Workers CompensationExperience Rating
Workshop
Presented by
Bill Wilson, CPCU, ARM, AIM, AAMDirector, Big “I” Virtual University
Premise
“What we have to learn to do,
we learn by doing.”
Aristotle
Impact
• Claim shown as $924,000… should have been $24,000
• Claim closed the day after the stat card cut-off date
• Carrier applied a new higher mod in violation of a statute
Cost to Insured
$30,000
$16,000
$199,957
Preface
• Theoretical considerations
• Practical applications
• “Real life” examples
• Symbols
Appendixdocument
Takenote
Exercise
3
What You Will Learn
• Introductory concepts
• Sources of information needed
• How to decipher the worksheet
• How to calculate a mod
• How to check a mod
• How to monitor a mod
• Miscellaneous considerations
3
What WCER IS
• It compares an insured’s actual loss experience to that expected for an “average” risk of the same type.
• It is used to predict future loss experience.
• It provides an incentive for loss prevention.
6
What WCER Is NOT
An agent asks:
“How can NCCI justify a debit mod when the account has been profitable? How can you explain to an insured who has a 43% loss ratio during the three-year experience period that he has a 1.25 mod and a 25% surcharge in the assigned risk pool?”
What WCER Is NOT
Introduction
• The Concept of Experience Rating
• Eligibility for the WCERP
• Experience Period
• Experience Used and Ownership Changes
The Concept of ER
Actual Losses
Mod = ------------------------
Expected Losses
• Formula tempered by credibility
• Formula stabilized to prevent fluctuations
6
Eligibility for the ERP
• Minimum Basic Manual Premium– TOTAL premium developed in last 1-2 years
of experience period = $9,000; OR– AVERAGE premium developed in last 3 years
of experience period = $4,500
• Eligibility and exceptions vary by state
• Caveat…monitor closely
7
Experience Period
• 3 years of experience ending one year prior to policy effective date. For example, the mod for a policy effective on 01/01/14 would be based on policy years 2010, 2011, and 2012, omitting 2013.
• Can use up to 3 ¾ years
• Can use only 1 year if insured for at least 2 consecutive years and meets the minimum premium requirement (e.g., $9,000)
7-8
ExerciseEligibility for WCERP
MANUAL PREMIUMS ELIGIBLE? ------------------------- -----------RISK 2010 2011 2012 2013 2014 2015---- ---- ---- ---- ---- ---- ---- A 5700 4500 6800 9200 Yes Yes
B 8200 6000 2600 4300 Yes No
C New 4700 5300 No Yes
Total premium last 1-2 years = $9,000
Average premium last 3 years = $4,5007
Experience Used
• All current and past operations within the state, including those discontinued or self-insured (interstate rating uses experience from most non-monopolistic states)
• All business of the insured under common majority ownership (see “Combination of Entities” in the WCERP manual)
8
Ownership Changes
In general, the purchaser of a business “buys” the mod unless ALL of the following conditions are met:
1. Material change in ownership
2. Reclassification of governing class code
3. Change in process and hazard
Material change in ownership =
• Complete change, OR• Interest < 1/3 before, OR• Interest < 1/2 after
8
ExerciseOwnership Changes
Rule 1 Rule 2 Rule 3 Change ---> Material Governing Process/ Ownership Class Code Hazard Change? Change? Change? NEW MOD --------- ---------- -------- -------Entity #1 No No No *1.23
Entity #2 Yes No No **
Entity #3 Yes No No *1.23
Entity #4 Yes No No *1.23
Entity #5 No No No *1.23
* Use mod of purchased business or recalculate if experience can be broken out
** Recalculate, else mod of purchaser applies 8
Sources of Information
• WCERP Worksheet
• Stat Cards
• Loss Runs and Closed Claim Reports
• Final Audit Reports
• WCERP Manual
10
WCERP Worksheet
• Kennamer Karpentry
• Where errors are usually found– Column 1…class codes– Column 4…payroll– Column 7…claim data– Column 8…claim reserves– Column 9…actual incurred losses
(These all come from the stat card.)10
Stat Cards
• Filed on all WC policies even if not experienced rated
• Important Deadlines:– 01/01/14 Policy Inception Date– 07/01/14 Stat Card Cut-Off Date (Claim Valuation Date)– 09/01/14 Stat Card Due Date– 11/01/14 Mod Promulgation Date– 01/01/15 Policy Renewal Date
• “Aggravated Inequities” rule10
Loss Runs & Claim Info
• Available from carrier or outside service such as www.mylossruns.com or www.lossrunner.com
• Request “as of” (stat card valuation) date if possible
• Includes info on claims, claimants, class codes, paid losses, and reserves 11
Final Audit Reports
• Request from carrier or insured
• Includes info on class codes, payroll, manual rates, etc.
