comparing General Liability and the Workers Compensation experience rating plans?
Both plans detrend the expected losses so that they are at the same level as the experience period.
Neither plan gives full credibility to excess losses.
ISO develops losses to ultimate, but the NCCI plan compares undeveloped losses.
NCCI has a premium threshold for eligibility. ISO Risks are eligible for experience rating if their credibility is greater than or equal to 0.07.
ISO manual is used for
experience and schedule rating of GL policies
EER is conceptually similar to
NCCI’s D-ratio
to get factor form
need to add 1 to the Mod
ISO is _ plan
- ISO is no-split plan
- while ISO plan is no-split, it only uses basic policy limits effectively ignoring excess losses above those limits
- additional capping mechanism = MSL
ISO plan responds primarily to
frequency of prior losses and less so to severity
ISO mod uses _ years of actual experience
3
and is typically the same experience period as you would use for NCCI experience mod
3 methods to calculate CSLC
standard, present average company rate, historical exposure at present company rates methods
depending on whether there has been a dramatic change in exposures during or since the experience period for reasons other than inflation
- if exposures have been fairly steady, use standard method
- if dramatic changes, use present average company rate or historical exposure at present company rates methods
standard method: 3 initial adjustments to make these expected losses more comparable with actual losses from experience period
- convert BLEL by subline up to occurrence level, in case policy being rated is a claims made policy
- convert BLEL by subline (now at occurrence level) to level matching actual level from each historical experience period
- detrend expected losses to be same trend level as actual losses from experience period
credibility for schedule and experience rating
- if credibility is > 0.03, risk is eligible for schedule rating
- if credibility is > 0.07, risk is eligible for experience rating
AER numerator
is just BF estimate of ultimate basic limits losses & ALAE limited by MSL
- AER numerator consists of 2 components:
1. actual historical loss & ALAE limited by basic limits & MSL
2. expected future loss development from experience period loss & ALAE
to obtain first component of AER numerator (actual historical loss & ALAE limited by basic limits & MSL)
need to obtain historical loss & ALAE data for experience period
- will need to cap historical losses, need historical claim level details and need each claim split into loss & ALAE
- each loss should be capped in 2 steps:
1. basic limits loss = min[actual loss, applicable basic per occurrent limit]
2. includable loss & ALAE limited by MSL = min[basic limits loss+ALAE, MSL]
to obtain second component of AER numerator (expected future loss development from experience period loss & ALAE)
don’t use actual historical losses
- LDFs are really %unreported
- age to use for each LDF for each historical period is measured from start of historical policy term to data evaluation date
- LDFS can be either company LDFs or LDFs from ISO in Table15
- if historical policy is claims made policy, always use LDF of 0 instead
why the plan uses basic limits losses, and limits losses and allocated loss adjustment
expenses to a maximum single loss limitation (MSL).
limits prevent any large individual claims from overly influencing the experience mod.
They also make the plan more responsive to the frequency of losses rather than the severity.
why the MSL increases as the size of the risk (as measured by premium or credibility)
increases.
The larger the risk, the larger expected losses, and the less impact a loss of a given size will have on the mod. As such, the MSL will increase to allow for more credibility to be given to the actual experience.
