Strengthening Ohio’s Workers’ Compensation

System

Group Rating/Experience Rating – Actuarial Perspective

Jeffery W. Scholl, FCAS, MAAAWilliam Hansen, FCAS, MAAA

Columbus, Ohio

Oliver Wyman Actuarial Consulting, Inc.

2

Principles of Ratemaking 2

Experience Rating Plans 6

Timeframes, Considerations and Conclusions 14

Principles of Ratemaking

4

Principles of Ratemaking

Statement of Principles Regarding Property & Casualty Insurance Ratemaking – Adopted by CAS in 1988

Statement defines ratemaking as “the process of establishing rates used in insurance or other risk transfer mechanisms.”

5

Principles of Ratemaking Principle 1

A rate is an estimate of the expected value of future costs.• It is prospective because the rate must be developed prior to the

transfer of risk.

Principle 2 A rate provides for all costs associated with the transfer of risk

• It should provide for all costs so that the insurance system is financially sound.

Principle 3 A rate provides for the costs associated with an individual risk

transfer.• It should provide for the costs associated with an individual risk

transfer so that equity among insureds is maintained.

Principle 4 A rate is reasonable and not excessive, inadequate, or unfairly

discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.• Rates will be actuarial sound if the estimation is based on

Principles 1, 2, and 3.

Experience Rating Plans

7

Experience Rating Plans Presentation Outline

Attributes of a good experience rating plan

Explanation of 2 plans: Ohio BWC NCCI

8

Experience Rating Plans Attributes of a good experience rating plan

1. Serves the needs of the organization (BWC and Employers) using them

2. Appropriately balances risk bearing and risk sharing

3. Not subject to internal or external pressures4. Simple to administer5. Easy to understand6. Responsive to individual risk experience7. Stable—does not subject the affected entities to large fluctuations in costs from year-to-year

9

Experience Rating Plans Ohio Plan

Minimum Expected Loss to qualify is $8,000

Non-split plan (4 years of experience)• Maximum loss varies by expected loss, from $12,500 for small risks to $250,000 for largest risks

Credibility varies by expected loss size (see table)• Maximum credibility of 90% at $1 million

Formula:

Example:

)(0.1%)((lim)

EMonModificatiycredibilitssesExpectedLo

ssesExpectedLoesActualLoss

28.00.1)90.0(000,000,1$

000,000,1$000,200$

$1,000,000 manual premium pays $280,000 after the credit modification

10

Experience Rating PlansCredibility and Maximum Value of a Loss

Credibility Group Expected Losses* Credibility Percent Group Maximum

Value

1 8,000 05 12,500 2 15,000 09 12,500 3 27,000 14 25,000 4 45,000 18 37,500 5 62,500 23 55,000 6 90,000 27 75,000 7 122,500 32 87,500 8 160,000 36 100,000 9 202,500 41 112,500 10 250,000 45 125,000 11 302,500 50 137,500 12 360,000 54 150,000 13 422,500 59 162,500 14 490,000 63 175,000 15 562,500 68 187,500 16 640,000 72 200,000 17 722,500 77 212,500 18 810,000 81 225,000 19 902,500 86 237,500 20 1,000,000 90 250,000

11

Experience Rating Plans NCCI Plan

Split plan • Primary Loss is first $5,000 of a claim• Medical Only limited to 30 percent of loss• Maximum loss capped at state limit (i.e. $250,000)

Credibility varies by expected loss size• Maximum credibility of 91 percent for primary, 80 percent for excess

Formula: [W and B are the credibility components divided between primary and excess]

Example:

)()1()(

EMonModificatiBssesExpectedLo

BWcessExpectedExWssActualExcesActualPLos

58.0428,109000,000,1$

428,109)44.01(000,750$)44.0(000,150$000,50$

$1,000,000 manual premium pays $580,000 after the credit modification

12

Experience Rating Plans NCCI Plan

Split plan• Primary Loss is first $5,000 of a claim• Medical Only limited to 30 percent of loss• Maximum loss capped at state limit (i.e. $250,000)

Credibility varies by expected loss size• Maximum credibility of 91 percent for primary, 80 percent for excess

