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WORKERS’ COMPENSATION RATEMAKING

WORKERS’ COMPENSATION RATEMAKING. OR HOW DO WE DO THAT ACTUARIAL THING? Senate Bill 304 Study Committee September 22, 2003 Mike Taylor State Relations - NCCI, Inc. Workers’ Compensation Ratemaking. What you won’t hear Where do we start Where does it come from What do we do with it

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WORKERS’ COMPENSATION RATEMAKING

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  1. WORKERS’ COMPENSATION RATEMAKING OR HOW DO WE DO THAT ACTUARIAL THING? Senate Bill 304 Study Committee September 22, 2003 Mike Taylor State Relations - NCCI, Inc. 1

  2. Workers’ Compensation Ratemaking • What you won’t hear • Where do we start • Where does it come from • What do we do with it • How can we be sure • Bottom line to Joe Q. Public 2

  3. Technical Actuarial Type Words • Tail Factors • Incurred But Not Reported • On-Level Factor • Exponential Trend Factors • 18th to Ultimate Development • Composite Adjustment Factor • Off-Balance 3

  4. What Steps Do We Take? • Look at where the state stands • Obtain new and updated data • Analyze it to see where it leads • Add in other factors • Spread it out 4

  5. Where are we? • What’s the current status? • System changes? • Benefit Changes? • Law Changes? • Other Stuff? 5

  6. 1ST StepDetermine Overall Rate Level • How much money (premium) is needed to fund the system to only pay all the anticipated indemnity losses, medical losses and loss adjustment costs? 6

  7. Data… • Financial Data • Calendar Year Data • Policy Year Data • How much premium did the industry bring in? 7

  8. …and more Data • Loss Data • How much did the industry pay out? • Type of injuries • Medical costs • Wage Replacement • Frequency • Severity 8

  9. Different data for different needs Calendar Year Data Policy Year Data Individual Policy Data 9

  10. Calendar Year 2000 1/1/99 1/1/01 1/1/00 Consists of all transactions reported in 2000, irrespective of the years which generated them. Premium in – losses paid out Sources: NAIC, Annual Statements or AM Best 10

  11. Calendar Year Data Advantages Readily available Fresher Compiled quickly Fixed over time Easily reconciled to other sources 11

  12. Calendar Year Data • Drawbacks • Distorted by rapid growth or decline in market share • Greatly impacted by prior years reserve changes in current year • Not a good measure of profitability 12

  13. Policy Year 1999 1/1/98 1/1/99 1/1/00 1/1/01 Data is organized by matching premiums and losses to policies issued during a given year, regardless of when it’s reported to insurer 13

  14. Policy Year Data • Advantages • Matches losses & premiums to the underlying policies • More Mature • More stable 14

  15. Policy Year Data • Drawbacks • Older • Takes too long to finalize • Not readily published 15

  16. 2nd Step - Trend • Getting from Point A • (what we are) • to Point B • (where we’re going) • Measures the changes in the growth/decline of wages and losses • Differences indicate trend 16

  17. Cost Per Claim Going Up, Number of Claims Going Down Based on data through 12/31/00. Average indemnity and medical cost per lost-time claim. 17

  18. Wages in Montana Are Expected to Grow Source: U.S. Department of Census. 18

  19. Negative Trend 19

  20. Positive Trend 20

  21. Flat Trend 21

  22. Real World 22

  23. 3rd StepAdd In The New… • Legislated benefit changes • Court decisions • New regulations 23

  24. Impact of changes • Benefit Changes–Immediate impact on premium by higher or lower wage loss payments-Overall or by class • SB 450 • Court Decisions– Alter laws on compensabilty, coverages or benefits. Impact can be retroactive, immediate or in the future • Stavenjord • Regulations– Generally more long term in nature (safety requirements) but can have immediate effect (assessments) 24

  25. If we continue at the same level… • Will things balance out? • Will there be enough money to pay anticipated claims? 25

  26. 4th Step - Sanity Check • Check outside sources for independent verification • DOL • WCD • OSHA • BLS • Carriers • Guy on the street 26

  27. Determine Overall Premium Level • Add everything up to determine what the premium level needs to do • Up, down or no change +13.2% effective July 1, 2003 27

  28. 5th StepSpread Out The Changes • Not equitable to apply rate change unilaterally to all employers • 1st, Distribute to 5 Industry groups based on their experience • 2nd, Distribute to individual classifications based on their experience • Finally, Apply exceptions, caps and rules 28

