Pennsylvania Compensation Rating Bureau Experience Rating Plan Changes

1
Pennsylvania Compensation Rating
BureauExperience Rating Plan Changes April 1,
2004

• A Guide for Carriers, Employers and Producers

2
PCRB Experience Rating Plan Changes April 1, 2004

• This presentation addresses the following points
• pertaining to the above topic
• Chronology of Events During the Study and
  Amendment of the Experience Rating Plan
• Reasons for Considering Experience Rating Plan
  Changes
• A Summary of Important Experience Rating Plan
  Changes Effective April 1, 2004
• Important Features Retained From Legacy Plan
• Illustrative Experience Modifications Computed
  Using the Prior and Revised Experience Rating
  Plans

3
PCRB Experience Rating Plan Changes April 1, 2004
Chronology of Events During the Study and
Amendment of the Experience Rating Plan

• December 1992 Pennsylvania Insurance Department
  Initiates an Examination of the PCRB
• January 1995 Examination Report is Issued,
  Indicating That Review of Classification Pricing
  and Experience Rating are Ongoing

4
PCRB Experience Rating Plan Changes April 1, 2004
Chronology of Events During the Study and
Amendment of the Experience Rating Plan

• April 1998 New Classification Pricing
  Procedures are Implemented
• Use of Five Years of Data Regardless of
  Classification Size
• Payroll Used as the Basis for Credibility (Rather
  than Expected Losses)
• Industry Group Relativities Become Limited to
  Reflecting Effects of Experience Rating, No
  Longer Measure Loss Ratio Differentials

5
PCRB Experience Rating Plan Changes April 1, 2004
Chronology of Events During the Study and
Amendment of the Experience Rating Plan

• 1999 PCRB Tries Unsuccessfully to Compute
  Optimum Credibility Scale for Experience Rating
• 2000 2001 Alternative Testing Procedure for
  Measuring Experience Rating Plan Differences is
  Identified and Used in Preliminary Testing
• 2002 Experience Rating Plan Analysis is
  Expanded Across Hundreds of Different Plan
  Versions Across Multiple Test Periods

6
PCRB Experience Rating Plan Changes April 1, 2004
Chronology of Events During the Study and
Amendment of the Experience Rating Plan

• June 2003 Proposal to Revise Experience Rating
  Plan Effective April 1, 2004 is Filed with
  Pennsylvania Insurance Department
• December 2003 Experience Rating Plan Filing is
  Approved
• April 1, 2004 Revised Experience Rating Plan
  Filing Becomes Effective

7
Reasons for Considering Experience Rating Plan
Changes
PCRB Experience Rating Plan Changes April 1, 2004

• The Legacy Plans Fundamental Design and
  Parametric Underpinnings Had Not Been Revised in
  Decades
• Many Features of the Plan (Eligibility Standards,
  Credibility Scale, Loss Limitations) Differed
  From Plans Used Elsewhere
• While the Plan Seemed to Correctly Identify Risks
  Deserving Debits and Credits, It Appeared to
  Overcorrect for Prior Experience of Larger Risks

8
A Summary of Important Experience Rating Plan
Changes Effective April 1, 2004
PCRB Experience Rating Plan Changes April 1, 2004

• The Credibility Scale is Very Different
• Small Risks Have Higher Credibility, Up from a
  Starting Point of Five Percent in the Legacy Plan
  to 28 Percent in the Revised Plan
• Large Risks Have Somewhat Reduced Credibility,
  Down from 100 Percent in the Legacy Plan to 94
  Percent in the Revised Plan

9
A Summary of Important Experience Rating Plan
Changes Effective April 1, 2004
PCRB Experience Rating Plan Changes April 1, 2004

• Applicable Loss Limitations (the Maximum Amount
  Charged to Employer Experience for any Claim or
  Accident) are Lower
• Under the Revised Plan All Risks Have a Common
  Loss Limitation of 42,500
• In the Legacy Plan, Small Risks Had Loss
  Limitations Starting at 49,980
• In the Legacy Plan, Large Risks Had Loss
  Limitations Ranging Up to 324,000

