Pricing Excess Workers Compensation

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Pricing Excess Workers Compensation

• 2003 CAS Ratemaking Seminar
• Session REI-5
• By
• Natalie J. Rekittke, FCAS, MAAA
• Midwest Employers Casualty Company

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Pricing Excess Workers Compensation

• Estimate ultimate ground-up losses
• Estimate excess portion of ultimate losses
• Consider qualitative information
• Apply risk loadings including load for terrorism

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Pricing Excess Workers Compensation

• Estimating Ultimate Ground-up Losses
• Loss Ratio (or Loss Cost) Method
• Experience Modified Loss Cost Method

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Pricing Excess Workers Compensation

• Loss Ratio (or Loss Cost) Method
• Estimate on-level premium (or payroll) for
  historical years
• Develop losses to ultimate
• Adjust ultimate losses for trend in excess of
  payroll trend to prospective pricing period
• Calculate loss ratio (loss cost) by year and
  select
• Apply selected loss ratio (loss cost) to
  estimated prospective premium (payroll) to
  estimate ultimate ground-up losses

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Pricing Excess Workers Compensation
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Pricing Excess Workers Compensation

• Loss Ratio (or Loss Cost) Method
• Advantages
• useful when exposure detail (payroll by class) is
  not available
• useful when industry expected loss costs are not
  available
• Disadvantage
• loss cost method does not contemplate changes in
  mix of business historically or prospectively

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Pricing Excess Workers Compensation

• Experience Modified Loss Cost Method
• Apply industry loss costs by class (trended to
  historical periods and at historical benefit
  levels) to historical payroll by class to
  calculate industry expected losses
• Estimate expected reported (or paid) losses as of
  the current evaluation date
• Divide actual reported (or paid) losses by
  expected to calculate historical experience
  modification factors
• Select experience modification factor (mod)
• Apply selected mod to expected prospective losses
  to estimate ultimate ground-up losses

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Pricing Excess Workers Compensation
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Pricing Excess Workers Compensation

• Experience Modified Loss Cost Method
• Advantages
• reflects changes in mix of business
• allows for adjustment for potential benefit level
  changes or changing medical trends
• Disadvantages
• requires payroll by class historically and
  prospectively - sometimes difficult to obtain
• development of industry expected losses by class
  code and incorporation of benefit levels and
  trends can be time consuming and complex

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Pricing Excess Workers Compensation

• Estimating excess portion of ultimate losses
• Industry ELPPFs
• Entity-Specific Excess Ratios
• Large Loss Experience Method

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Pricing Excess Workers Compensation

• Industry ELPPFs
• Available by state, by hazard group, by
  limitation
• Separate selected ground-up ultimate losses into
  the four hazard groups
• For each hazard group, multiply ground-up
  ultimate losses by ELPPF at desired loss
  limitation and add all hazard groups together to
  derive expected excess losses

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Pricing Excess Workers Compensation

• Industry ELPPFs
• Advantages
• readily available
• easy to use
• Disadvantages
• not unique to the entity
• only 4 possible ELPPFs for a given state and loss
  limitation, and most entities fall in hazard
  groups 2 and 3

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Pricing Excess Workers Compensation

• Entity-Specific Excess Ratios
• Estimate average severity by type of injury (TOI)
  
• Divide the loss limitation (specific retention)
  by the average severity to calculate an entry
  ratio by TOI
• Use the entry ratio as an index into the loss
  distribution (curves available by state benefit
  characteristics, by TOI from the NCCI)
• The portion of claims in excess of the entry
  ratio (excess ratio) is returned (see
  Retrospective Rating Excess Loss Factors by
  William R. Gillam for technical details on excess
  ratio derivation)
• For each TOI, multiply ground-up ultimate losses
  by the excess ratio, and sum to derive expected
  excess losses

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Pricing Excess Workers Compensation

