BASIC TECHNIQUES FOR
WORKERS COMPENSATION
Presented by
Richard B. Moncher, Protegrity Services
Andrew J. Doll, General Casualty
2001 CAS Seminar on Ratemaking
Las Vegas, Nevada
March 13, 2001
WCP - 16
SESSION OUTLINE
RICH MONCHER:
•
•
•
•
Overview of WC
NCCI Filing
Overall Rate / LC Level Change
Class Rate / LC Changes
2
SESSION OUTLINE
ANDY DOLL:
•
•
•
•
•
Other Bureau Ratemaking
Expenses
Loss Cost Multipliers
Company Pricing Programs
Current WC Market
3
WC RATING PROCEDURE
Exposure x Manual Rate = Manual Premium
Manual Premium x Experience Mod
= Standard Premium
- Premium Discount = Net Premium
4
Example:
Loss Cost = 1.60
Expenses = 0.40
Rate = 1.60 + 0.40 = 2.00
2000 Payroll = 1,500,000
Exposure = Payroll / 100 = 15,000
2000 Manual Premium = Rate x Exposure
= 2.00 x 15,000 = 30,000
5
Example (cont’d)
2000 Payroll = 1,500,000
2001 Payroll = 1,800,000
20% increase in payroll
If same $2.00 Rate, then
2001 Manual Premium = 18,000 x 2.00 = 36,000
36,000 / 30,000 = 20% increase in premium
6
ADVANTAGES OF PAYROLL
• Inflation Sensitive
- Payroll up
Premium up
• Tracks with Indemnity Benefits
• Verifiable / Auditable
- Less potential for fraud
• Readily Available
7
WC DATA BASES
• Financial Aggregate Calls
- Annual Data at Year End
- Statewide & Assigned Risk
• WC Statistical Plan
- Detail By Class
- Payroll & Losses
- Five Evaluations
8
FINANCIAL AGGREGATE CALLS
• Purposes
- Overall Rate/Loss Cost Level Change
- where overall means statewide,
voluntary or assigned risk
- Trend Analyses
- changes in historical loss ratios
9
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
10
VALUATION OF FINANCIAL DATA
POLICY YEAR
Expiration
Date
Policy
Year
1999
Effective
Date
1/1/99
12/31/99
12/31/00
(1st report)
12/31/01
(2nd report)
11
VALUATION OF FINANCIAL DATA
ACCIDENT YEAR
Expiration
Date
Accident
Year
2000
Effective
Date
1/1/99
1/1/00
12/31/00
(1st report)
12/31/01
(2nd report)
12
RATEMAKING: THE BIG PICTURE
• Start with historical (premium and loss) data
usually one to two years old
• Use analysis and judgment to estimate the
ultimate losses by adjusting historical losses
• Adjust the premium (excluding expenses for loss
cost states) from historical data to simulate the
(pure) premium currently in place
13
RATEMAKING: THE BIG PICTURE
• Divide ultimate losses by simulated premium to
obtain loss ratio.
•
Trend loss ratio to effective period.
• Check if current rates / loss costs are adequate.
If trended loss ratio is close to 1.0, then no rate /
lost cost change may be needed. Otherwise,
revised rates / loss costs are needed.
14
Does current premium level provide
adequate funds for future benefits?
15
PREMIUM ON-LEVEL FACTORS
Adjust historical premium to current rate / loss
cost level based on subsequent rate / loss cost
changes
PY 1999 Premium = $100M
1/1/2001 Loss Cost Change = - 5.0%
PY 1999 Premium at Current Loss Cost Level =
$95M
16
LOSS ON-LEVEL FACTORS
Adjust historical losses to current benefit level
based on subsequent benefit (law) changes
PY 1999 Medical Losses = $100M
1/1/2001 Medical Fee Schedule Change = 10%
savings
PY 1999 Medical Losses at Current Benefit Level
= $90M
17
• Trend Factors
- Compares movements in indemnity and
medical benefits to movements in payroll
- Applied to loss ratio =
(Adjusted losses) / (Adjusted premium)
}
Benefit Costs
Trend
Payroll
Data in
Filing
Time
Filing
Eff Date
18
LOSS EXPERIENCE INDICATION
• Estimate ultimate losses at current benefit level.
• Estimate premium at current loss cost level.
• Divide these losses by these premiums to obtain
loss ratio.
• Trend loss ratio to average accident date of
effective period (PY 2002).
19
LOSS EXPERIENCE INDICATION
• If loss ratio > 1.0, then more premium is needed.
So, loss costs need to be increased for PY 2002.
• If loss ratio < 1.0, then less premium is needed.
So, loss costs need to be decreased for PY 2002.
20
WC STATISTICAL PLAN
• Purposes
- Classification Relativities
- Industry Group Differentials
- Experience Rating
- Retrospective Rating
- Research
21
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.)
22
OVERALL CHANGE TO INDUSTRY
GROUPS
•
Overall change is distributed to industry groups
and then to individual classes
• Manufacturing
• Miscellaneous
•
Contracting
•
Office
&
- Textiles
- Trucking
• Goods &
Plumbing
Clerical
- Cabinets
- Logging
Services
Roads
Clerical
- Automobiles
- Surface coal
- Restaurants
- Houses
office
mining
- Retail sales
employees
- Nursing
- Outside
Homes
sales
23
MANUFACTURING INDUSTRY GROUP
CHANGE
Analysis shows that:
• Overall (statewide) change is +10%
• Manufacturing industry group experience is 10%
worse than statewide. So,...
Mfg Industry
=
Group Chg
=
=
=
Statewide Industry Group x
1
Change
Differential
(1.10) (1.10) - 1
1.21 - 1
21%
24
VALUATION OF WC STATISTICAL
PLAN DATA
3rd
4th
1st
2nd
5th
Report
Report
Report
Report
Report
Valuation Valuation Valuation Valuation Valuation
Policy
Effective
1/1/96
7/1/97
7/1/98
7/1/99
7/1/00
7/1/01
25
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
26
BASIC TECHNIQUES FOR
WORKERS
COMPENSATION
Company Perspective
27
INDEPENDENT BUREAU
VS. NCCI FILING
ACTIVITIES







