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Rating Organizations. Any rating organization is an independent organization that develops manual rules and rates for its member companies to use in a given state Examples: National Council on Compensation Insurance (NCCI) Monopolistic states Other state-approved organizations other than NCCI
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Rating Organizations • Any rating organization is an independent organization that develops manual rules and rates for its member companies to use in a given state • Examples: • National Council on Compensation Insurance (NCCI) • Monopolistic states • Other state-approved organizations other than NCCI • Primary functions: • Maintaining risk-based employer job classification • Collecting and analyzing statistical data • File “advisory” (or manual) rates with states on behalf of member companies • File “loss cost” expectations in some states rather than full rates.
Workers’ Comp Job Classification System • Manual rates are applied to $100 chunks of an employer’s remuneration (payroll) to create the manual premium • An employer’s payroll is broken down into job classes that reflect the relative riskiness of the employer’s operations • Each different job class has a different premium rate per $100 of payroll to which it is assigned • Higher rates apply to job classes considered more risky • Getting the job class correct is very important.
Workers’ Comp Job Classification System • Comp rating classes differ from North American Industry Classification System (NAICS) • NAICS uses six-digit number to determine a company’s primary business activity • Rating agency codes are typically four-digit codes reflecting differences in workplace exposures to loss rather than relative differences in business activities • Common for different business activities to be included in the same workers’ comp job class code if exposures are similar.
The Workers’ Comp Governing Class • The job classification process is intended to classify the overall business of the employer and NOT the specific work performed by any given employee • The “governing classification” is the job class code that applies to majority of employer’s payroll • Other than payroll associated with one of the standard exceptionssuch as outside sales, office/clerical, and auto salespeople • The NCCI Scopes Manual specifies what is intended to be included under each class code • Scopes Manual “General Inclusions.”
“Loss Cost” Filing • Full premium rate filing by rating organization includes expected loss costs and adjustment expenses, insurer operating expenses and profit loading • “Loss cost” filing only includes expected loss costs and adjustment expenses • Insurers required to file their own multipliers to reflect operating expense and profit loading • Can be influenced by competition • In other states, insurers might file for deviations from the published manual rates or file their own rates.
Remuneration as a Rating Base • Remuneration is money or substitutes for money paid by employer to workers • Wages, salaries, commissions, draws, bonuses • Pay associated with paid time-off • Salary reductions associated with retirement or cafeteria (section 125) plans • Value of store certificates, merchandise, or credits • Supplemental benefit payments in excess of those required by law • Pay to employees for time not worked • Premium portion of overtime wage rates and tips/gratuities can be deducted in most states.
Manual Premium Rates • Manual rates multiplied by estimated payroll (per $100) in a given classification produces a manual premium • Either all insurance companies use the same manual rate or competing insurers can use their own manual rates • Actual final premium determined based on actual payroll determined after policy expires • Annual premiums of $5,000 or more must be audited annually • Premiums less than $5,000 must be audited in first year and then at least once every three years thereafter.
Adjustments to Manual Premiums • Experience Modification Factor • Minimum premiums – only one min premium amount can be used regardless of the number of classifications or states covered • Premium discounts • Schedule rating – discretionary application of debit and credit premium adjustments up to a maximum percentage per regulatory rate filings • Intended to reflect characteristics not reflected in employer’s loss experience • Other adjustments include expense constant, terrorism risk charge, various state fund assessments.
Experience Rating • Uses an Experience Modification Factor to compare a given employer’s own historical losses against the average losses in a particular class • Creates incentive for employer to control losses, both frequency of incidents and severity of losses • More closely ties the premium charged to the actual risk being insured against • Adds an additional underwriting element that otherwise does not exist with manual rating.
Experience Modification Factor • The ex mod is mandatory for all qualified employers • It is calculated annually by the NCCI (or other rating agency) • Single ex-mod applies to all operations of a given risk and generally in all states of operation • Expected losses for a given employer are compared to expected losses for all employers in same classification in a given state.
Calculating the Experience Mod Factor • No more than 45 months of prior policy information used in calculation • Prior policy effective dates must fall at least 21 months before but no more than 57 months before the current policy effective date • Once calculated, all insurers must use the same ex-mod factor • Annual changes to ex-mod based on changes to payroll and claims information identified on Unit Statistical Reports provided by insurers to NCCI.
Experience Mod Formula • Remember the ex-mod factor is a number (factor) that uses prior loss experience to modify manual rate • General formula Actual Losses/Expected Losses • < 1 is credit mod and > 1 is debit mod • Statistical credibility of historical losses is considered • Frequency is more heavily weighted than severity.
Experience Mod Formula – Actual Losses • Actual loss amounts are split at $5,000 (increasing to $15,000) into primary and excess components with excess part capped at state accident limit • Actual excess loss amounts above the cap simply not used in calculation • Results in greater overall weight assigned to frequency than to severity • Although the severity weight increases with the size of the employer (via greater credibility weight applied to excess loss amounts).
Experience Mod Formula – Expected Losses • Uses the Expected Loss Rate (ELR), or that part of manual rate designed for losses • If loss ratio is .65, then ELR for a classification with manual rate of $1.00 per $100 of payroll will be $0.65 per $100 of payroll • Total expected losses will be ELR x (payroll/$100) • Expected losses also broken down between primary and excess • Discount ratio (or D-ratio) reflects expected primary losses • Breakdown is important when accounting for credibility • Weighting factor applied to actual and expected excess losses to reflect statistical credibility of employer’s own losses • Weight increases as employer size increases.
Loss Sensitive Programs • Loss sensitive programs offer chance for lower premiums than guaranteed-cost programs but with greater risk • Types of loss sensitive plans • Retrospectively rated plans • Dividend plans • Deductible plans.
Retrospectively Rated Plans • General retro formula Retro Premium = [Basic Prem + Converted Losses + Excess Loss Prem + Retro Development Prem] x Tax Multiplier • Employer pays initial premium • Calculated 6 months after expiration and re-calculated every 12 months after that until the policy is “closed” • At each adjustment it’s determined whether employer owes more premium or receives premium refund • Subject to maximum and minimum amounts • Policy year being closed shifts 100 percent of claims payment burden to insurer.
Dividend Plans • Employer may benefit from return of premium in form of a dividend • Not a guaranteed benefit, but no downside risk to the employer • Types • Sliding scale dividends • Standard or flat dividend.
Deductible Plans • Higher deductible translates into lower premium • Insurer fronts the claims payments and seeks reimbursement from employer up to the deductible amounts • Both per loss and annual aggregate deductibles apply • Most states currently have Small Deductible Programs (minimum deductible of $100) • Large deductible programs (deductibles range from $5,000 - $1 million per loss) • Employer pays relatively very small initial deposit premium plus pre-funds escrow claims account • Significant potential reward, but much larger risk.
