Basic Techniques for Workers Compensation

8/14/2019 Basic Techniques for Workers Compensation

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BASIC TECHNIQUES FORBASIC TECHNIQUES FORWORKERS COMPENSATIONWORKERS COMPENSATIONPresented byPresented by

Richard B. Moncher, NCCI, Inc.Richard B. Moncher, NCCI, Inc.

Andrew J. Doll, General CasualtyAndrew J. Doll, General Casualty

1999 CAS Seminar on Ratemaking1999 CAS Seminar on Ratemaking

Nashville, TennesseeNashville, Tennessee

March 12, 1999March 12, 1999

INT - 4INT - 4


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COURSE OUTLINECOURSE OUTLINE

RICH MONCHER:RICH MONCHER:

OverviewOverview

NCCI FilingNCCI Filing Overall Rate / LC Level ChangeOverall Rate / LC Level Change

Class Rate / LC ChangesClass Rate / LC Changes


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COURSE OUTLINECOURSE OUTLINE

ANDY DOLL:ANDY DOLL:

Other Bureau RatemakingOther Bureau Ratemaking

ExpensesExpenses Loss Cost MultipliersLoss Cost Multipliers

Company Pricing ProgramsCompany Pricing Programs

Current WC MarketCurrent WC Market


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WC RATING PROCEDUREWC RATING PROCEDURE

Exposure x Manual Rate = Manual PremiumExposure x Manual Rate = Manual Premium

Manual Premium x Experience ModManual Premium x Experience Mod

= Standard Earned Premium= Standard Earned Premium

- Premium Discount = Net Premium- Premium Discount = Net Premium

+ Expense Constant+ Expense Constant

3


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Example:Example:

Loss Cost = 1.60Loss Cost = 1.60 Expenses = 0.40Expenses = 0.40Rate = 1.60 + 0.40 = 2.00Rate = 1.60 + 0.40 = 2.00

1998 Payroll = 1,500,0001998 Payroll = 1,500,000

Exposure = Payroll / 100 = 15,000Exposure = Payroll / 100 = 15,000

1999 Manual Premium = Rate x Exposure1999 Manual Premium = Rate x Exposure

= 2.00 x 15,000 = 30,000= 2.00 x 15,000 = 30,000


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Example (contd)Example (contd)

1998 Payroll = 1,500,0001998 Payroll = 1,500,0001999 Payroll = 1,800,0001999 Payroll = 1,800,000

20% increase in Payroll20% increase in Payroll

If same $ 2.00 Rate, thenIf same $ 2.00 Rate, then

1999 Manual Premium = 18,000 x 2.00 = 36,0001999 Manual Premium = 18,000 x 2.00 = 36,000

So, 20% increase in PremiumSo, 20% increase in Premium


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W.C. DATA BASESW.C. DATA BASES

Financial Aggregate CallsFinancial Aggregate Calls

- Annual Data at Year End- Annual Data at Year End

- Statewide & Assigned Risk- Statewide & Assigned Risk

W.C. Statistical PlanW.C. Statistical Plan

- Class Detail (Approx. 600)- Class Detail (Approx. 600)

- Payroll & Losses- Payroll & Losses

- 18, 30, 42, 54, 66 Months after Effective Date- 18, 30, 42, 54, 66 Months after Effective Date


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FINANCIAL AGGREGATE CALLSFINANCIAL AGGREGATE CALLS ExperienceExperience

- By Policy Year- By Policy Year- By Calendar-Accident Year- By Calendar-Accident Year

Data ElementsData Elements

- Std. Earned Premium at DSR Level- Std. Earned Premium at DSR Level

- Std. Earned Premium at Company Level- Std. Earned Premium at Company Level- Net Earned Premium- Net Earned Premium

- Benefit Costs: Indemnity/Medical/Total- Benefit Costs: Indemnity/Medical/Total

- Payments (Paid Losses)- Payments (Paid Losses)

- Case Reserves- Case Reserves

- Bulk/IBNR Reserves- Bulk/IBNR Reserves


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FINANCIAL AGGREGATE CALLSFINANCIAL AGGREGATE CALLS

PurposesPurposes

- Overall Rate/Loss Cost Level Change- Overall Rate/Loss Cost Level Change

- Overall => Statewide, Voluntary, Assigned Risk- Overall => Statewide, Voluntary, Assigned Risk