10
A Summary of Important Experience Rating Plan
Changes Effective April 1, 2004
PCRB Experience Rating Plan Changes April 1, 2004

• When Experience Modifications are Computed Under
  the New Plan, There Will Be a Limit on How Much
  the Prior Policys Modification Can Be Changed,
  Up or Down
• The New Modification Cannot Be Higher Than 125
  Percent of the Prior Modification
• The New Modification Cannot Be Lower Than 75
  Percent of the Prior Modification
• These Swing Limits Are Expected to Be a
  Permanent Part of the Experience Rating Plan in
  Future Years

11
A Summary of Important Experience Rating Plan
Changes Effective April 1, 2004
PCRB Experience Rating Plan Changes April 1, 2004

• Because of the Combined Effects of the New
  Credibility Scale and the New Loss Limitations
• The New Experience Rating Plan Will Be MORE
  Responsive to the Prior Experience of Small to
  Medium-Sized Risks Than was the Legacy Plan
• The New Experience Rating Plan will be LESS
  Responsive to the Prior Experience of Large Risks
  Than Was the Legacy Plan

12
Important Features Retained From Legacy Plan
PCRB Experience Rating Plan Changes April 1, 2004

• Eligibility Threshold for Experience Rating
  Remains at 10,000 in Expected Losses, Developed
  by Extending Rating Period Exposures Times
  Current PCRB Loss Costs

13
Important Features Retained From Legacy Plan
PCRB Experience Rating Plan Changes April 1, 2004

• Experience Modification Formula Is The Same As
  for the Legacy Plan
• M AxC Ex(LxC) Ex(1.0-C) / E
• Where
• A Actual Limited Losses,
• C Credibility (from Table B),
• E Expected Losses, and
• LxC Loss Limitation Charge (from Table B)
  

14
Illustrative Experience Modifications Calculated
Using the Legacy and New Experience Rating Plans
PCRB Experience Rating Plan Changes April 1, 2004

• For Purposes of the following slides, the
  following hypothetical risk descriptions were
  used
• Small Risk Employer With 40,000 Annual
  Payroll in Code 601, Road Construction
• Medium-Sized Risk Employer With 1,000,000
  Annual Payroll in Code 601, Road Construction
• Large Risk Employer With 10,000,000 Annual
  Payroll in Code 601, Road Construction

15
Illustrative Experience Modifications Calculated
Using the Legacy and New Experience Rating Plans
PCRB Experience Rating Plan Changes April 1, 2004

• Case 1 Small Rated Risk, Loss-Free
• Legacy Plan Experience Modification 0.967
• New Plan Indicated Experience Modification
  0.835
• Limitation or Capping of New Plan Indicated
  Modification Would Apply if the Prior
  Modification Was Either Less Than 0.668 (Cap on
  Increase), or Greater Than 1.113 (Cap on
  Decrease)
• Note New Plan is More Responsive to Small Risk
  Experience Than Legacy Plan

16
Illustrative Experience Modifications Calculated
Using the Legacy and New Experience Rating Plans
PCRB Experience Rating Plan Changes April 1, 2004

• Case 2 Small Rated Risk, Single 25,000 Loss
• Legacy Plan Experience Modification 1.184
• New Plan Indicated Experience Modification
  2.065
• Limitation or Capping of New Plan Indicated
  Modification Would Apply if the Prior
  Modification Was Either Less Than 1.652 (Cap on
  Increase), or Greater Than 2.753 (Cap on
  Decrease)
• Note New Plan is More Responsive to Small Risk
  Experience Than Legacy Plan

17
Illustrative Experience Modifications Calculated
Using the Legacy and New Experience Rating Plans
PCRB Experience Rating Plan Changes April 1, 2004

• Case 3 Small Rated Risk, Single 250,000 Loss
• Legacy Plan Experience Modification 1.402
• New Plan Indicated Experience Modification
  2.926
• Limitation or Capping of New Plan Indicated
  Modification Would Apply if the Prior
  Modification Was Either Less Than 2.341 (Cap on
  Increase), or Greater Than 3.901 (Cap on
  Decrease)
• Note New Plan is More Responsive to Small Risk
  Experience Than Legacy Plan

