just like #yrs of historical data used in statewide rate indication
yrs of individual insured experience used in experience rating plan must balance stability and responsiveness
NCCI experience rating plan uses _ prior years of each insured’s actual loss experience although there are certain exceptions for which less experience is used
3
what does NCCI do to historical losses
- NCCI does not develop or trend actual losses or change them to latest benefit levels
- NCCI instead makes adjustments to expected loss to make them comparable to historical actual losses
eligibility for NCCI experience rating is based on
insured’s manual premium during experience period
-not that the experience rating is mandatory once insured meeting eligibility requirements
risk need only satisfy 1 of the requirements listed in order to be eligible for experience rating
- risk’s most recent 2 years of experience period has total manual premium of at least amount in column A (10K for AL)
- risk’s average annual manual premium over entire experience period (3 years) is at least the amount in column B (5K for AL)
NCCI experience rating plan for WC
split plan
W&B of Mod formula are related to and what W&B are
- both W&B are related to credibility and they vary by state and insured size
- W=weighting value; used to limit weight of actual excess losses
- B=Ballast value; used to provide stability by limiting impact of any single loss in mod
0<w>0</w>
no insured has
100% credibility given to their actual experience
-NCCI WC experience rating plan historically used split point of
of 5k for primary and excess losses
expected losses for risk to use in mod formula are obtained using
risk’s payroll by class code along with NCCI published ELRs and discount ratios (d-ratios) by class code
ELRs and D-ratios
- ELRs represent expected losses per $100 payroll, adjusted for capping applied to actual losses and adjusted to be at historical loss development, trend, and benefit levels corresponding with these levels for actual losses
- D-ratios represent expected primary percentage of expected losses
- for each class code in which a risk has payroll, can lookup ELR and D-ratio for that class
- in general, want to use tables that would apply to policy’s effective date
-once ELRs and D-ratios for each class i are known
- can calculate E, Ep, Ee
- once you have E, can look up in each of last 2 tables in manual to obtain the values of B and W that will apply to risk
Application of the mod
- experience mod is applied to sum of manual premium across all classes and locations to obtain standard premium if we ignore the schedule mod
- since experience mod is applied after manual premium which varies by class, mod differentiates loss potential for risks within a class not between classes
What are the circumstances when entities are combined for Experience Rating?
What is the purpose of such combination?
When entities share common majority ownership, they are combined. This prevents the ownership from moving loss experience from one company to another for purposes of manipulating the experience mod.
Which of the following entities will be combined
for Experience Rating?
Rule 3.D.1.a.: Group A only has majority ownership in Entity 1. Group B only has majority
ownership in Entity 2.
Rule 3.D.1.b.: No entities have ownership of any other entities.
Therefore, none of the entities should be combined.
Assuming that losses increase over time with inflation, should the split point increase, decrease, or stay the same?
The split point should increase over time to help maintain the proportions of excess and primary losses. If the split point did not increase with inflation, the D-ratios would decrease, which would cause higher expected excess losses. This would increase mods over time.
procedures to add stability to workers compensation experience rating.
Introduce a limit to how much of any single loss enters the experience rating component of ratemaking. Workers compensation have limits for single claimant and multiple claimant accidents.
Give greater weight to actual experience for larger risks - The larger the risk, the more stable their expected losses are. If actual experience for small risks was given the same weight as for large risks, then the mods for small risks would be erratic.
argument against including stability procedures in terrorism insurance ratemaking.
Work Comp experience rating and terrorism ratemaking have different goals. WC
experience rating uses past losses to the extent that they are predictive of the future loss to improve individual risk equity. Large losses are capped because to some extent they are bad luck and should not be allowed to swing the mod past a certain point. Terrorism ratemaking is not interested in individual risk equity as much as spreading the cost of terrorism losses across all insureds. Capping losses may improve stability but may lead to inadequacy.
Due to the rarity and catastrophic nature of terrorism losses, it is unlikely that larger risks would have more stable losses than smaller risks.