- Trend Analyses- Trend Analyses


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VALUATION OF FINANCIAL DATAVALUATION OF FINANCIAL DATA

POLICY YEARPOLICY YEAR

ExpirationExpiration

DateDate

EffectiveEffective

DateDate

PolicyPolicy

YearYear19971997

1/1/971/1/97 12/31/9712/31/97 12/31/9812/31/98

(1st report)(1st report)12/31/9912/31/99

(2nd report)(2nd report)


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VALUATION OF FINANCIAL DATAVALUATION OF FINANCIAL DATAACCIDENT YEARACCIDENT YEAR

1/1/971/1/97 1/1/981/1/98 12/31/9812/31/98

(1st report)(1st report)12/31/9912/31/99

(2nd report)(2nd report)

AccidentAccident

YearYear

19981998

ExpirationExpiration

DateDate

EffectiveEffective

DateDate

1


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RATEMAKING: BIG PICTURERATEMAKING: BIG PICTURE

We start with historical data (premium and losses) usually oneWe start with historical data (premium and losses) usually one

to two years oldto two years old

We use analysis and judgment to estimate the ultimate lossesWe use analysis and judgment to estimate the ultimate losses

by adjusting historical lossesby adjusting historical losses

We adjust the premium (excluding expenses for loss costWe adjust the premium (excluding expenses for loss cost

states) from the historical data to simulate the (pure) premiumstates) from the historical data to simulate the (pure) premium

currently in placecurrently in place

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RATEMAKING: BIG PICTURERATEMAKING: BIG PICTURE

We divide estimated losses by simulatedWe divide estimated losses by simulated

premium to see if current rates/loss costs arepremium to see if current rates/loss costs are

adequate (i.e. If losses/premium = 1.0, then weadequate (i.e. If losses/premium = 1.0, then we

have exactly enough premium to cover losses.have exactly enough premium to cover losses.

If not then we must make new rates/loss costs.)If not then we must make new rates/loss costs.)

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Does current premium level provideDoes current premium level provide

adequate funds for future benefits?adequate funds for future benefits?

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PREMIUM ON-LEVEL FACTORSPREMIUM ON-LEVEL FACTORS

Adjust historical premium to current rate/loss cost levelAdjust historical premium to current rate/loss cost level

based on subsequent rate/loss cost changesbased on subsequent rate/loss cost changes

PY 1997 Premium = $100MPY 1997 Premium = $100M

1/1/99 Loss Cost Change = - 5.0%1/1/99 Loss Cost Change = - 5.0%

PY 1997 Premium @ Current Loss Cost Level = $95MPY 1997 Premium @ Current Loss Cost Level = $95M


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LOSS ON-LEVEL FACTORSLOSS ON-LEVEL FACTORS

Adjust historical losses to current benefit level basedAdjust historical losses to current benefit level based

on subsequent benefit (law) changeson subsequent benefit (law) changes

PY 1997 Medical Losses = $100MPY 1997 Medical Losses = $100M

1/1/99 Medical Fee Schedule Change = 10% savings1/1/99 Medical Fee Schedule Change = 10% savings

PY 97 Medical Losses @ Current Benefit Level = $90MPY 97 Medical Losses @ Current Benefit Level = $90M

1


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Trend FactorsTrend Factors

- Compares movements in indemnity and medical- Compares movements in indemnity and medical

benefits to movements in payrollbenefits to movements in payroll- Applied to loss ratio =- Applied to loss ratio =

(Adjusted losses)/(adjusted premium)(Adjusted losses)/(adjusted premium)

Data inData in

FilingFilingTimeTime

}

FilingFilingEffectiveEffective

TrendTrend

PayrollPayroll

Benefit CostsBenefit Costs

1


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LOSS EXPERIENCE INDICATIONLOSS EXPERIENCE INDICATION

Estimate what the losses will be in 2000, and all theEstimate what the losses will be in 2000, and all the

premium at the current 1999 loss costspremium at the current 1999 loss costs

Divide the losses by the premium to see if we haveDivide the losses by the premium to see if we have

enough premium to cover all of the lossesenough premium to cover all of the losses