18
Illustrative Experience Modifications Calculated
Using the Legacy and New Experience Rating Plans
PCRB Experience Rating Plan Changes April 1, 2004

• Case 4 Medium-Size Rated Risk, Loss-Free
  Record
• Legacy Plan Experience Modification 0.684
• New Plan Indicated Experience Modification
  0.623
• Limitation or Capping of New Plan Indicated
  Modification Would Apply if the Prior
  Modification Was Either Less Than 0.498 (Cap on
  Increase), or Greater Than 0.831 (Cap on
  Decrease)
• Note New Plan is More Responsive to This Risks
  Experience Than Legacy Plan

19
Illustrative Experience Modifications Calculated
Using the Legacy and New Experience Rating Plans
PCRB Experience Rating Plan Changes April 1, 2004

• Case 5 Medium-Size Rated Risk, 250,000 in
  Losses (No Limited Losses)
• Legacy Plan Experience Modification 1.432
• New Plan Indicated Experience Modification
  1.748
• Limitation or Capping of New Plan Indicated
  Modification Would Apply if the Prior
  Modification Was Either Less Than 1.398 (Cap on
  Increase), or Greater Than 2.330 (Cap on
  Decrease)
• Note New Plan is More Responsive to This Risks
  Experience Than Legacy Plan

20
Illustrative Experience Modifications Calculated
Using the Legacy and New Experience Rating Plans
PCRB Experience Rating Plan Changes April 1, 2004

• Case 6 Medium-Size Rated Risk, Single
  250,000 Loss
• Legacy Plan Experience Modification 0.933
• New Plan Indicated Experience Modification
  0.814
• Limitation or Capping of New Plan Indicated
  Modification Would Apply if the Prior
  Modification Was Either Less Than 0.651 (Cap on
  Increase), or Greater Than 1.086 (Cap on
  Decrease)
• Note New Plan is Slightly More Responsive to This
  Risks Experience Than Legacy Plan

21
Illustrative Experience Modifications Calculated
Using the Legacy and New Experience Rating Plans
PCRB Experience Rating Plan Changes April 1, 2004

• Case 7 Large Rated Risk, Loss-Free Record
• Legacy Plan Experience Modification 0.162
• New Plan Indicated Experience Modification
  0.496
• Limitation or Capping of New Plan Indicated
  Modification Would Apply if the Prior
  Modification Was Either Less Than 0.397 (Cap on
  Increase), or Greater Than 0.661 (Cap on
  Decrease)
• Note New Plan is Less Responsive to This Risks
  Experience Than Legacy Plan

22
Illustrative Experience Modifications Calculated
Using the Legacy and New Experience Rating Plans
PCRB Experience Rating Plan Changes April 1, 2004

• Case 8 Large Rated Risk, 500,000 in Losses
  (No Limited Losses)
• Legacy Plan Experience Modification 0.470
• New Plan Indicated Experience Modification
  0.797
• Limitation or Capping of New Plan Indicated
  Modification Would Apply if the Prior
  Modification Was Either Less Than 0.637 (Cap on
  Increase), or Greater Than 1.062 (Cap on
  Decrease)
• Note New Plan is Less Responsive to This Risks
  Experience Than Legacy Plan

23
Illustrative Experience Modifications Calculated
Using the Legacy and New Experience Rating Plans
PCRB Experience Rating Plan Changes April 1, 2004

• Case 9 Large Rated Risk, Single 500,000 Loss
• Legacy Plan Experience Modification 0.373
• New Plan Indicated Experience Modification
  0.522
• Limitation or Capping of New Plan Indicated
  Modification Would Apply if the Prior
  Modification Was Either Less Than 0.417 (Cap on
  Increase), or Greater Than 0.695 (Cap on
  Decrease)
• Note New Plan is Less Responsive to This Risks
  Experience Than Legacy Plan

24
PCRB Experience Rating Plan Changes April 1, 2004

• Additional Information Can Be Obtained from
• the PCRB Web Site See Especially Sections
• on Manuals, Filings and Circulars
• Questions May be Directed to
• Betty Ann Campbell
• [phone], Extension 4425
• bcampbell_at_pcrb.com