Strengthening Ohio’s Workers’ Compensation System

1. Strengthening Ohio’s Workers’ Compensation System

2. Stabilizing rates • BWC believes a good individual rating system will balance risk sharing, fairly distribute costs, and minimize fluctuations. • MIRA • BWC discount programs • Group Rating

3. Past progress toward equity • Non-group discount for policy years • 7-1-2002 • 7-1-2003 • 7-1-2004 • 7-1-2005 • 7-1-2006 • Maximum credibility reduced from 100 percent to 90 percent for July 1, 2007 policy year

4. Loss ratios • A ratio of incurred losses to paid premiums • A relative measure among all employers • An effective measure of actuarial soundness (if ratios are similar among various segments of employers)

5. Historical loss ratios and relativities The premium collected led to an inequity – where non-group employers paid more premiums relative to their losses. Loss ratio relativities are compared to the loss ratios of all private employers.

6. Loss ratio relativities by credibility levels Loss relativities – all experience rated employers As credibility maximums decrease, the variability of loss ratios decrease. This is desirable as it achieves equity among employers by the level of risk.

7. Loss ratio relativities By the group’s EM for group-rated employers There are inequities within the groups, as those groups with the largest credits (EM of 5-15%) show minimal amount of premiums paid relative to their incurred losses. The manual premiums for these groups falls into the manual premium of $250,000 and greater on the previous slide.

8. PDP analysis Loss ratio relativity compared to penalty rated employers The loss ratio relativities show that the discounts given in these programs are justified. The premium figures used in the loss ratio calculation include discounts. *Employers have not fully completed the program requirements. ** Data as of 09/30/05

9. DFWP analysis Loss ratio relativity compared to all other employers The loss ratio relativities show that the discounts given in these programs are justified. The premium figures used in the loss ratio calculation includes discounts *Employers have not fully completed the program requirements. ** Data as of 12/15/05

10. “Stacked” discount analysis Loss ratio relativity compared to penalty rated employers The loss ratio relativities show that the discounts given in these programs are justified. The premium figures used in the loss ratio calculation includes discounts. *Employers have not fully completed the program requirements. **Data as of 12/13/05

11. Other discount programs • One claim program • Amount of discount has neither been actuarially determined nor evaluated • Has re-distributed approximately $5.4 million in premiums among all employers over 18 months • Safety councils • Amount of refunds has neither been actuarially determined nor evaluated • Oliver Wyman opined in March 2006 that loss experience is not mature enough to draw strong conclusions • $21.3 million refunded to employers for participation in policy years 7-1-2004 and 7-1-2005 • Retrospective rating • Designed to be actuarially sound • Premiums are assessed retrospectively, and adequate premiums are collected relative to the incurred losses by the participating employer

12. Conclusions • The scheduled reduction in the maximum credibility from 100 percent to 90 percent has improved rate equity • Loss ratios are more equitable when the maximum credibility is approximately 60 percent

13. Actuarial Recommendations • Oliver Wyman • Recommends a maximum credibility of 60% • Pinnacle Actuarial Resources, Inc. • Recommends a maximum credibility of 53% • AON Risk Consultants • Recommendation pending

14. Definitions Credibility– reflects the degree of belief that the employers experience is a valid predictor of future costs. Credibility Table – the table used in Ohio experience rating that identifies the varying levels of maximum credits an employer or group can receive from the base rate stratified by employer size (measured by expected losses). Experience Modifier (EM) – is a the amount of credit or penalty applied to the base rate that is calculated at the employer/group level. Loss Ratio – a percentage found by dividing incurred losses by the premiums paid. Loss Ratio Relativity – a comparative measure of loss ratios normalized to one. Incurred losses – the sum of the paid medical, paid indemnity and reserve for all claims within a policy period Experience rating – a program that recognizes that premium distribution by actual losses incurred will penalize or award an employer based upon their loss history and intended to promote safety consciousness. Penalty rated – describes an employer whose actual losses are higher than what is expected for an employer given their exposure and size. Credit rated - describes an employer whose actual losses are lower than what is expected for an employer given their exposure and size. Base rated – describes an employer whose exposure size is too small to be experience rated. Manual premium – premium computed prior to experience rating. PDP+ - Premium Discount Program – a safety program where employers implement 10 safety and claims management steps in exchange for a premium discount and possible claim frequency or severity reduction bonus.   DFWP - Drug Free Workplace Program – a safety program designed to help employers establish safer workplaces and reduce the chance of an accident caused by substance use.   Stacked  - An option available to eligible employers to participate in the PDP+ and DFWP at the same time and combine the resulting premium discounts. One-claim program -  A premium reduction program designed for all employers who lose their Group Rating Program participation due to the cost of one significant claim. 

15. Strengthening Ohio’s Workers’ Compensation System