11
WCERP Manual
• Order directly from NCCI for under $100 for one state (less for annual renewals)…[email protected]
• Includes information essential for checking, monitoring, and calculating mods…rules, ELRs, D-Ratios, “W” and “B” values, etc.
11
General Information
• Name of Risk
• Risk Identification Number
• State
• Policy Effective Date
• Page Number
• Mod Promulgation Date
12
Expected Loss Data
• Class Code & Audited Payroll
• Expected Loss Rate (ELR)
• Expected Losses & Total Expected Losses
• Discount Ratio (D-Ratio)
• Expected Primary Losses & Total Expected Primary Losses
• Expected Excess Losses
Class Codes & Payroll
• Classification Codes– Check for accuracy– Should be properly assigned to the risk
• Payroll– Should be final audit figures– Should meet the definition of “payroll” in the manual
or state statutes– Should be properly assigned and prorated between
class codes– Should not be over- or under-stated 13
ELRs
• Expected Loss Rates (ELRs) are analogous to manual rate “pure loss costs” (no LAE)
• Used to calculate Expected Losses for each class during the upcoming policy period per $100 payroll
13-14
Expected Losses andTotal Expected Losses
• Expected Losses represent “average” losses anticipated for each class during the upcoming policy period
• Calculated from ELR and payroll for each class (see Column 5 formula)
• Total Expected Losses are entered in Item D on the worksheet and used to determine “W” and “B” values 14
D-Ratios
• Discount Ratios (D-Ratios) represent an actuarial estimate of what percentage (%) of Expected Losses are smaller “primary” losses (i.e., under $5,000)
• Used to calculate Expected Primary Losses for each class
14
Expected Primary Losses and Total Expected Primary Losses
• Expected Primary Losses represent the percentage (%) of Expected Losses anticipated to be less than $5,000
• Calculated from D-Ratios and Expected Losses (see Column 6 formula)
• Total Expected Primary Losses are entered in Item E and Column 11 to directly reflect loss frequency (i.e., the entire amount of Expected Primary Losses goes into the mod calculation) 14-15
Expected Excess Losses
• Represent projected loss amounts in excess of “primary” losses
• Calculated by subtracting Item E from Item D
• Entered in Item C (see formula) and used in Columns 12 and 13 to reflect loss severity in the mod calculation
15
ExerciseExpected Loss Data
• Webber Enterprises…using the “blank” worksheet for Webber and the Sample Manual Tables from the Appendix, complete Steps 1-4 of the mod calculation process
• Check your work against the “Webber Enterprises Solution” worksheet in the Appendix
15
Actual Loss Data
• Claim Data
• Claim Status
• Actual Incurred Losses & Total Actual Incurred Losses
• Actual Primary Losses & Total Actual Primary Losses
• Actual Excess Losses
Claim Data
• Claims ≤ $2,000– Total number (“NO.”) of claims for policy year is shown in Column 7
and an asterisk (*) in Column 8
– Total amount of all policy year claims combined is shown in Column 9
• Claims > $2,000– Specific claim # is shown in Column 7 for tracking, IJ and O/F codes
shown in Column 8, and actual claim amount in Column 9
– If the claim exceeds the state “per accident” limitation(s), a pound sign (#) appears to the left of the amount in Column 9
– When totaling the claims for Item H, any such state “cap” is used, not the actual claim amount shown on the worksheet
16
Claim Status
• Injury (IJ) Identification Codes– See workbook listing…usually 1, 2, 5, 6, or 9– IJ and O/F codes are shown only for claims above $2,000…
otherwise only an asterisk (*) appears
• O/F Codes– “O” = Open claim– “F” = Final settlement (closed claim)
• Common errors– Reserve closed or lowered without stat card submission– Reserve amounts consistently excessive– Caveat…review 7-9 months in advance of renewal date!
