The New NCCI
Hazard Groups
Presented by:
Jonathan Evans, FCAS, MAAA
Actuary
NCCI
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
1
Today’s Outline:
 Background on Hazard Groups
 Item B-1403 and Subsequent Annual
Updates
 Impact of the New Hazard Groups
 Next Steps—USL&HW
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
2
Today’s Outline:
 Background on Hazard Groups
 Item B-1403 and Subsequent Annual
Updates
 Impact of the New Hazard Groups
 Next Steps—USL&HW
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
3
What Are Hazard Groups?
 Each class code is assigned to a hazard group
(HG)
 HGs capture the variation in large loss potential
among class codes
 Classes in HG A—least likelihood for large claims
 Classes in HG G—greatest likelihood for large
claims
HG A …
…
…
… HG G
Likelihood of Large Claims
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
4
What Are Hazard Groups
Used For?
Retrospective Rating


Excess Loss Factors (ELFs), used to
determine the charge for an optional claim
limit
State Hazard Group Relativities (SHGRs),
used in determining the insurance charge
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
5
What Are Hazard Groups
Used For?
Deductible Credits


NCCI files small deductible programs based
on hazard groups in the voluntary market in
just over 20 states
NCCI does not file large deductible programs
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
6
What Are Hazard Groups
Used For?
Other Miscellaneous Uses for
Hazard Groups:

Profiling premium distribution for reinsurance
purposes

Reinsurance pricing

Underwriting guidelines

Predictive modeling
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
7
Today’s Outline:
 Background on Hazard Groups
 Item B-1403 and Subsequent Annual
Updates
 Impact of the New Hazard Groups
 Next Steps—USL&HW
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
8
Item B-1403
Filing Contents
 New mapping to both four and seven
hazard groups
 ELFs for most states
 State Hazard Group Relativities (SHGRs)
 Expected Loss Groups (ELGs)
 Deductible credits not included
 Approved in all states
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
9
Interaction of HG and
Rate Filings
 ELFs and deductible credits in rate filing
depend on HG filing (B-1403)
 New HGs took effect with approval of the first
rate or loss cost filing on or after
January 1, 2007*
* Separate effective dates were filed in CO and ME due to no loss cost filings
in 2007 and in SC due to a delayed loss cost effective date
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
10
ELFs Effective in 2007
 Loss cost states effective in first half of year
– AK, AL, AR, CO*, CT, GA, HI, IL, IN, KS, LA, MD, ME*, MO, MS,
MT, NC, NE, NH, NM, NV, OK, OR, RI, SC*, SD, TN, VA, VT
– ELFs were in HG filing and loss cost filing
 Loss cost states effective in second half of year
– DC, KY, UT
– ELFs were in loss cost filing
 Rate states
– AZ, FL, IA, ID
– ELFs were in rate filing
* No loss cost filing made in CO and ME with 2007 eff date; SC eff date delayed
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
11
ELFs Effective in 2008
and Subsequent
 Loss cost states
– ELFs filed annually in ELG/SHGR filing (mid-year)
– Effective with loss cost filing
– Continue to appear in loss cost filings as well
 Rate states
– ELFs in rate filing
– Same as current practice
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
12
ELGs/SHGRs
Effective in 2008 and
Subsequent
 File annually at mid-year
 Single January 1 effective date for all states
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
13
The New Hazard Groups
 The old four hazard groups labeled I through
IV were replaced with seven hazard groups
labeled A through G
 To accommodate carriers that preferred a
four-hazard group system, there was also a
new four-hazard-group option labeled 1
through 4
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
14
4 HG Option
 Made available primarily for carriers who could not
update their system in the time required.
 Carriers that elected to use the new four-hazardgroup option had to make a filing in each state to
adopt it. Otherwise they are considered to have
adopted the seven HGs.
 New 7 Hazard Groups collapse into new 4.
–
–
–
–
New
New
New
New
HG
HG
HG
HG
1
2
3
4
= HGs A & B
= HGs C & D
= HGs E & F
– HG G
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
15
Hierarchical Collapsing of New HGs
A
B
1
C
D
2
E
F
3
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
G
4
16
Today’s Outline:
 Background on Hazard Groups
 Item B-1403 and Subsequent
Annual Updates
 Impact of the New Hazard Groups
 Next Steps—USL&HW
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
17
Old Hazard Groups
HG
Number of
Standard Premium
Classes
% of Total
Premium
I
40
II
417
66,637,777,888
45.5%
III
303
74,858,646,647
51.1%
IV
100
3,633,449,434
Total
860
146,392,832,343
1,262,958,374
0.9%
2.5%
100.00%
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
18
Number of Classes per
Hazard Group
Old vs. New
Old Mapping
III
IV
100
303
I
40
II
417
New Mapping
F
67
E
198
D
67
G
123
36
A
B
176
C
193
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
19
Percentage of Premium
per Hazard Group
Old vs. New
Old
New
IV: 2%
F
19%
I: 1%
III
51%
E
20%
II
46%
D
12%
G
5% A
4%
B
14%
C
26%
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
20
New Hazard Groups
Before Underwriting Review
0.250
Excess Ratio at $1M
Each symbol represents a class
Each color represents a HG
0.200
0.150
0.100
0.050
0.000
0.200
0.300
0.400
0.500
0.600
0.700
Excess Ratio at $100K
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
21
Underwriting Review of
Hazard Group Assignments
 Member companies surveyed
 101 classes had full credibility, of which 53
received comments
 61 classes had credibility of 75%–99%, of
which 30 received comments
 Of the remaining 700 classes, 200+ also
received comments
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
22
Underwriting Review of
Hazard Group Assignments
 Much feedback pertained to dangers faced by
employees, such as:
–
–
–
Extensive driving
Heavy machinery
Dangerous materials
 Feedback also reflected reasoning by analogy:
–
–
Suggesting classes with similar operations be assigned to
the same HG
Suggesting a small class be mapped to the same HG as a
larger class with similar operations
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
23
Underwriting Review of
Hazard Group Assignments
 Final HG assignments based on:
– Statistically indicated mapping
– Survey comments
– Internal Underwriting review
– Statistical credibility of class
– Statistical ambiguity of class (e.g., was indicated
mapping between 2 HGs?)
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
24
Class Movement From
Old to New 4 HGs
Number of Classes
700
586
600
500
400
300
219
200
100
0
1
Down 2
HGs
Down 1 HG
No
Movement
51
3
Up 1 HG
Up 2 HGs
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
25
Revenue Neutrality
 General increase in ELFs when comparing the
old 4 HGs to the new 4 HGs (e.g., old HG I to
new HG 1).
 General movement of classes to lower HGs.
 These two results offset each other, and the
overall average ELFs are unaffected across all
hazard groups and prior to trend. Therefore,
there is no overall premium effect.
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
26
Percentage Change in
Average Cost per Case
Injury
Type
Old vs. New 4 HGs
Hazard Group
3
4
+48.6% +14.0%
+2.2%
-5.3%
PT
+18.7%
+4.0%
+3.4%
+29.2%
PP
+2.1%
+9.1%
+2.8%
-6.0%
TT
-3.3%
+4.8%
+1.1%
-5.8%
Med
Only
-6.8%
+2.9%
+1.4%
-9.5%
Fatal
1
2
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
27
PT Average Cost per Case
Old HG IV vs. New HG 4
HG IV
HG 4
$413,376
$533,913
$ 214,619
$ 450,789
$ 573,275
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
28
Percentage Change in
Injury Type Weights
Old vs. New 4 HGs
Hazard Group
Injury
Type
1
2
3
4
Fatal
+133.3%
+30.0%
+3.8%
-23.4%
PT
+12.1%
+8.2%
0.0%
+39.4%
PP
-1.6%
+2.7%
+0.7%
-1.5%
TT
-4.7%
-3.3%
-1.3%
-2.3%
Med Only
+15.2%
-13.2%
-5.2%
-29.2%
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
29
PT Weight
Old HG IV vs. New HG 4
HG IV
HG 4
10.4%
14.5%
4.1%
12.0%
15.7%
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
