BOARD OF DIRECTORS MEETING (OPEN) AGENDA ITEM 18a

BOARD OF DIRECTORS MEETING (OPEN)

AGENDA ITEM 18a

ATTACHMENT 18a-I

WORKERS' COMPENSATION INSURANCE RATING BUREAU (WCIRB) PRESENTATION: CALIFORNIA EXPERIENCE RATING PLAN OVERVIEW

PRESENTED BY: Dave Bellusci, WCIRB

March 13, 2009

W o r k e r s’ C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a

WCIRBCalifornia®

California ExperienceCalifornia ExperienceRating Plan OverviewRating Plan Overview

Presented by:Dave Bellusci

WCIRB of California

State Fund Board of Directors Meeting

March 13, 2009

California Experience Rating Plan OverviewCalifornia Experience Rating Plan Overview

WCIRBCalifornia®

WCIRB Ratemaking ProcessWCIRB Ratemaking Process

Overall Pure Premium Rate Level ChangeOverall Pure Premium Rate Level ChangeClassification Pure Premium (PP) Rates Classification Pure Premium (PP) Rates Experience RatingExperience Rating


WCIRBCalifornia®

WCIRB Ratemaking ProcessWCIRB Ratemaking Process

Projected Pure

Premium

Projected Loss & LAE


Projected Pure

Premium

Current PP Rates LowCurrent PP Rates LowPP Rate Increase IndicatedPP Rate Increase Indicated

Current PP Rates HighCurrent PP Rates HighPP Rate Decrease IndicatedPP Rate Decrease Indicated


Projected Pure

Premium

System in BalanceSystem in Balance

Overall Pure Premium Rate Level ChangeOverall Pure Premium Rate Level Change


WCIRBCalifornia®

WCIRB Ratemaking ProcessWCIRB Ratemaking ProcessStandard Classification SystemStandard Classification System

Approved by Insurance CommissionerApproved by Insurance CommissionerApproximately 500 Industry ClassificationsApproximately 500 Industry ClassificationsMandatory for Data ReportingMandatory for Data ReportingAdvisory for Insurer PricingAdvisory for Insurer PricingCritical for Ratemaking ProcessCritical for Ratemaking Process

Many classifications with few large employers Many classifications with few large employers

Many small employersMany small employers

Great cost variation by classificationGreat cost variation by classification


WCIRBCalifornia®

WCIRB Ratemaking ProcessWCIRB Ratemaking ProcessClassification Pure Premium RatesClassification Pure Premium Rates

$70$800

$1,200$2,100

$3,000

$5,100

$8,800

$0

$2,500

$5,000

$7,500

$10,000

SoftwareDevelopers

Hospitals Restaurants Landscapers TruckingFirms

LoggingFirms

Roofing Low Wage

Average Benefit Cost for an Employee Earning Average Benefit Cost for an Employee Earning $50,000 Annually$50,000 Annually


WCIRBCalifornia®

Experience Rating OverviewExperience Rating OverviewStatutory ObjectivesStatutory Objectives

Contain Reasonable Eligibility StandardsContain Reasonable Eligibility StandardsProvide Adequate Incentive for Loss Prevention Provide Adequate Incentive for Loss Prevention Provide Sufficient Premium Differentials to Encourage Provide Sufficient Premium Differentials to Encourage SafetySafety


WCIRBCalifornia®

Experience Rating OverviewExperience Rating OverviewOther Supporting ObjectivesOther Supporting Objectives

Distribute Costs of System Equitably Among Employers in Distribute Costs of System Equitably Among Employers in an Industry Classification an Industry Classification SimplicitySimplicityPredictability Predictability No Impact on Overall Statewide PremiumNo Impact on Overall Statewide PremiumConsistency Across JurisdictionConsistency Across Jurisdiction


WCIRBCalifornia®

Experience Rating OverviewExperience Rating OverviewStatutory DefinitionStatutory Definition

Contained in Section 11730 of the California Insurance CodeContained in Section 11730 of the California Insurance Code

“rating procedure utilizing past insurancepast insuranceexperienceexperience of the individual policyholder to forecast future lossesforecast future losses by measuring the policyholder’s loss experience against the loss experience of policyholders in the same policyholders in the same classificationclassification to produce a prospective premium credit, debit or unity modification.”


