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The New NCCI Hazard Groups

Learn about the latest NCCI Hazard Groups, Item B-1403 filing, and the impact on insurance charges. Discover how hazard groups are used in underwriting, predictive modeling, and reinsurance pricing.

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The New NCCI Hazard Groups

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  1. The New NCCI Hazard Groups Presented by: Jonathan Evans, FCAS, MAAA Actuary NCCI

  2. Today’s Outline: • Background on Hazard Groups • Item B-1403 and Subsequent Annual Updates • Impact of the New Hazard Groups • Next Steps—USL&HW

  3. Today’s Outline: • Background on Hazard Groups • Item B-1403 and Subsequent Annual Updates • Impact of the New Hazard Groups • Next Steps—USL&HW

  4. What Are Hazard Groups? • Each class code is assigned to a hazard group (HG) • HGs capture the variation in large loss potential among class codes • Classes in HG A—least likelihood for large claims • Classes in HG G—greatest likelihood for large claims HG A … … … … HG G Likelihood of Large Claims

  5. What Are Hazard Groups Used For? Retrospective Rating • Excess Loss Factors (ELFs), used to determine the charge for an optional claim limit • State Hazard Group Relativities (SHGRs), used in determining the insurance charge

  6. What Are Hazard Groups Used For? Deductible Credits • NCCI files small deductible programs based on hazard groups in the voluntary market in just over 20 states • NCCI does not file large deductible programs

  7. What Are Hazard Groups Used For? Other Miscellaneous Uses for Hazard Groups: • Profiling premium distribution for reinsurance purposes • Reinsurance pricing • Underwriting guidelines • Predictive modeling

  8. Today’s Outline: • Background on Hazard Groups • Item B-1403 and Subsequent Annual Updates • Impact of the New Hazard Groups • Next Steps—USL&HW

  9. Item B-1403 Filing Contents • New mapping to both four and seven hazard groups • ELFs for most states • State Hazard Group Relativities (SHGRs) • Expected Loss Groups (ELGs) • Deductible credits not included • Approved in all states

  10. Interaction of HG and Rate Filings • ELFs and deductible credits in rate filing depend on HG filing (B-1403) • New HGs took effect with approval of the first rate or loss cost filing on or after January 1, 2007* * Separate effective dates were filed in CO and ME due to no loss cost filings in 2007 and in SC due to a delayed loss cost effective date

  11. ELFs Effective in 2007 • Loss cost states effective in first half of year • AK, AL, AR, CO*, CT, GA, HI, IL, IN, KS, LA, MD, ME*, MO, MS, MT, NC, NE, NH, NM, NV, OK, OR, RI, SC*, SD, TN, VA, VT • ELFs were in HG filing and loss cost filing • Loss cost states effective in second half of year • DC, KY, UT • ELFs were in loss cost filing • Rate states • AZ, FL, IA, ID • ELFs were in rate filing * No loss cost filing made in CO and ME with 2007 eff date; SC eff date delayed

  12. ELFs Effective in 2008 and Subsequent • Loss cost states • ELFs filed annually in ELG/SHGR filing (mid-year) • Effective with loss cost filing • Continue to appear in loss cost filings as well • Rate states • ELFs in rate filing • Same as current practice

  13. ELGs/SHGRs Effective in 2008 and Subsequent • File annually at mid-year • Single January 1 effective date for all states

  14. The New Hazard Groups • The old four hazard groups labeled I through IV were replaced with seven hazard groups labeled A through G • To accommodate carriers that preferred a four-hazard group system, there was also a new four-hazard-group option labeled 1 through 4

  15. 4 HG Option • Made available primarily for carriers who could not update their system in the time required. • Carriers that elected to use the new four-hazard-group option had to make a filing in each state to adopt it. Otherwise they are considered to have adopted the seven HGs. • New 7 Hazard Groups collapse into new 4. • New HG 1 = HGs A & B • New HG 2 = HGs C & D • New HG 3 = HGs E & F • New HG 4 – HG G

  16. C A B D E F G 2 1 3 4 Hierarchical Collapsing of New HGs

  17. Today’s Outline: • Background on Hazard Groups • Item B-1403 and Subsequent Annual Updates • Impact of the New Hazard Groups • Next Steps—USL&HW

  18. Old Hazard Groups

  19. Number of Classes per Hazard Group Old vs. New Old Mapping New Mapping IV F G III 67 100 I 123 A E 303 40 36 198 B 176 D II 67 C 417 193

  20. Percentage of Premium per Hazard GroupOld vs. New Old New IV: 2% F I: 1% G 19% III 5% A 4% E 51% B 20% 14% II D C 46% 12% 26%

  21. New Hazard Groups Before Underwriting Review Each symbol represents a class Each color represents a HG

  22. Underwriting Review ofHazard Group Assignments • Member companies surveyed • 101 classes had full credibility, of which 53 received comments • 61 classes had credibility of 75%–99%, of which 30 received comments • Of the remaining 700 classes, 200+ also received comments