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LOSS EXPERIENCE INDICATIONLOSS EXPERIENCE INDICATION

This Ratio of losses to premium is called theThis Ratio of losses to premium is called the Loss RatioLoss Ratio

if there areif there are moremore losses than premiums (i.e. the losslosses than premiums (i.e. the loss

ratio > 1.00) then we needratio > 1.00) then we need more premiummore premium, so we have, so we have

toto raiseraise loss costs for 2000loss costs for 2000

if there areif there are lessless losses than premium (i.e. the losslosses than premium (i.e. the loss

ratio < 1.00) then we haveratio < 1.00) then we have too muchtoo much premium, so wepremium, so we

have tohave to lowerlowerloss costs for 2000loss costs for 2000


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OVERALL CHANGE TO INDUSTRYOVERALL CHANGE TO INDUSTRY

GROUPSGROUPS

Overall change is distributed to industry groups andOverall change is distributed to industry groups and

then to individual classesthen to individual classes

ManufacturingManufacturing- TextilesTextiles- CabinetsCabinets- AutomobilesAutomobiles

Office &Office &

ClericalClerical- ClericalClerical

officeoffice

employeesemployees

- OutsideOutsidesalessales

ContractingContracting- PlumbingPlumbing- RoadsRoads- HousesHouses

Goods &Goods &

ServicesServices- RestaurantsRestaurants- Retail salesRetail sales- NursingNursing

MiscellaneousMiscellaneous- TruckingTrucking- LoggingLogging- Surface coalSurface coal

miningmining

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MANUFACTURING INDUSTRY GROUPMANUFACTURING INDUSTRY GROUP

CHANGECHANGEAnalysis shows that:Analysis shows that: Overall (statewide) change is +10%Overall (statewide) change is +10%

Manufacturing industry group experience is 10% worseManufacturing industry group experience is 10% worse

that statewide so,that statewide so,

Mfg. IndustryMfg. Industry

Group ChangeGroup Change==

StatewideStatewide

ChangeChangexx

Industry GroupIndustry Group

DifferentialDifferential

== (1.1) (1.1) - 1(1.1) (1.1) - 1

== 1.21 - 11.21 - 1

== 21%21%

-- 11

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W.C. STATISTICAL PLANW.C. STATISTICAL PLAN

Experience by PolicyExperience by Policy

Classification DetailsClassification Details

- Exposure / Premium / Exper. Mod- Exposure / Premium / Exper. Mod- Individual Claim Records- Individual Claim Records

Indemnity / MedicalIndemnity / Medical

Case Incurred ValuesCase Incurred Values

By Injury Type (Fatal, PT, etc.)By Injury Type (Fatal, PT, etc.)

2


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W.C. STATISTICAL PLANW.C. STATISTICAL PLAN

PurposesPurposes

- Classification Relativities- Classification Relativities

- Experience Rating- Experience Rating

- Retrospective Rating- Retrospective Rating- Research- Research

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VALUATION OF W.C. STATISTICAL PLANVALUATION OF W.C. STATISTICAL PLAN

DATADATA

7/1/987/1/98PolicyPolicy

EffectiveEffective

1/1/951/1/95

7/1/967/1/96 7/1/977/1/97 7/1/997/1/99 7/1/007/1/00

1st1st

ReportReport

ValuationValuation

2nd2nd

ReportReport

ValuationValuation

3rd3rd

ReportReport

ValuationValuation

4th4th

ReportReport

ValuationValuation

5th5th

ReportReport

ValuationValuation

2


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DISTRIBUTION OF INDUSTRY GROUPDISTRIBUTION OF INDUSTRY GROUP

CHANGE TO CLASSCHANGE TO CLASS

Unit ReportsUnit Reports

Relativities (between classes)Relativities (between classes)

- five years of WCSP data- five years of WCSP data

- current loss cost/rate - adjusted- current loss cost/rate - adjusted

- adjusted national experience for class- adjusted national experience for class


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BASIC TECHNIQUES FORBASIC TECHNIQUES FOR

WORKERS COMPENSATIONWORKERS COMPENSATION

Company PerspectiveCompany Perspective

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INDEPENDENT BUREAU VS.INDEPENDENT BUREAU VS.

NCCI FILING ACTIVITIESNCCI FILING ACTIVITIESq CaliforniaCalifornia

q MassachusettsMassachusetts

q MinnesotaMinnesotaq New JerseyNew Jersey

q New YorkNew York

q Pennsylvania/DelawarePennsylvania/Delaware

q TexasTexas

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LOSS COSTS - WHY?LOSS COSTS - WHY?q McCarran-Ferguson DebateMcCarran-Ferguson Debate

q Antitrust ConcernsAntitrust Concerns

q Ease of Developing Final RatesEase of Developing Final Rates

Note: 15 years ago all states were rate states.Note: 15 years ago all states were rate states.

Now, almost all NCCI states are loss costs.Now, almost all NCCI states are loss costs.