WCIRBCalifornia®


Measuring PolicyholdersMeasuring Policyholders’’ Past Experience Against the Past Experience Against the Experience of Policyholders in the Same ClassificationExperience of Policyholders in the Same ClassificationProduce a Prospective Premium Credit, Debit or Unity Produce a Prospective Premium Credit, Debit or Unity ModificationModification


WCIRBCalifornia®

Experience Rating OverviewExperience Rating Overview

$10,000

$15,000

Actual Losses Incurred byEmployer

Average Expected Losses forClassification

Actual Losses < Expected Losses : XActual Losses < Expected Losses : X--Mod <100%Mod <100%

Actual Losses Vs. Expected LossesActual Losses Vs. Expected Losses


WCIRBCalifornia®

Experience Rating OverviewExperience Rating Overview

$20,000

$15,000

Actual Losses Incurred byEmployer

Average Expected Losses forClassification

Actual Losses > Expected Losses : XActual Losses > Expected Losses : X--Mod >100%Mod >100%

Actual Losses Vs. Expected LossesActual Losses Vs. Expected Losses


WCIRBCalifornia®


Measuring PolicyholdersMeasuring Policyholders’’ Past Experience Against the Past Experience Against the Experience of Policyholders in the Same Classification Experience of Policyholders in the Same Classification Refinement of Classification System Refinement of Classification System Classifications Fairly Homogeneous but With DifferencesClassifications Fairly Homogeneous but With Differences

Operations (level of mechanization)Operations (level of mechanization)

Safety practicesSafety practices

Salary levelsSalary levels

Employee relations (e.g. degree of unionization) Employee relations (e.g. degree of unionization)

Availability of other benefits Availability of other benefits

Other characteristics (e.g. location)Other characteristics (e.g. location)


WCIRBCalifornia®


Forecast of Future Losses Forecast of Future Losses Not a Proxy for SafetyNot a Proxy for SafetyPast Experience Used to Extent it is Predictive of Future Past Experience Used to Extent it is Predictive of Future LossesLosses

Greater reliance on claim frequency than severity Greater reliance on claim frequency than severity

Predictive value depends on size of employersPredictive value depends on size of employers

Very small employers not eligible for experience ratingVery small employers not eligible for experience rating


WCIRBCalifornia®

Experience Rating OverviewExperience Rating OverviewPast Experience as a Predictor of Future LossesPast Experience as a Predictor of Future Losses

$0

$250,000

$500,000

$750,000

$1,000,000Cost of Actual Claims

Employer 1Employer 125 Claims Averaging 25 Claims Averaging

$40,000$40,000

Employer 2Employer 21 Claim of $1 Million1 Claim of $1 Million

Frequency Vs. SeverityFrequency Vs. Severity


WCIRBCalifornia®

Employer Loss Rate

Indusrty Average Rate

Employer Loss Rate

Industry Average Loss Rate

Experience Rating OverviewExperience Rating OverviewPast Experience as a Predictor of Future LossesPast Experience as a Predictor of Future Losses

X

Predicted Loss Rate

Small Employer Experience by YearSmall Employer Experience by YearX

Predicted

Loss Rate

Large Employer Experience by YearLarge Employer Experience by Year

Role of Employer SizeRole of Employer Size


WCIRBCalifornia®

California Experience Rating PlanCalifornia Experience Rating PlanSummarySummary

Introduced in California in 1921Introduced in California in 1921Approved by the Insurance Commissioner Approved by the Insurance Commissioner Comparison of 3Comparison of 3--Year Actual Incurred Loss History to Year Actual Incurred Loss History to Average Expected for ClassificationAverage Expected for ClassificationApplication of Published XApplication of Published X--Mod is Mandatory Under Mod is Mandatory Under Insurance Code 11734 Insurance Code 11734 Approximately 20% of Policies are Experience Rated, Approximately 20% of Policies are Experience Rated, Representing Approximately 85% of the Premium Representing Approximately 85% of the Premium Approximately 120,000 XApproximately 120,000 X--ModsMods issued annuallyissued annually


WCIRBCalifornia®

California Experience Rating PlanCalifornia Experience Rating PlanApplication of XApplication of X--ModMod

XX Employer Payroll ==

A B C

D E F

Subject PremiumSubject PremiumInsurer RatesInsurer Rates

AA

BB

CC

DD

EE

FF

Commissioner Approved P.P.