  23. Underwriting Review ofHazard Group Assignments • Much feedback pertained to dangers faced by employees, such as: • Extensive driving • Heavy machinery • Dangerous materials • Feedback also reflected reasoning by analogy: • Suggesting classes with similar operations be assigned to the same HG • Suggesting a small class be mapped to the same HG as a larger class with similar operations

  24. Underwriting Review ofHazard Group Assignments • Final HG assignments based on: • Statistically indicated mapping • Survey comments • Internal Underwriting review • Statistical credibility of class • Statistical ambiguity of class (e.g., was indicated mapping between 2 HGs?)

  25. Class Movement FromOld to New 4 HGs Number of Classes

  26. Revenue Neutrality • General increase in ELFs when comparing the old 4 HGs to the new 4 HGs (e.g., old HG I to new HG 1). • General movement of classes to lower HGs. • These two results offset each other, and the overall average ELFs are unaffected across all hazard groups and prior to trend. Therefore, there is no overall premium effect.

  27. Percentage Change in Average Cost per CaseOld vs. New 4 HGs

  28. HG IV $413,376 HG 4 $533,913 $ 214,619 $ 450,789 $ 573,275 PT Average Cost per CaseOld HG IV vs. New HG 4

  29. Percentage Change in Injury Type WeightsOld vs. New 4 HGs

  30. HG 4 14.5% HG IV 10.4% 4.1% 12.0% 15.7% PT Weight Old HG IV vs. New HG 4

  31. Change in Excess RatiosOld to New 4 HGs Each symbol represents a state

  32. Change in Excess RatiosHG I to HG 1

  33. Change in Excess RatiosHG II to HG 2

  34. Change in Excess RatiosHG III to HG 3

  35. Change in Excess RatiosHG IV to HG 4

  36. Old and New HGsCountrywide Average Excess Ratios

  37. Key Transitions Old Mapping Hazard Group I II III IV Total Number of Classes 40 417 303 100 860 Percent of Premium 0.9% 45.5% 51.1% 2.5% 100% Hazard Group A 26 10 0 0 36 0.4% 3.9% 0.0% 0.0% 4.3% B 165 10 1 0 176 13.0% 0.4% 0.1% 0.0% 13.6% C 178 1 14 0 193 21.7% 0.0% 3.7% 0.0% 25.5% New Mapping D 1 42 24 0 67 0.0% 5.2% 7.1% 0.0% 12.3% E 178 2 17 1 198 18.4% 0.0% 1.5% 0.0% 19.9% F 58 0 4 5 67 18.9% 0.0% 0.2% 0.3% 19.3% G 0 1 28 94 123 0.0% 0.0% 2.9% 2.2% 5.1%

  38. Largest Class Codes Transitioning From II to B *Indicates premium 45.1% of 8810 premium.

  39. Largest Class Codes Transitioning From II to C

  40. Change in Excess RatiosFrom Old HG II to … Change Due to New Mapping … excluding trend Change Due to New Mapping—Excluding Trend Each symbol represents a state

  41. Largest Class Codes Transitioning From III to E

  42. Largest Class Codes Transitioning From III to F

  43. Change in Excess RatiosFrom Old HG III to … Change Due to New Mapping—Excluding Trend Each symbol represents a state

  44. Impact on Small Deductibles • NCCI files deductible credits that vary by HG in just over 20 states in the voluntary market and in just over 10 states in the residual market • For deductibles of $5,000 or less, the impact of the revised credit on the loss cost premium of most risks is less than 5%

  45. Countrywide Average $500 Deductible Credits

  46. Today’s Outline: • Background on Hazard Groups • Item B-1403 and Subsequent Annual Updates • Impact of the New Hazard Groups • Next Steps—USL&HW

  47. Current USL&HW ELFs • Countrywide • Last filed in 1999 • Not updated annually • Based on F-class data

  48. Key Considerations • Countrywide vs. state-specific ELFs • USL&HW indemnity benefits are countrywide, but medical probably varies by state • Even half of the indemnity losses are paid at state benefit level in typical F-class • Minimal data available • Minimal use expected • Very few retro policies with USL exposure are being written

  49. Possible Options • Use state ELFs • Typically half of indemnity paid at state level • Medical probably varies by state and accounts for majority of large losses • Make use of USL percentage to derive state-specific USL ELFs • USL ELFs that vary by state could be derived by assuming USL costs exceed each specific state’s costs by the USL percentage, or some portion of the USL percentage

  50. Summary of New HGs • New 7 HGs provide a greater spread in ELFs • Classes are more evenly spread across the new HGs vs the old • General increase in ELFs, partly due to inflation over time • Increase in ELFs offset by movement to lower HG for many classes

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