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EXPENSE COMPONENTSEXPENSE COMPONENTSq ProductionProduction - commissions, premium- commissions, premium

collection, underwritingcollection, underwriting

q

Taxes, Licenses, and FeesTaxes, Licenses, and Fees - various- variouspremium taxes, bureau and filing feespremium taxes, bureau and filing fees

q GeneralGeneral - overhead, audits, general- overhead, audits, general

administrationadministration

q Profit and contingenciesProfit and contingencies - combined with- combined with

investment incomeinvestment income

3


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COSTS AS A PERCENTAGE OF FIRSTCOSTS AS A PERCENTAGE OF FIRST

$5,000 OF STANDARD PREMIUM$5,000 OF STANDARD PREMIUM

Profit

Taxes

General

Production

Loss & Loss

AdjustmentLoss

Assessments

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EVALUATION OF THE NEEDSEVALUATION OF THE NEEDS


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EVALUATION OF THE NEEDSEVALUATION OF THE NEEDS

OUTSIDE OF THE LOSS COSTOUTSIDE OF THE LOSS COSTItems always Outside the Loss CostItems always Outside the Loss Cost

q ProductionProductionq Taxes, Licenses, and FeesTaxes, Licenses, and Fees

q GeneralGeneral

q Profit and ContingenciesProfit and Contingencies

Items sometimes Outside the Loss CostItems sometimes Outside the Loss Costq Loss Adjustment ExpensesLoss Adjustment Expenses

q Loss Based AssessmentsLoss Based Assessments

Items rarely Outside the Loss Cost (MN)Items rarely Outside the Loss Cost (MN)q TrendTrend

q Loss Development beyond 8th reportLoss Development beyond 8th report3


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COMPONENTS OF A RATE IN OR OUTCOMPONENTS OF A RATE IN OR OUT

OF THE LOSS COSTOF THE LOSS COST

Losses

Loss

Adjustment

Expense

Expense and

Profit

Loss

Assessments


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HOW TO ACCOUNT FOR ITEMSHOW TO ACCOUNT FOR ITEMS

OUTSIDE THE LOSS COSTOUTSIDE THE LOSS COST

The Loss Cost Multiplier (LCM)The Loss Cost Multiplier (LCM)

q Factor to multiply loss costs by to load in insurersFactor to multiply loss costs by to load in insurers

expense and profitexpense and profit

q Must also consider other items not included in theMust also consider other items not included in the

Loss CostLoss Cost

q Loss Cost x LCM = RateLoss Cost x LCM = Rate

q Insurance Companies must file LCMs for approvalInsurance Companies must file LCMs for approval

in loss cost statesin loss cost states

q Also known as a Pure Premium MultiplierAlso known as a Pure Premium Multiplier


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DERIVATION OF A LOSS COSTDERIVATION OF A LOSS COST

MULTIPLIERMULTIPLIERq State A:State A: Loss Cost includes Loss, LossLoss Cost includes Loss, Loss

Adjustment expense, and AssessmentsAdjustment expense, and Assessments

q State B:State B: Loss Cost includes Loss and LossLoss Cost includes Loss and Loss

Adjustment expenseAdjustment expenseq State C:State C: Loss Cost includes LossLoss Cost includes Loss

In all three cases, loss includes full trend andIn all three cases, loss includes full trend and

loss developmentloss development

3


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MULTIPLIERMULTIPLIER

Portion of Standard PremiumPortion of Standard Premium

StateState

A B CA B C

Expenses .275Expenses .275

Profit .025Profit .025

Total of Items to Load on Loss Cost .300Total of Items to Load on Loss Cost .300

Indicated Loss Cost Multiplier 1.429Indicated Loss Cost Multiplier 1.429

= 1/(1 - Load Needed)= 1/(1 - Load Needed) 36


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MULTIPLIERMULTIPLIER

Portion of Standard PremiumPortion of Standard Premium

StateState

A B CA B C

Expenses .275 .275 .275Expenses .275 .275 .275

Profit .025 .025 .025Profit .025 .025 .025

Loss Assessments (% Prem) .020 .020Loss Assessments (% Prem) .020 .020

Loss Adj. Expense (% Prem) .080Loss Adj. Expense (% Prem) .080

Total of Items to Load on Loss Cost .300 .320 .400Total of Items to Load on Loss Cost .300 .320 .400

Indicated Loss Cost Multiplier 1.429 1.471 1.667Indicated Loss Cost Multiplier 1.429 1.471 1.667