Formula:)EM(onModificati

BssesExpectedLo

B)W(cessExpectedEx)W(ssActualExcesActualPLos

1

FrequencySeverity

13

Experience Rating PlansRetrospective Performance Tests

* NCCI plan factors used for these scenarios are estimates based on other state plans; use of experience rating parameters based on Ohio data would improve performance

1.111.151.081.140.92<=$25,000

0.960.930.940.980.79>$25,000 and <=80,000

0.980.970.950.880.71>$80,000 and <=$250,000

0.900.950.920.940.79>$250,000 and <=$800,000

1.031.021.041.041.33>$800,000

Plan*Plan*Plan*60%90%Premium ranges

NCCINCCINCCIMax CredMax Cred

20042003200220022002Policy Year

Experience Rating Plan Scenarios—Loss Ratio Relativities

14

Primary LossScenario

Increase over Base

Case

Increase over 90% Max Cred

Excess Loss

Experience Rating PlansHypothetical Examples

34%7%

0.78 $640,000 $ 60,000 NCCI PlanLosses

58%12%

0.82 $ 700,000 60% Max Cred $ 1,000,000 Two $250k

161%

0.73 $ 700,000 90% Max CredBase plus

   

17%35%

0.68 $395,000 $ 55,000 NCCI PlanLoss

29%33%

0.67 $ 450,000 60% Max Cred $ 1,000,000 One $250k

80%

0.51 $ 450,000 90% Max CredBase plus

   

107%

0.58 $150,000 $ 50,000 NCCI Plan

86%

0.52   $ 200,000 60% Max Cred $ 1,000,000 Case

0.28 $ 200,000 90% Max CredBase

Experience Mod

Experience Rating Plan

Expected Losses

15

Experience Rating Plan

Expected LossesScenario

Experience Rating PlansHypothetical Examples

38%28%

1.28 $ 10,000 $ 20,000 NCCI Plan Expected

3%0%

1.00   $ 30,000 60% Max Cred

$ 30,000 Equals

5% 

1.00   $ 30,000 90% Max Cred Total Loss

        

16%1%

1.08 $ 35,000 $ 10,000 NCCI Plan Loss

8%-2%

1.05   $ 45,000 60% Max Cred

$ 30,000 One $25k

12% 

1.07   $ 45,000 90% Max Cred Base plus

        

 -2%

0.93 $ 15,000 $ 5,000 NCCI Plan  

 2%

0.97   $ 20,000 60% Max Cred

$ 30,000 Case

 

0.95   $ 20,000 90% Max Cred Base

      

Increase over Base

Case

Increase over 90% Max Cred

Experience Mod

Excess Loss

Primary Loss

16

Experience Rating PlansReal Policy Examples

* Increase/Decrease Measure is relative to the 90 percent maximum credibility level

82% $ 46,000 $ 80,000 NCCI Plan  

59%  $ 173,000 60% Max Cred $ 1,500,000 Rated

base  $ 173,000 90% Max Cred Group

      

-26% $ 73,000 $ 16,000 NCCI Plan (Penalty)

-25%  $ 60,000 60% Max Cred $ 40,000 Rated

base  $ 60,000 90% Max Cred Debit

      

-19% $ 15,700 $ 6,000 NCCI Plan  

-11%  $ 16,000 60% Max Cred $ 72,000 Rated

base  $ 16,000 90% Max Cred Credit

      

Increase/ Decrease*Excess LossPrimary Loss

Experience Rating PlanExpected LossesType

Timeframes, Considerations and

Conclusions

18

Conclusion Timeframes

Desirable to phase in changes to minimize disruption Several alternative solutions are possible

Considerations Need to evaluate best parameters to fit Ohio data Must consider implementation challenges and premium impacts Familiarity within and outside of Ohio Competition Safety—frequency of claims as a predictor of future losses

Equity can be improved significantly by either the current Ohio plan or the NCCI plan if parameters are selected appropriately:

Still need to address group rules (plan changes won’t achieve balance between group and non-group)

Need to identify what is most important: fairness, stability, responsiveness, and ease-of-use

Oliver Wyman Recommendation: move to 60 percent credibility in the short term and transition to NCCI plan when practical

Strengthening Ohio’s Workers’ Compensation

System