Strengthening Ohios Workers Compensation System

1
Strengthening Ohios Workers Compensation System
Group Rating/Experience Rating Actuarial
Perspective
Jeffery W. Scholl, FCAS, MAAA William Hansen,
FCAS, MAAA Columbus, Ohio
Oliver Wyman Actuarial Consulting, Inc.
2

• Principles of Ratemaking 2
• Experience Rating Plans 6
• Timeframes, Considerations and Conclusions 14

3
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.

6
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
• Serves the needs of the organization (BWC and
  Employers) using them
• Appropriately balances risk bearing and risk
  sharing
• Not subject to internal or external pressures
• Simple to administer
• Easy to understand
• Responsive to individual risk experience
• Stabledoes 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

1,000,000 manual premium pays 280,000 after the
credit modification
10
Experience Rating Plans
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

1,000,000 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

13
Experience Rating PlansRetrospective Performance
Tests
Experience Rating Plan ScenariosLoss Ratio
Relativities
2004
2003
2002
2002
2002
Policy Year
NCCI
NCCI
NCCI
Max Cred
Max Cred
Plan
Plan
Plan
Premium ranges
60
90
gt800,000
1.03
1.02
1.04
1.04
1.33
gt250,000 and lt800,000
0.90
0.95
0.92
0.94
0.79
gt80,000 and lt250,000
0.98
0.97
0.95
0.88
0.71
gt25,000 and lt80,000
0.96
0.93
0.94
0.98
0.79
lt25,000
1.11
1.15
1.08
1.14
0.92
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
14
Experience Rating PlansHypothetical Examples
Primary Loss
Scenario
Increase over Base Case
Increase over 90 Max Cred
Excess Loss
Experience Mod
Experience Rating Plan
Expected Losses
0.28
200,000
90 Max Cred
Base
86
0.52
 
200,000
60 Max Cred
1,000,000
Case
107
0.58
150,000
50,000
NCCI Plan
 
 
 
80
0.51
450,000
90 Max Cred
Base plus
29
33
0.67
450,000
60 Max Cred
1,000,000
One 250k
17
35
0.68
395,000
55,000
NCCI Plan
Loss
 
 
 
161
0.73
700,000
90 Max Cred
Base plus
58
12
0.82
700,000
60 Max Cred
1,000,000
Two 250k
34
7
0.78
640,000
60,000
NCCI Plan
Losses
15
Experience Rating PlansHypothetical Examples
Experience Rating Plan
Expected Losses
Scenario
Increase over Base Case
Increase over 90 Max Cred
Experience Mod
Excess Loss
Primary Loss
 
 
 
 
 
 
 
0.95
 
20,000
90 Max Cred
 
Base
 
2
0.97
 
20,000
60 Max Cred
30,000
Case
 
-2
0.93
15,000
5,000
NCCI Plan
 
 
 
 
 
 
 
 
 
 
12
 
1.07
 
45,000
90 Max Cred
 
Base plus
8
-2
1.05
 
45,000
60 Max Cred
30,000
One 25k
16
1
1.08
35,000
10,000
NCCI Plan
 
Loss
 
 
 
 
 
 
 
 
5
 
1.00
 
30,000
90 Max Cred
 
Total Loss
3
0
1.00
 
30,000
60 Max Cred
30,000
Equals
38
28
1.28
10,000
20,000
NCCI Plan
 
Expected
16
Experience Rating PlansReal Policy Examples
Increase/ Decrease
Excess Loss
Primary Loss
Experience Rating Plan
Expected Losses
Type
 
 
 
 
 
 
base
 
16,000
90 Max Cred
 
Credit
-11
 
16,000
60 Max Cred
72,000
Rated
-19
15,700
6,000
NCCI Plan
 
 
 
 
 
 
 
 
base
 
60,000
90 Max Cred
 
Debit
-25
 
60,000
60 Max Cred
40,000
Rated
-26
73,000
16,000
NCCI Plan
 
(Penalty)
 
 
 
 
 
 
base
 
173,000
90 Max Cred
 
Group
59
 
173,000
60 Max Cred
1,500,000
Rated
82
46,000
80,000
NCCI Plan
 
 
Increase/Decrease Measure is relative to the 90
percent maximum credibility level
17
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
• Safetyfrequency 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
  wont 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
19
Strengthening Ohios Workers Compensation System