Workers Compensation Experience Rating Workshop

transcript

Workers CompensationExperience Rating

Workshop

Presented by

Bill Wilson, CPCU, ARM, AIM, AAMDirector, Big “I” Virtual University

Premise

“What we have to learn to do,

we learn by doing.”

Aristotle

Impact

• 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

Preface

• Theoretical considerations

• Practical applications

• “Real life” examples

• Symbols

Appendixdocument

Takenote

Exercise

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

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.

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?”

What WCER Is NOT

Introduction

• The Concept of Experience Rating

• Eligibility for the WCERP

• Experience Period

• Experience Used and Ownership Changes

The Concept of ER

Actual Losses

Mod = ------------------------

Expected Losses

• Formula tempered by credibility

• Formula stabilized to prevent fluctuations

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

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)

ExerciseEligibility for WCERP

MANUAL PREMIUMS ELIGIBLE? ------------------------- -----------RISK 2010 2011 2012 2013 2014 2015---- ---- ---- ---- ---- ---- ---- A 5700 4500 6800 9200 Yes Yes

B 8200 6000 2600 4300 Yes No

C New 4700 5300 No Yes

Total premium last 1-2 years = $9,000

Average premium last 3 years = $4,5007

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)

Ownership Changes

In general, the purchaser of a business “buys” the mod unless ALL of the following conditions are met:

1. Material change in ownership

2. Reclassification of governing class code

3. Change in process and hazard

Material change in ownership =

• Complete change, OR• Interest < 1/3 before, OR• Interest < 1/2 after

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

Sources of Information

• WCERP Worksheet

• Stat Cards

• Loss Runs and Closed Claim Reports

• Final Audit Reports

• WCERP Manual

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

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” rule10

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

Final Audit Reports

• Request from carrier or insured

• Includes info on class codes, payroll, manual rates, etc.

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.

General Information

• Name of Risk

• Risk Identification Number

• State

• Policy Effective Date

• Page Number

• Mod Promulgation Date

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

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

• 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

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

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

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

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

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

Actual Loss Data

• Claim Data

• Claim Status

• Actual Incurred Losses & Total Actual Incurred Losses

• Actual Primary Losses & Total Actual Primary Losses

• Actual Excess Losses

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

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!

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

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)

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)

ExerciseActual Loss Data

• Webber Enterprises…complete Steps 5-8 of the mod calculation process (be careful in Step 5!)

Mod Calculation

• Weighting Value

• Ballast Value

• Ratable Excess Losses Calculation

• Stabilizing Value Calculation

• Adjusted Actual & Expected Total Calculation

• Experience Mod Calculation

“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

“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

Exercise“W” & “B” Values

• Webber Enterprises…complete Steps 9-10 of the mod calculation process

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

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

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

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

ExerciseMod Calculation

• Webber Enterprises…complete Steps 11-14 of the mod calculation process

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.

Questions?

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

Mod Changes

• Permissible Reasons– Most clerical errors– Most subrogation recoveries– Claim determined to be non-compensable– Risk reclassification– Certain (unlikely) changes in ownership– Employer refuses to cooperate

• Application of Change– Mod Decreases…apply retroactively to policy inception or

Anniversary Rating Date– Mod Increases…apply retroactively in first 90 days, pro rata

thereafter

• Caveat…reasons and timing of changes may vary greatly from state to state 23-24

Loss Frequency

• Kennamer Karpentry“Effect of Loss Control on the Mod”

• Compare to original Kennamer Karpentry worksheet

• Total amount of claims (Item H) are identical, but the amount in Year 3 came from 23 (rather than 2) claims

• Result is a dramatic increase in the mod due to an increase in “primary” losses (see Item I and Column 11) from $7,221 to $22,944 24

Deductible Plans

• Kennamer Karpentry“Mod Impact of a $5,000 Net Reporting Deductible Plan”

• Vary from state to state…– May not have a deductible plan– May not apply to residual market– May vary from company to company– Only large deductibles may be available– Most states use a gross reporting basis

• Review workbook discussion

• “Unofficial” deductible plans 25

Loss Control

• NOCENT Bank“The Importance of Loss Control”

• Important to all, NOT just high-risk insureds

• “Experience Ratio” Rule

• Make sure your clients understand! 26

Interstate Rating

• Apex Manufacturing“Interstate Rating Example”

• Procedures for calculating an interstate mod are basically the same as an intrastate mod except that the “W” and “B” values are prorated 27

ExerciseMod Verification & Calculation

• “Wilson Enterprises Original” worksheet

• Use worksheet and final audit reports, loss run, and supplementary information in workbook to identify four (4) errors, correct them, and recalculate the mod

• Check your work using the “Wilson Enterprises Corrected” worksheet

Exercise ResultsError #1

• Year 1 payroll is understated for Code 5221– Worksheet shows $216,292– Final audit shows $225,246

• All things being equal, the higher the payroll, the lower the mod

• Year 3 payroll is understated for Code 8227– Worksheet shows $124,653– Final audit shows $424,653

• All things being equal, the higher the payroll, the lower the mod

• Year 3 Codes 5221 and 8227 and payroll are transposed– Code 8227 payroll should be $40,852 as

shown on final audit report– Code 5221 payroll should be $424,653 as per

audit and corrected payroll amount

• All things being equal, the higher the payroll and associated ELR, the lower the mod

• Year 2 claim reserve was not capped at state limit– Pound (#) sign should appear next to reserve

amount in Column 9– Total Actual (Item H) should be $89,911, not

$99,783, to reflect $54,500 cap

• The more claim reserves are overstated, the higher the mod

Exercise ResultsNon-Error #5

• Year 2 claim # 1010101 was closed at $40,133, according to the Supplementary Information in the workbook

• Important Dates:– 12/14/11 1st stat card cut-off on Year 2 $64,372 open claim– 12/14/12 2nd stat card cut-off on Year 2 open claim– 01/10/13 Claim closed at $40,133 (see loss run)– 02/08/13 Mod promulgation date (from worksheet)– 06/14/13 Upcoming policy renewal date– 12/14/13 3rd stat card cut-off on closed Year 2 claim– 06/14/14 $40,133 closed claim amount reflected in mod

• Wilson Enterprises “If Life Was Fair” worksheet

ExerciseAnother example…

• October residual market renewal• $29,000 reserve on injured hand• Claim settled earlier in year on May 1 for $5,000• Stat card cut-off date was April 28…3 days earlier• Mod was 1.37 + 30% ARP surcharge…

could/should have been 1.08 with no surcharge• Cost to insured: $23,145

Questions?

Appendix

• Worksheets, tables, and other information

• How to “Monitor the Mod”

• Online resources

Virtual Universitywww.bigivu.com

• Research library

• Online courses and webinars

• “Ask an Expert”

• Free newsletter

• Other features….

• Free access to Big “I” membersEmail: logon@iiaba.net

Workers Compensation Experience Rating Workshop

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