30
Change in Excess Ratios
Old to New 4 HGs
Change Due to New Mapping
Percentage Change in Excess Ratio
30%
Each symbol represents a state
24%
18%
12%
6%
0%
-6%
-12%
HG I to 1
HG II to 2
HG III to 3
HG IV to 4
$1M Attachment Point
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
31
Change in Excess Ratios
HG I to HG 1
$1,000,000
Percentage Change in Excess Ratios
80%
70%
60%
50%
40%
30%
20%
10%
0%
AR NM VA SC MT HI ME MS OR SD NV MD NC TN LA NH RI IN VT AK KS CO NE OK IL CT MO
State
Total Change in B-1403
Change Due To Remapping
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
32
Change in Excess Ratios
HG II to HG 2
$1,000,000
Percentage Change in Excess Ratios
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
MT AR OR SC NV NM SD VA
HI TN MS AK NC ME NE VT LA CO RI MD OK NH IN KS CT
IL MO
State
Total Change in B-1403
Change Due To Remapping
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
33
Change in Excess Ratios
HG III to HG 3
$1,000,000
Percentage Change in Excess Ratios
20%
15%
10%
5%
0%
-5%
MT AR OR SC SD NM NV OK AK NE
HI
LA VA CO ME TN MD MS NH VT
IN
RI NC KS MO CT
IL
State
Total Change in B-1403
Change Due To Remapping
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
34
Change in Excess Ratios
HG IV to HG 4
$1,000,000
Percentage Change in Excess Ratios
50%
40%
30%
20%
10%
0%
-10%
RI SD NH ME AK
HI OK VA MD NE LA CT SC NM VT MT NC MS OR IL MO NV AR KS TN IN CO
State
Total Change in B-1403
Change Due To Remapping
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
35
Old and New HGs
Countrywide Average Excess Ratios
Countrywide Excess Ratios
0.200
Excess Ratio at $ 1 million
0.180
0.160
HG I
HG II
0.140
HG III
HG IV
HG A
0.120
0.100
HG B
HG C
HG D
0.080
HG E
HG F
HG G
0.060
0.040
0.020
0.000
0.250
0.300
0.350
0.400
0.450
0.500
0.550
0.600
0.650
Excess Ratio at $100 K
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
36
Key Transitions
Old Mapping
Hazard Group
I
II
III
IV
Total
40
0.9%
417
45.5%
303
51.1%
100
2.5%
860
100%
26
0.4%
10
3.9%
0
0.0%
0
0.0%
36
4.3%
B
10
0.4%
165
13.0%
1
0.1%
0
0.0%
176
13.6%
C
1
0.0%
178
21.7%
14
3.7%
0
0.0%
193
25.5%
D
1
0.0%
42
5.2%
24
7.1%
0
0.0%
67
12.3%
E
2
0.0%
17
1.5%
178
18.4%
1
0.0%
198
19.9%
F
0
0.0%
4
0.2%
58
18.9%
5
0.3%
67
19.3%
G
0
0.0%
1
0.0%
28
2.9%
94
2.2%
123
5.1%
Number of Classes
Percent of Premium
New Mapping
Hazard Group
A
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37
Largest Class Codes
Transitioning From II to B
Class
Code
Description
Premium Size
(8810 = 1000)
8017
Store: Retail NOC
451*
8018
Store: Wholesale NOC
271
8868
College: Professional Employees
and Clerical
223
9052
Hotel: All Other Employees and
Salespersons, Drivers
219
9101
College or School: All Other
Employees
162
*Indicates premium 45.1% of 8810 premium.
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
38
Largest Class Codes
Transitioning From II to C
Class
Code
Description
Premium Size
(8810 = 1000)
8810
Clerical Office Employees NOC
1000
8829
Convalescent or Nursing Home—All
Employees
293
8033
Store: Meat, Grocery and Provision
(Combined)—Retail—NOC
248
8833
Hospital: Professional Employees
214
9014
Buildings—Operation by
Contractors
189
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
39
Change in Excess Ratios
From Old HG II to …
30%
Percentage Change in Excess Ratio
Change
ChangeDue
Dueto
toNew
NewMapping
Mapping—Excluding
… excluding Trend
trend
20%
Each symbol represents a state
10%
0%
-10%
-20%
-30%
HG 2
HG B
HG C
$1M Attachment Point
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
40
Largest Class Codes
Transitioning From III to E
Class
Code
Description
Premium Size
(8810 = 1000)
8742
Salespersons, Collectors or Messengers—
Outside
453
5190
Electrical Wiring—Within Buildings and
Drivers
399
5183
Plumbing NOC and Drivers
366
7228
Trucking—Local Hauling Only—All
Employees and Drivers
325
5221
Concrete or Cement Work—Floors,
Driveways, Yards or Sidewalks—and Drivers
250
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
41
Largest Class Codes
Transitioning From III to F
Class
Code
Description
Premium Size
(8810 = 1000)
5645
Carpentry—Detached One or Two
Family Dwellings
500
7229
Trucking—Long-Distance Hauling—
All Employees and Drivers
416
5403
Carpentry NOC
289
5022
Masonry NOC
285
3724
Machinery or Equipment Erection or
Repair NOC and Drivers
272
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
42
Change in Excess Ratios
From Old HG III to …
30%
Percentage Change in Excess Ratio
Change Due to New Mapping—Excluding Trend
20%
Each symbol represents a state
10%
0%
-10%
-20%
-30%
HG 3
HG E
HG F
$1M Attachment Point
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
43
Impact on Small
Deductibles
 NCCI files deductible credits that vary by HG
in just over 20 states in the voluntary market
and in just over 10 states in the residual
market
 For deductibles of $5,000 or less, the impact
of the revised credit on the loss cost premium
of most risks is less than 5%
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
44
Countrywide Average
$500 Deductible Credits
25%
Deductible Credit
20%
15%
10%
5%
A
B
I
II
C
F
D
E
III
IV
G
0%
$500 Deductible Amount
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
45
Today’s Outline:
 Background on Hazard Groups
 Item B-1403 and Subsequent
Annual Updates
 Impact of the New Hazard Groups
 Next Steps—USL&HW
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
46
Current USL&HW ELFs
 Countrywide
 Last filed in 1999
 Not updated annually
 Based on F-class data
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
47
Key Considerations
 Countrywide vs. state-specific ELFs
– USL&HW indemnity benefits are countrywide,
but medical probably varies by state
– Even half of the indemnity losses are paid at
state benefit level in typical F-class
 Minimal data available
 Minimal use expected
– Very few retro policies with USL exposure are
being written
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
48
Possible Options
 Use state ELFs
– Typically half of indemnity paid at state level
– Medical probably varies by state and accounts for
majority of large losses
 Make use of USL percentage to derive statespecific USL ELFs
– USL ELFs that vary by state could be derived by
assuming USL costs exceed each specific state’s
costs by the USL percentage, or some portion of the
USL percentage
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
49
Summary of New HGs
 New 7 HGs provide a greater spread in ELFs
 Classes are more evenly spread across the new
HGs vs the old
 General increase in ELFs, partly due to inflation
over time
 Increase in ELFs offset by movement to lower
HG for many classes
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
50