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					          Strengthening Ohio’s
Workers’ Compensation System

       Group Rating/Experience Rating –
                   Actuarial Perspective

                          Jeffery W. Scholl, FCAS, MAAA
                           William Hansen, FCAS, MAAA
                                         Columbus, Ohio
                Oliver Wyman Actuarial Consulting, Inc.
   Principles of Ratemaking     2
   Experience Rating Plans      6
   Timeframes, Considerations
    and Conclusions              14




                                      2
Principles of Ratemaking
Principles of Ratemaking
   Statement of Principles Regarding Property &
    Casualty Insurance Ratemaking – Adopted by
    CAS in 1988
   Statement defines ratemaking as “the process
    of establishing rates used in insurance or other
    risk transfer mechanisms.”




                                                       4
Principles of Ratemaking
   Principle 1
        A rate is an estimate of the expected value of future costs.
           • It is prospective because the rate must be developed prior to the transfer of risk.
   Principle 2
        A rate provides for all costs associated with the transfer of risk
           • It should provide for all costs so that the insurance system is financially sound.
   Principle 3
        A rate provides for the costs associated with an individual risk transfer.
           • It should provide for the costs associated with an individual risk transfer so that equity
              among insureds is maintained.
   Principle 4
        A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an
         actuarially sound estimate of the expected value of all future costs associated with an
         individual risk transfer.
           • Rates will be actuarial sound if the estimation is based on Principles 1, 2, and 3.




                                                                                                          5
Experience Rating Plans
Experience Rating Plans
Presentation Outline

   Attributes of a good experience rating plan
   Explanation of 2 plans:
       Ohio BWC
       NCCI




                                                  7
Experience Rating Plans
   Attributes of a good experience rating plan
    1.   Serves the needs of the organization (BWC and Employers)
         using them
    2.   Appropriately balances risk bearing and risk sharing
    3.   Not subject to internal or external pressures
    4.   Simple to administer
    5.   Easy to understand
    6.   Responsive to individual risk experience
    7.   Stable—does not subject the affected entities to large
         fluctuations in costs from year-to-year



                                                                    8
Experience Rating Plans
   Ohio Plan
      Minimum Expected Loss to qualify is $8,000

       Non-split plan (4 years of experience)
         • Maximum loss varies by expected loss, from $12,500 for small risks to
           $250,000 for largest risks

       Credibility varies by expected loss size (see table)
         • Maximum credibility of 90% at $1 million

       Formula:
                   ActualLosses(lim)  ExpectedLosses
                                                      (credibility %)  1.0  Modification( EM )
                            ExpectedLosses

   Example:
                   $200,000  $1,000,000
                                         (0.90)  1.0  0.28
                        $1,000,000

                   $1,000,000 manual premium pays $280,000 after the credit modification

                                                                                                   9
Experience Rating Plans
                         Credibility and Maximum Value of a Loss

     Credibility Group        Expected Losses*   Credibility Percent   Group Maximum
                                                                           Value
           1                      8,000                 05               12,500
           2                     15,000                 09               12,500
           3                     27,000                 14               25,000
           4                     45,000                 18               37,500
           5                     62,500                 23               55,000
           6                     90,000                 27               75,000
           7                    122,500                 32               87,500
           8                    160,000                 36              100,000
           9                    202,500                 41              112,500
           10                   250,000                 45              125,000
           11                   302,500                 50              137,500
           12                   360,000                 54              150,000
           13                   422,500                 59              162,500
           14                   490,000                 63              175,000
           15                   562,500                 68              187,500
           16                   640,000                 72              200,000
           17                   722,500                 77              212,500
           18                   810,000                 81              225,000
           19                   902,500                 86              237,500
           20                 1,000,000                 90              250,000
                                                                                       10
Experience Rating Plans
   NCCI Plan
      Split plan
          • Primary Loss is first $5,000 of a claim
          • Medical Only limited to 30 percent of loss
          • Maximum loss capped at state limit (i.e. $250,000)

        Credibility varies by expected loss size
          • Maximum credibility of 91 percent for primary, 80 percent for excess

        Formula: [W and B are the credibility components divided
         between primary and excess]
                          ActualPLoss  ActualExcess (W )  ExpectedExcess(1  W )  B
                                                                                        Modification( EM )
                                             ExpectedLosses  B

        Example:         $50,000  $150,000(0.44)  $750,000(1  0.44)  109,428
                                                                                   0.58
                                          $1,000,000  109,428

                          $1,000,000 manual premium pays $580,000 after the credit modification
                                                                                                              11
Experience Rating Plans
   NCCI Plan
           Split plan
             • Primary Loss is first $5,000 of a claim
             • Medical Only limited to 30 percent of loss
             • Maximum loss capped at state limit (i.e. $250,000)

           Credibility varies by expected loss size
             • Maximum credibility of 91 percent for primary, 80 percent for excess

