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)…customer_service@ncci.com

• 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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