California
Massachusetts
Minnesota
New Jersey
New York
Pennsylvania/Delaware
Texas
28
LOSS COSTS - WHY?




McCarran-Ferguson Debate
Antitrust Concerns
Ease of Developing Final Rates
Note: Twenty years ago, all states
were rate states. Now, almost all
NCCI states are loss costs.
29
COMPONENTS OF A RATE




Losses
Loss Adjustment Expenses
Expenses and Profit
Loss Assessments
30
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
31
COSTS AS A PERCENTAGE OF
FIRST $5,000 OF STANDARD
PREMIUM
Profit
Taxes
General
Production
Loss & Loss
Adjustment
Loss
Assessments
32
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
33
COMPONENTS OF A RATE IN OR
OUT OF THE LOSS COST
Loss
Assessments
Expense and
Profit
Losses
Loss
Adjustment
Expense
34
HOW TO ACCOUNT FOR ITEMS
OUTSIDE THE LOSS COST
The Loss Cost Multiplier (LCM)
 Factor to multiply loss costs by in order 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 LCMs for
approval in loss cost states
 Also known as a Pure Premium Multiplier
35
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
36
DERIVATION OF A LOSS
COST MULTIPLIER
Expenses
Profit
Total of Items to Load on Loss Cost
Indicated Loss Cost Multiplier
= 1/(1 - Load Needed)
Portion of Standard Premium
State
A
B
C
.275
.025
.300
1.429
37
DERIVATION OF A LOSS
COST MULTIPLIER
Expenses
Profit
Loss Assessments (% Prem)
Loss Adj. Expense (% Prem)
Total of Items to Load on Loss Cost
Indicated Loss Cost Multiplier
= 1/(1 - Load Needed)
Portion of Standard Premium
State
A
B
C
.275
.275
.275
.025
.025
.025
.020
.020
.080
.300
.320
.400
1.429
1.471
1.667
38
DERIVATION OF THE LCM
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)
39
ADDITIONAL CONSIDERATIONS
FOR THE LCM



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?
40
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)
41
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
42
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
43
WORKERS COMPENSATION CLIMATE
AND THE ROLE OF THE ACTUARY





Industry results deteriorating on calendar and
accident year bases
Rates / Loss Costs changes vary by
jurisdiction, from decreases to increases
Changes are not reflective of deterioration in
results
Actuaries must be aware of changing
environments, how pricing tools are used, and
how that will impact results
Actuaries must communicate findings with
management
44