• Entity-Specific Excess Ratios
• Advantages
• unique to the entity, allows for price
  differentiation among various entities of similar
  risk levels
• most responsive to entity experience and risk
  level if average severities are estimated not
  only by TOI, but even more refined to the class
  code level
• Disadvantages
• difficult to estimate average severities and
  ultimate losses by TOI, much less by class
• entity experience at this level of detail lacks
  credibility, and to compile industry statistics
  of this nature to complement entity experience
  would be extremely difficult and time consuming

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Pricing Excess Workers Compensation

• Large Loss Experience Method
• Use actual large loss experience to select
  ultimate losses in a working layer
• Based on loss distribution curves, estimate the
  relationship of expected losses in the higher
  pricing layer to expected losses in the working
  layer
• Apply that relationship to the selected losses in
  the working layer to price the higher layer

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Pricing Excess Workers Compensation

• Large Loss Experience Method
• Advantages
• May be useful when ground-up loss data is not
  available, and only large loss experience is
  provided for pricing
• Relationship of higher layer to a working layer
  may be more reliable than relationship of higher
  layer to ground-up losses
• Disadvantages
• Does not contemplate change in exposure level or
  mix of business
• Large loss data lacks credibility

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Pricing Excess Workers Compensation

• Credibility
• Credibility of industry and entity data should be
  considered in all of the methods discussed
• In addition to formula driven credibility,
  qualitative information can lend credibility to
  and assist the actuary in interpreting the
  quantitative analysis

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Pricing Excess Workers Compensation

• Qualitative Considerations
• Self-insureds attitude/commitment regarding its
  workers compensation program
• Quality of third party claim administrator (TPA)
• Quality of loss control vendor/program

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Pricing Excess Workers Compensation

• Self-Insureds Attitude/Commitment Regarding its
  Workers Compensation Program
• Proper use of safety committees
• Accountability for safety at appropriate
  management levels
• Timeliness of claim/incident reporting
• Supervisor contact with injured employees
• Returning injured employees to work (light duty
  programs)
• Frequency of changing TPA and loss control vendors

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Pricing Excess Workers Compensation

• Quality of TPA
• Medical management
• Lost time claim management
• Catastrophic claim management
• Case resolution/settlement philosophy
• Case reserving practices

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Pricing Excess Workers Compensation

• Quality of Loss Control Vendor/Program
• Professional qualifications of vendor personnel
• Supervisor/employee safety training
• Engineering/loss control analysis
• Employee safety incentive programs

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Pricing Excess Workers Compensation

• Issues for Consideration
• How much soft knowledge can be gathered in a
  cost efficient manner?
• How much knowledge is enough?
• How much impact do best practices have on
  retained losses?
• Where does the impact occur (e.g., frequency,
  severity, tail factors,)?
• How can other disciplines help you?

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Pricing Excess Workers Compensation

• Applying Risk Loadings
• High Retentions
• Terrorism

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Pricing Excess Workers Compensation

• Risk Loading for High Retention
• Expected losses in high layers are low
• Underlying exposure to loss could be very high
• If premium is close to expected losses, it could
  take hundreds of policies to cover one actual
  loss
• A risk load should be used

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Pricing Excess Workers Compensation

• Loading for Terrorism
• NCCI filed primary loss cost loadings of around
  0.02 per 100 payroll
• A terrorism event would be considered a single
  occurrence ? excess insurance would effectively
  turn into primary insurance
• Excess insurance should apply similar 0.02
  loading

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Pricing Excess Workers Compensation

• Terrorism loading example
• Primary Policy
• 100M payroll
• Average rate of 2 ? premium of 2M
• Terrorism loading of 0.02 ? total premium of
  2,020,000
• Terrorism load is 1
• Excess Policy
• 100M payroll
• Average manual rate of 2 ? manual premium of 2M
• SIR of 300,000
• Excess rate of 5 ? excess premium of 100,000
• Terrorism loading of 0.02 (per 100 payroll) ?
  total premium of 120,000
• Terrorism load is 20

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Pricing Excess Workers Compensation

• Managing Terrorism
• Load premium for terrorism
• Put specific limits on your policies
• Manage your concentration of risk by knowing
• where your business is
• number of insured employees within a certain
  square mile range
• probable maximum loss within a certain square
  mile range
• total loss your company is willing to bear