           Formula:
                                             Severity
Frequency


ActualPLoss  ActualExcess( W )  ExpectedExcess( 1  W )  B
                                                               Modification( EM )
                    ExpectedLosses  B

                                                                                      12
Experience Rating Plans
Retrospective Performance Tests


                      Experience Rating Plan Scenarios—Loss Ratio Relativities
Policy Year                                     2002           2002          2002           2003           2004


                                              Max Cred      Max Cred         NCCI           NCCI           NCCI

Premium ranges                                      90%            60%       Plan*          Plan*          Plan*

>$800,000                                           1.33           1.04           1.04          1.02              1.03

>$250,000 and <=$800,000                            0.79           0.94           0.92          0.95              0.90

>$80,000 and <=$250,000                             0.71           0.88           0.95          0.97              0.98

>$25,000 and <=80,000                               0.79           0.98           0.94          0.93              0.96

<=$25,000                                           0.92           1.14           1.08          1.15              1.11


* NCCI plan factors used for these scenarios are estimates based on other state plans; use of experience rating
parameters based on Ohio data would improve performance

                                                                                                                         13
 Experience Rating Plans
 Hypothetical Examples
                                                                                Increase    Increase
              Expected    Experience                               Experience   over 90%   over Base
 Scenario      Losses     Rating Plan   Primary Loss Excess Loss      Mod       Max Cred      Case



Base                      90% Max Cred $    200,000                      0.28

Case        $ 1,000,000   60% Max Cred $    200,000                      0.52       86%

                           NCCI Plan    $    50,000   $150,000           0.58      107%



Base plus                 90% Max Cred $    450,000                      0.51                  80%

One $250k   $ 1,000,000   60% Max Cred $    450,000                      0.67       33%        29%

Loss                       NCCI Plan    $    55,000   $395,000           0.68       35%        17%



Base plus                 90% Max Cred $    700,000                      0.73                 161%

Two $250k   $ 1,000,000   60% Max Cred $    700,000                      0.82       12%        58%

Losses                     NCCI Plan    $    60,000   $640,000           0.78        7%        34%

                                                                                                       14
 Experience Rating Plans
 Hypothetical Examples
                                                                                   Increase    Increase
                 Expected   Experience                               Experience    over 90%   over Base
  Scenario        Losses    Rating Plan   Primary Loss Excess Loss      Mod        Max Cred      Case



Base                        90% Max Cred $    20,000                        0.95

Case         $     30,000   60% Max Cred $    20,000                        0.97         2%

                             NCCI Plan    $    5,000   $ 15,000             0.93        -2%



Base plus                   90% Max Cred $    45,000                        1.07                   12%

One $25k     $     30,000   60% Max Cred $    45,000                        1.05        -2%         8%

Loss                         NCCI Plan    $   10,000   $ 35,000             1.08         1%        16%



Total Loss                  90% Max Cred $    30,000                        1.00                    5%

Equals       $     30,000   60% Max Cred $    30,000                        1.00         0%         3%

Expected                     NCCI Plan    $   20,000   $ 10,000             1.28        28%        38%
                                                                                                          15
 Experience Rating Plans
 Real Policy Examples

                                        Experience Rating                                           Increase/
         Type     Expected Losses               Plan              Primary Loss        Excess Loss   Decrease*



Credit                                    90% Max Cred        $     16,000                                 base

Rated             $    72,000             60% Max Cred        $     16,000                                 -11%

                                            NCCI Plan         $      6,000        $ 15,700                 -19%



Debit                                     90% Max Cred        $     60,000                                 base

Rated             $    40,000             60% Max Cred        $     60,000                                 -25%

(Penalty)                                   NCCI Plan         $     16,000        $ 73,000                 -26%



Group                                     90% Max Cred        $    173,000                                 base

Rated             $ 1,500,000             60% Max Cred        $    173,000                                  59%

                                            NCCI Plan         $     80,000        $ 46,000                  82%

* Increase/Decrease Measure is relative to the 90 percent maximum credibility level
                                                                                                                  16
Timeframes, Considerations
          and Conclusions
Conclusion
    Timeframes
       Desirable to phase in changes to minimize disruption
       Several alternative solutions are possible

    Considerations
       Need to evaluate best parameters to fit Ohio data
       Must consider implementation challenges and premium impacts
       Familiarity within and outside of Ohio
       Competition
       Safety—frequency of claims as a predictor of future losses

    Equity can be improved significantly by either the current Ohio plan or the NCCI
     plan if parameters are selected appropriately:
       Still need to address group rules (plan changes won’t achieve balance between
         group and non-group)
       Need to identify what is most important: fairness, stability, responsiveness, and
         ease-of-use

    Oliver Wyman Recommendation: move to 60 percent credibility in the short term and
    transition to NCCI plan when practical
                                                                                            18
          Strengthening Ohio’s
Workers’ Compensation System

				
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