  29. Distribution of Rate ChangeEffective 7-1-03 29

  30. 6th Step -Distribute Changes to Individual Classifications • Analyze individual policy data (Unit Stat) • 5 years of experience used • Older than overall ratemaking data • 96, 97, 98, 99, 00 Policy Years • Measure for credibility • Low volume classes use national data (at Montana levels) to enhance credibility 30

  31. Derived by Formula Pure Premium Adjustments New Proposed Loss Cost Class Ratemaking Summary times equals 31

  32. Exceptions, Caps & Rules • Maximum change +/-25% from Industry Group indication: • Transition limits – Generally for new classes • Mandated caps by legislature, regulator or other factors 32

  33. Loss Cost including LAE Loss Adjustment Expense Developed and Trended Losses Final Loss Cost • Add in a provision for Loss Adjustment Expense • Expenses of an insurance company which are directly chargeable to the settlement of losses such as the cost of investigating cases, defending law suits, etc. • May also include loss-based assessments 33

  34. Full Rate Profit & Contingencies Taxes, Licen & Fees Production & General Expense Loss Adjustment Expense Developed and Trended Losses Final Manual Rate • A provision for each expense item is added by the insurer to the final loss cost to produce a full manual rate • Carrier rates expressed as a Loss Cost Multiplier • Loss cost X LCM = Final Rate 34

  35. Policyholder Pricing Programs • Programs "tailor" the final premium to better match the characteristics of each insured • Experience rating - mandatory for risks with premium above a minimum threshold • Compares actual versus expected losses to calculate an experience modification • Premium discounts by size of policy • Reflects the fact that the relative expense of servicing large premium policies is less than that for small premium policies 35

  36. More Policyholder Pricing Programs • Retrospective Rating • Final premium depends on the experience generated by the insured during the same time the policy is in force • Schedule rating • Premium is modified to reflect characteristics of the risk that are not reflected in the manual rate such as on-site medical facilities, safety devices, etc. • Deviations from manual rate/loss cost • Filed with the state insurance department • Carrier loss cost multiplier filings are used to build up loss costs to the final manual rate 36

  37. Final Premium Impact • What does this mean to the average employer? • Are there other factors involved? • Growth • Change in exposure • Losses • Bottom Line: “HOW MUCH IS THIS GOING TO COST ME?” / 37

  38. Dirt Diggers, IncGeneral Excavation Dirt Diggers, Inc Payroll: $100,473 8810 $ 25,617 Loss Cost Rates: 6217 = $17.45 8810 = $ .61 Two Guys Mutual Insurance Company Loss Cost Multiplier = 1.25 TGMIC Rates: Class 5180 = $21.81 Class 8810 = $0.75 38

  39. Dirt Diggers, IncPremium Development 5183 $100,473 x $21.81/$100 = $21,913 8810 $25,716 x $ .75/$100 = $ 193 Manual Premium = $22,106 Experience Mod x .95 Standard Premium = $21,001 Schedule Rating (-25%) x .75 $15,751 Base Premium = $22,106 Actual Premium = $15,571 DIFFERENCE = $6,535 OR @ 30% 39

  40. Fall in a Hole, IncGeneral Excavation Fall in a Hole, Inc Payroll: $100,473 8810 $ 25,617 Loss Cost Rates: 6217 = $17.45 8810 = $ .61 Somewhat Equitable Insurance Company Loss Cost Multiplier = 1.50 SEIC Rates: Class 6217 = $26.17 Class 8810 = $ .92 40

  41. Fall in a Hole, IncPremium Development 6217 $100,473 x $26.17/$100 = $26,826 8810 $25,716 x $ .92/$100 = $ 236 Manual Premium = $27,062 Experience Mod x 1.20 Standard Premium = $32,474 Schedule Rating (+15%) x 1.15 $37,345 Base Premium = $27,062 Actual Premium = $37,345 DIFFERENCE = $10,283 OR @ 38% 41

  42. Dirt Diggers, Inc Safety conscientious, controlled losses, better training, gives them more carrier choices, options for premium savings via lower ex-mod, scheduled credits Fall in a Hole, Inc Multiple losses, less emphasis on safety, spotty training results in less options for coverage, higher ex-mod, scheduled debits equaling higher premiums. Differences $15,571 vs. $37,345 140% Higher! 42

  43. Questions?Comments? 43

  44. Contact: Mike Taylor 6975 SW Sandburg Suite 160 Tigard, Or 97220 503-624-1831 mike_taylor@ncci.com 44

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