= 1/(1 - Load Needed)= 1/(1 - Load Needed)37



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MULTIPLIER - ALTERNATIVE APPROACHMULTIPLIER - ALTERNATIVE APPROACH

q Prior methodology assumes that all items included in thePrior methodology assumes that all items included in theLCM are related to PremiumLCM are related to Premium

q Loss Adjustment Expenses and Assessments may notLoss Adjustment Expenses and Assessments may not

have a stable relationship to Premiumhave a stable relationship to Premium

q

An alternative approach for states that require a loadingAn alternative approach for states that require a loading

for loss related items is:for loss related items is:

1 + Loss Related Items (% Loss)1 + Loss Related Items (% Loss)

LCM =LCM =

1 - Premium Related Items (% Premium)1 - Premium Related Items (% Premium)

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ADDITIONAL CONSIDERATIONS FORADDITIONAL CONSIDERATIONS FOR

THE LOSS COST MULTIPLIERTHE LOSS COST MULTIPLIERq Administered Pricing vs. Competitive RatingAdministered Pricing vs. Competitive Rating

When to use a LCM?When to use a LCM?

q Evaluation of the Bureau Loss Cost FilingEvaluation of the Bureau Loss Cost Filing

Do you agree with the various assumptions?Do you agree with the various assumptions?

How does your book compare?How does your book compare?

Is there additional, more current info?Is there additional, more current info?

q Consideration of the Companys experienceConsideration of the Companys experience

How does your experience compare?How does your experience compare?

Are there changes to consider?Are there changes to consider?When will you be implementing a change?When will you be implementing a change?

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MANUAL RATE IS STARTING POINT FORMANUAL RATE IS STARTING POINT FOR

DETERMINING COST OF WORKERSDETERMINING COST OF WORKERS

COMPENSATION INSURANCECOMPENSATION INSURANCEAdditional FactorsAdditional Factors

q Prospective Experience RatingProspective Experience Rating

q Premium DiscountsPremium Discountsq DeviationsDeviations

q Schedule RatingSchedule Rating

q Retrospective RatingRetrospective Rating

q Dividend PlansDividend Plans

q Deductibles (Small and Large)Deductibles (Small and Large)

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PROGRAMS THAT CAN BE USED TO BETTERPROGRAMS THAT CAN BE USED TO BETTER


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PROGRAMS THAT CAN BE USED TO BETTERPROGRAMS THAT CAN BE USED TO BETTER

REFLECT INDIVIDUAL RISK CHARACTERISTICSREFLECT INDIVIDUAL RISK CHARACTERISTICSq Experience RatingExperience Rating - mandatory tool that compares actual- mandatory tool that compares actual

and expected lossesand expected losses

q Premium DiscountsPremium Discounts - by policy size; reflects that relative- by policy size; reflects that relative

expense is less for larger insuredsexpense is less for larger insureds

q Expense ConstantExpense Constant - reflects expense gradation for- reflects expense gradation for

smaller insuredssmaller insuredsq DeviationsDeviations - filed by companies (LCM or rate) to reflect- filed by companies (LCM or rate) to reflect

anticipated experience differencesanticipated experience differences

q Schedule RatingSchedule Rating - reflects characteristics not reflected by- reflects characteristics not reflected by

experience ratingexperience rating

q Dividend PlansDividend Plans - means to reflect favorable experience;- means to reflect favorable experience;

similar to schedule or retro ratingsimilar to schedule or retro rating 41


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WORKERS COMPENSATION CLIMATE AND THEWORKERS COMPENSATION CLIMATE AND THE


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WORKERS COMPENSATION CLIMATE AND THEWORKERS COMPENSATION CLIMATE AND THE

ROLE OF THE ACTUARYROLE OF THE ACTUARY

q

Rates/Loss Costs continue to decrease in manyRates/Loss Costs continue to decrease in manyjurisdictions, but starting to moderatejurisdictions, but starting to moderate

q Market remains relatively soft, with continued use ofMarket remains relatively soft, with continued use of

pricing tools (schedule rating, dividends)pricing tools (schedule rating, dividends)

q Industry results deteriorating on an accident yearIndustry results deteriorating on an accident year

basisbasisq Actuaries must be aware of changing environments,Actuaries must be aware of changing environments,

how pricing tools are used, and how that will impacthow pricing tools are used, and how that will impact

resultsresults

q

Actuaries must communicate findings withActuaries must communicate findings withmanagementmanagement

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Basic Techniques for Workers Compensation

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