Rate Reform: Split-Plan Overview

1. Rate Reform: Split-Plan Overview Wednesday, February 10

2. Objectives: • Re-introduction to split-rating plan - Reason for rating change - Split-Plan Example - Potential Benefits • Review split-plan parameters currently being considered - Primary/Excess Split Points (single vs. multi) - Use of Credibility - Medical only claims • Define next steps and 2010 deliverable dates

3. What is the importance of an accurate experience rating system? • Should produce a premium that best reflects the employers exposure • Should use a premium calculation based on sound insurance principles and the employer’s own data

4. Key risk factors to consider for an accurate rating plan • The cost of a specific accident is statistically less predictive than the occurrence of an accident • - The greater importance should be that an accident occurred • As a result, greater weight should be given to the frequency of claims than to accident severity • - Employers with higher frequency of claims will generally have higher future workers compensation claims cost. • - However, a small number of costly claims should not be ignored

5. How does a split-rating plan recognize these risk factors • A split-experience rating plan uses a measure of both frequency and severity to assess employer risk • Uses a per claim split point to distinguish primary and excess losses • - Primary – represents claim frequency • - Excess – represents claim severity • More emphasis is put on the primary loss bucket (frequency) while still recognizing the costs of a claim

6. Other benefits of implementing a split-rating plan • Better accuracy in determining individual employer premiums based on the risk they present • Less volatility from one significant claim • Greater incentive to prevent workplace injuries • More consistency with the rating plans in other states

7. Rating plan example Consider two employers: - Employer A - 1 loss of $175,000 in the 4 year experience period - Employer B - 10 losses totaling $175,000 in the 4 year exp. period Generally speaking, which risk would you expect to produce lower future costs?

8. Split-rating plan example • The current rating system would view these employers as having the same risk • Employer A and Employer B would both have the $175,000 applied to their experience equally • Under the split-rating plan, with a $10,000 split point, employer B would receive a higher EM than employer A • Employer A would have $10,000 applied to primary losses and $165,000 to excess losses • Employer B would have $100,000 applied to primary losses and $75,000 to excess losses

9. Preliminary split-plan structure • Experience period - Same as current (oldest 4 of last 5 calendar years) • Expected loss calculation - Expected loss rates will be separated into primary and excess buckets - Primary expected loss: Ep = ELRp * payroll/100 - Excess expected loss: Ee = ELRe * payroll/100 - Total expected loss: E = Primary + Excess

10. Preliminary split-plan structure • Actual loss calculation • Ratable losses will include the same costs as today with the exception being the maximum single loss (MSL) point and medical only claims • MSL point: $175,000 for all employers • Medical only claims: • Exclude costs from the experience calculation up to a dollar threshold • Will include transition rule impacts (medical reserves) - A per claim dollar amount will be established as a split point • Primary loss = sum of all ratable losses below the split limit. • Excess loss = sum of all ratable losses above the split limit. • Credibility calculation - Separate credibility weights will be applied to both primary and excess losses • Greater credibility will be given to primary losses

11. Split-rating plan preliminary formula • Zp = Primary Credibility • Ze = Excess Credibility • Ap = Actual Primary Loss • Ae = Actual Excess Loss • Ep = Expected Primary Loss • Ee = Expected Excess Loss • E = Ep + Ee

12. Split-plan parameters in development • Defining appropriate split point(s) - Impacts of using a single split point vs. multiple-split points by size of risk • The calculation of actuarially appropriate credibility values - Primary and excess credibility values - Credibility based on years of operation • An employer with one year of experience may receive less credibility than another with 2, 3 or 4 years of experience • Treatment of medical-only claims - Appropriate threshold to exclude from the experience calculation (e.g. $1,000) • This encourages reporting of all medical claims and costs

13. Performance measures • It is critical to define key performance measures associated with testing and analysis. - The results should produce similar performance across any segment of employers. - This similar performance will indicate that we are charging employers an appropriate premium level relative to the risk they bring to the system. • Determining employer impacts • Stability of the rating plan • Ease of use/understanding for employers

14. Where do groups fit into the new split-rating plan? • The primary focus in developing the split rating plan is to allow BWC to accurately rate individual policies • The performance of groups under the new rating plan will be analyzed once this goal is achieved

15. Split-plan deliverable dates

16. Rate Reform: Split-Plan Overview Wednesday, February 10