16-17
Actual Incurred Losses and Total Actual Incurred Losses
• Actual Incurred Losses include both closed claims (paid) and open claims (reserved) and medical and indemnity payments
• If a claim exceeds the state “per accident” limitation (see workbook), a pound sign (#) appears to the left of the amount in Column 9
• Total Actual Losses are entered in Item H on the worksheet
17-18
Actual Primary Losses and Total Actual Primary Losses
• Actual Primary Losses– Claims ≤ $2,000…entire combined amount from
Column 9 is shown in Column 10– Claims > $2,000 but ≤ $5,000…entire amount of each
individual claim in Column 9 is shown in Column 10– Claims > $5,000…Column 10 entry is capped at
$5,000 ($10,000 for “multiple claim” accidents)
• Total Actual Primary Losses are entered in Item I and Column 11 to directly reflect loss frequency (i.e., the entire amount of Actual Primary Losses goes into the mod calculation)
18-19
Actual Excess Losses
• Calculated by subtracting Item I from Item H
• Entered in Item F (see formula) and used in Column 13 to reflect loss severity in the mod calculation (though minimal for most insureds)
19
ExerciseActual Loss Data
• Webber Enterprises…complete Steps 5-8 of the mod calculation process (be careful in Step 5!)
• Check your work against the “Webber Enterprises Solution” worksheet in the Appendix
19
Mod Calculation
• Weighting Value
• Ballast Value
• Ratable Excess Losses Calculation
• Stabilizing Value Calculation
• Adjusted Actual & Expected Total Calculation
• Experience Mod Calculation
“W” Value
• Reflects the credibility of the insured’s loss experience (based on Item D)
• Ratable Excess (Column 13) is directly proportional to “W” value
• Stabilizing Value (Column 12) is indirectly proportional to “W” value
20
“B” Value
• Minimizes the effect of individual large losses on the mod (based on Item D)
• Stabilizes fluctuations in the mod from policy period to the next
• Stabilizing Value is directly proportional to the “B” value
20
Exercise“W” & “B” Values
• Webber Enterprises…complete Steps 9-10 of the mod calculation process
• Check your work against the “Webber Enterprises Solution” worksheet in the Appendix
20
Ratable Excess Losses
• Determines the impact of larger losses on the mod
• Incorporates a percentage of Excess Losses (Items C & F) into the mod calculation, depending on the credibility (“W” value) of the insured’s loss experience
21
Stabilizing Value
• Minimizes the impact of large losses on the mod
• Minimizes mod fluctuations from one policy period to the next by adding the same value to both the numerator and denominator of the calculation
21
Adjusted Actual & Expected Totals
• Form the numerator and denominator of the mod calculation
• Add the “Actual” numbers from Columns 11, 12, and 13 and enter in Item J under Column 14
• Add the “Expected” numbers from Columns 11, 12, and 13 and enter in Item K under Column 14
21
Mod Calculation
• Divide Item J by Item K and enter the result in Column 15, rounded to two decimal places
• A mod over 1.00 is called a “debit” mod and a mod under 1.00 is called a “credit” mod
• Mods of smaller insureds are subject to maximums (see workbook), so be sure debit mods are properly capped
21-22
ExerciseMod Calculation
• Webber Enterprises…complete Steps 11-14 of the mod calculation process
• Check your work against the “Webber Enterprises Solution” worksheet in the Appendix
22
Final Adjusted Premium
• Determine manual premium
• Apply increased employers’ liability coverage factor, if applicable
• Apply experience mod
• Apply assigned risk plan surcharge, if applicable
• Apply schedule credits/debits, if applicable
• Apply premium discount, if applicable
• Add expense constant
• Apply any applicable rules for minimum premiums, deposit premiums, etc.
22
Questions?