Rate


WCIRBCalifornia®


Modified Premium

A

D

CB

E FUniformX-Mod

=XA B C

D E F

Subject Premium


WCIRBCalifornia®


FINAL PREMIUM

=X

Individual Insurer Rating Plan Adjustments

A B C

D E F

A B C

D E FModified Premium

A

D

CB

E F


WCIRBCalifornia®

California Experience Rating PlanCalifornia Experience Rating PlanGeneral PurposeGeneral Purpose

Experience Rating Benchmarks a Business Against Others in Experience Rating Benchmarks a Business Against Others in its Industryits Industry

It provides a direct financial incentive for employers to reduceIt provides a direct financial incentive for employers to reduceaccidentsaccidents

It is intended to distribute the cost of workersIt is intended to distribute the cost of workers’’ compensation compensation insurance equitably among employers in an industry insurance equitably among employers in an industry classificationclassification


WCIRBCalifornia®

Employer A $100,000

Pure Premium

Employer A Employer A $100,000$100,000

Pure PremiumPure Premium


Distributing the Cost of WorkersDistributing the Cost of Workers’’ CompensationCompensationTwo employers in the same classification code Two employers in the same classification code

Each develops $100,000 in pure premiumEach develops $100,000 in pure premium

= $200,000= $200,000++

Pool of WorkersPool of Workers’’ Compensation Insurance Pure PremiumCompensation Insurance Pure Premium

Employer B $100,000

Pure Premium

Employer B Employer B $100,000$100,000



WCIRBCalifornia®


Distributing the Cost of WorkersDistributing the Cost of Workers’’ Compensation Compensation If Employer A has a favorable loss history compared to If Employer A has a favorable loss history compared to Employer B, Employer BEmployer B, Employer B’’s Xs X--Mod would increase to offset the Mod would increase to offset the decrease in Employer Adecrease in Employer A’’s so that the industry modified pure s so that the industry modified pure premium remains the same or premium remains the same or ““premium neutral.premium neutral.””

Employer A $100,000 x 80% =$80,000 Modified

Pure Premium

Employer A Employer A $100,000 x 80% =$100,000 x 80% =$80,000 Modified $80,000 Modified

Pure PremiumPure Premium= $200,000= $200,000++

Employer B $100,000 x 120% =$120,000 Modified

Pure Premium

Employer B Employer B $100,000 x 120% =$100,000 x 120% =$120,000 Modified $120,000 Modified


Pool of WorkersPool of Workers’’ Compensation Insurance Pure PremiumCompensation Insurance Pure Premium


WCIRBCalifornia®

California Experience Rating PlanCalifornia Experience Rating PlanEligibilityEligibility

All California Insured Employers with Minimum Qualifying All California Insured Employers with Minimum Qualifying Premium (Approximately 120,000)Premium (Approximately 120,000)Qualifying Premium Based on Payroll During the Experience Qualifying Premium Based on Payroll During the Experience Period and Current Pure Premium RatesPeriod and Current Pure Premium RatesFor Average Classification, Eligibility is 6 FullFor Average Classification, Eligibility is 6 Full--Time Time Employees Over 3 Year Experience PeriodEmployees Over 3 Year Experience Period

Varies depending on the classification pure premium Varies depending on the classification pure premium


WCIRBCalifornia®

California Experience Rating Plan California Experience Rating Plan EligibilityEligibility

1 24

12

45

68

0

10

20

30

40

50

60

70

Carpentry (LowWage)

Trucking Firms Retail Stores Private Schools AccountingFirms

MortgageBrokers

Number of FullNumber of Full--Time Employees (Earning $50,000 Annually) Time Employees (Earning $50,000 Annually) Needed to Meet Experience Rating EligibilityNeeded to Meet Experience Rating Eligibility

Experience Rating EligibilityExperience Rating Eligibility


WCIRBCalifornia®

California Experience Rating PlanCalifornia Experience Rating PlanExperience PeriodExperience Period

Typically 3 Year Experience PeriodTypically 3 Year Experience PeriodTypically Most Current Policy in Experience Period Expired Typically Most Current Policy in Experience Period Expired 12 months Prior to the X12 months Prior to the X--Mod Effective Date Mod Effective Date

2009 ratings reflect 2005, 2006 and 2007 policies2009 ratings reflect 2005, 2006 and 2007 policies


WCIRBCalifornia®

California Experience Rating PlanCalifornia Experience Rating PlanExperience PeriodExperience Period

20032003 20042004 20052005 20062006 20072007 20082008 20092009

Experience Period 2008 X-Mod

January 1, 2009 X-Mod Effective Date

January 1, 2009 X-

Mod Published by WCIRB

Experience period losses valued

Experience UsedExperience Used


WCIRBCalifornia®

California Experience Rating PlanCalifornia Experience Rating PlanLoss and Payroll Experience UsedLoss and Payroll Experience Used

