculation • Weighting Value • Ballast Value • Ratable Excess Losses Calculation • Stabilizing Value Calculation • Adjusted Actual & Expected Total Calculation • Experience Mod Calculation

  40. “W” Value • Reflects the credibility of the insured’s loss experience (based on Item D) • Ratable Excess (Column 13) is directly proportional to “W” value • Stabilizing Value (Column 12) is indirectly proportional to “W” value 20

  41. “B” Value • Minimizes the effect of individual large losses on the mod (based on Item D) • Stabilizes fluctuations in the mod from policy period to the next • Stabilizing Value is directly proportional to the “B” value 20

  42. Exercise“W” & “B” Values • Webber Enterprises…complete Steps 9-10 of the mod calculation process • Check your work against the “Webber Enterprises Solution” worksheet in the Appendix 20

  43. Ratable Excess Losses • Determines the impact of larger losses on the mod • Incorporates a percentage of Excess Losses (Items C & F) into the mod calculation, depending on the credibility (“W” value) of the insured’s loss experience 21

  44. Stabilizing Value • Minimizes the impact of large losses on the mod • Minimizes mod fluctuations from one policy period to the next by adding the same value to both the numerator and denominator of the calculation 21

  45. Adjusted Actual & Expected Totals • Form the numerator and denominator of the mod calculation • Add the “Actual” numbers from Columns 11, 12, and 13 and enter in Item J under Column 14 • Add the “Expected” numbers from Columns 11, 12, and 13 and enter in Item K under Column 14 21

  46. Mod Calculation • Divide Item J by Item K and enter the result in Column 15, rounded to two decimal places • A mod over 1.00 is called a “debit” mod and a mod under 1.00 is called a “credit” mod • Mods of smaller insureds are subject to maximums (see workbook), so be sure debit mods are properly capped 21-22

  47. ExerciseMod Calculation • Webber Enterprises…complete Steps 11-14 of the mod calculation process • Check your work against the “Webber Enterprises Solution” worksheet in the Appendix 22

  48. Final Adjusted Premium • Determine manual premium • Apply increased employers’ liability coverage factor, if applicable • Apply experience mod • Apply assigned risk plan surcharge, if applicable • Apply schedule credits/debits, if applicable • Apply premium discount, if applicable • Add expense constant • Apply any applicable rules for minimum premiums, deposit premiums, etc. 22

  49. Questions?

  50. Misc. Considerations • When Changes Can Be Made in Mods • The Effect of Loss Frequency on the Mod • Deductible Plans • The Importance of Loss Control • Interstate Experience Rating

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