Misc. Considerations
• When Changes Can Be Made in Mods
• The Effect of Loss Frequency on the Mod
• Deductible Plans
• The Importance of Loss Control
• Interstate Experience Rating
Mod Changes
• Permissible Reasons– Most clerical errors– Most subrogation recoveries– Claim determined to be non-compensable– Risk reclassification– Certain (unlikely) changes in ownership– Employer refuses to cooperate
• Application of Change– Mod Decreases…apply retroactively to policy inception or
Anniversary Rating Date– Mod Increases…apply retroactively in first 90 days, pro rata
thereafter
• Caveat…reasons and timing of changes may vary greatly from state to state 23-24
Loss Frequency
• Kennamer Karpentry“Effect of Loss Control on the Mod”
• Compare to original Kennamer Karpentry worksheet
• Total amount of claims (Item H) are identical, but the amount in Year 3 came from 23 (rather than 2) claims
• Result is a dramatic increase in the mod due to an increase in “primary” losses (see Item I and Column 11) from $7,221 to $22,944 24
Deductible Plans
• Kennamer Karpentry“Mod Impact of a $5,000 Net Reporting Deductible Plan”
• Vary from state to state…– May not have a deductible plan– May not apply to residual market– May vary from company to company– Only large deductibles may be available– Most states use a gross reporting basis
• Review workbook discussion
• “Unofficial” deductible plans 25
Loss Control
• NOCENT Bank“The Importance of Loss Control”
• Review workbook discussion
• Important to all, NOT just high-risk insureds
• “Experience Ratio” Rule
• Make sure your clients understand! 26
Interstate Rating
• Apex Manufacturing“Interstate Rating Example”
• Review workbook discussion
• Procedures for calculating an interstate mod are basically the same as an intrastate mod except that the “W” and “B” values are prorated 27
ExerciseMod Verification & Calculation
• “Wilson Enterprises Original” worksheet
• Use worksheet and final audit reports, loss run, and supplementary information in workbook to identify four (4) errors, correct them, and recalculate the mod
• Check your work using the “Wilson Enterprises Corrected” worksheet
28-29
Exercise ResultsError #1
• Year 1 payroll is understated for Code 5221– Worksheet shows $216,292– Final audit shows $225,246
• All things being equal, the higher the payroll, the lower the mod
Exercise ResultsError #2
• Year 3 payroll is understated for Code 8227– Worksheet shows $124,653– Final audit shows $424,653
• All things being equal, the higher the payroll, the lower the mod
Exercise ResultsError #3
• Year 3 Codes 5221 and 8227 and payroll are transposed– Code 8227 payroll should be $40,852 as
shown on final audit report– Code 5221 payroll should be $424,653 as per
audit and corrected payroll amount
• All things being equal, the higher the payroll and associated ELR, the lower the mod
Exercise ResultsError #4
• Year 2 claim reserve was not capped at state limit– Pound (#) sign should appear next to reserve
amount in Column 9– Total Actual (Item H) should be $89,911, not
$99,783, to reflect $54,500 cap
• The more claim reserves are overstated, the higher the mod
Exercise ResultsNon-Error #5
• Year 2 claim # 1010101 was closed at $40,133, according to the Supplementary Information in the workbook
• Important Dates:– 12/14/11 1st stat card cut-off on Year 2 $64,372 open claim– 12/14/12 2nd stat card cut-off on Year 2 open claim– 01/10/13 Claim closed at $40,133 (see loss run)– 02/08/13 Mod promulgation date (from worksheet)– 06/14/13 Upcoming policy renewal date– 12/14/13 3rd stat card cut-off on closed Year 2 claim– 06/14/14 $40,133 closed claim amount reflected in mod
• Wilson Enterprises “If Life Was Fair” worksheet
ExerciseAnother example…
• October residual market renewal• $29,000 reserve on injured hand• Claim settled earlier in year on May 1 for $5,000• Stat card cut-off date was April 28…3 days earlier• Mod was 1.37 + 30% ARP surcharge…
could/should have been 1.08 with no surcharge• Cost to insured: $23,145
Questions?
Appendix
• Worksheets, tables, and other information
• How to “Monitor the Mod”
• Online resources
30
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