Uses Data Submitted Under Uniform Statistical Reporting Uses Data Submitted Under Uniform Statistical Reporting Plan (USRP) approved by the Insurance Commissioner Plan (USRP) approved by the Insurance Commissioner Audited Payroll by ClassificationAudited Payroll by ClassificationLoss Amounts Reflect Incurred Loss Estimates as of Most Loss Amounts Reflect Incurred Loss Estimates as of Most Current USRP ValuationCurrent USRP ValuationIndividual Claims Limited to $175,000Individual Claims Limited to $175,000


WCIRBCalifornia®

California Experience Rating PlanCalifornia Experience Rating PlanExpected LossesExpected Losses

Based on Audited USRP Payroll and Expected Loss Rates by Based on Audited USRP Payroll and Expected Loss Rates by Classification Approved by Insurance CommissionerClassification Approved by Insurance CommissionerExpected Loss Rates Reflect Average Losses by Expected Loss Rates Reflect Average Losses by Classification for Period Used in CalculationClassification for Period Used in Calculation

2009 expected loss rates reflect average losses estimated by 2009 expected loss rates reflect average losses estimated by class for 2007 policies (valued at 18 months), 2006 policies class for 2007 policies (valued at 18 months), 2006 policies (valued at 30 months) and 2005 policies (valued at 42 months)(valued at 30 months) and 2005 policies (valued at 42 months)


WCIRBCalifornia®

California Experience Rating PlanCalifornia Experience Rating PlanXX--Mod Calculation FormulaMod Calculation Formula

XX--Mod Based on the Ratio of Actual Losses to Expected Mod Based on the Ratio of Actual Losses to Expected Losses for Experience PeriodLosses for Experience PeriodFormula Reflects Actuarial Adjustment for Predictive Value Formula Reflects Actuarial Adjustment for Predictive Value Based on Size of Claim and Size of EmployerBased on Size of Claim and Size of EmployerIndividual Losses Segregated into Individual Losses Segregated into ““PrimaryPrimary”” and and ““ExcessExcess””ComponentsComponentsXX--Mods are Corrected for Erroneous Unit Statistical Data or Mods are Corrected for Erroneous Unit Statistical Data or Changes in Claim Activity (E.G. Subrogation)Changes in Claim Activity (E.G. Subrogation)

ReRe--rates if claims in aggregate close for 60% or less of value rates if claims in aggregate close for 60% or less of value used in xused in x--mod computationmod computation

Approximately 18,000 reApproximately 18,000 re--rates annuallyrates annually


WCIRBCalifornia®

Experience Rating Task ForceExperience Rating Task Force

Created at Directive of Insurance CommissionerCreated at Directive of Insurance Commissioner

Objective to Review How Well Experience Rating Plan Meets Objective to Review How Well Experience Rating Plan Meets

its Principal Objectives its Principal Objectives

Includes Representatives of Insurers, Employers, Labor, Includes Representatives of Insurers, Employers, Labor,

Producers, CDI & WCIRBProducers, CDI & WCIRB

Reviewed Principal Aspects of Experience Rating SystemReviewed Principal Aspects of Experience Rating System

Report Submitted to CDI in July 2008Report Submitted to CDI in July 2008


WCIRBCalifornia®

Experience Rating Task Force Experience Rating Task Force Principal RecommendationsPrincipal Recommendations

Single Primary/Excess Loss Split PlanSingle Primary/Excess Loss Split PlanUpdate Rating Values with Most Current Available DataUpdate Rating Values with Most Current Available DataSimplify Plan FormulaSimplify Plan FormulaEnhanced Expected Loss Rate Projection MethodologyEnhanced Expected Loss Rate Projection MethodologyNew Experience Rating WorksheetNew Experience Rating WorksheetBroad Educational Outreach ProgramBroad Educational Outreach ProgramImplementation Plan Implementation Plan

Substantive calculation changes to be proposed effective 1/1/10Substantive calculation changes to be proposed effective 1/1/10

Worksheet changes to be proposed effective 1/1/11Worksheet changes to be proposed effective 1/1/11

Broad outreach program to be undertakenBroad outreach program to be undertaken

W o r k e r s’ C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a

WCIRBCalifornia®

California ExperienceCalifornia ExperienceRating Plan OverviewRating Plan Overview

Presented by:Dave Bellusci

WCIRB of California

State Fund Board of Directors Meeting

March 13, 2009

Documents

BOARD OF DIRECTORS MEETING (OPEN) AGENDA ITEM 18a