Seminar on Ratemaking
March 9, 2000
WCP-23 Experience Rating
– Current Challenges
10:15 to 11:15 PM
Worker’s Compensation Experience Rating
Washington State Fund
(with comparisons to other states)
Three years of recent accident year experience
Calculation of Primary Losses and Excess Losses
Eligibility for experience rating
Credibility of the firm’s experience (using B&W tables)
Compensable Claim Free Discount (Rating the small firm)
Bill Vasek, FCAS, PhD
Senior Actuary, WA. Dept. of Labor & Industries
Experience Period
Three years of recent accident year experience
Washington State:
Washington State Fund policies have quarterly periods
January 1st , April 1st, July 1st and October 1st beginning dates
Each experience modification factor is effective per calendar year.
For year 2000 rating the experience period is:
The accident/policy periods 7/1/95 to 6/30/98 evaluated 6/1/99
for all policies.
This is 23 months past the beginning of the last fiscal accident year.
All policies with experience were rated and firms were notified of 2000 rates in December 1999.
Other states:
Annual or three-year policy periods
For year 2000 rating the experience period is:
Policy years 1996 to 1998 evaluated at 18 months following the beginning of the 1998 policy period.
For a January 1st policy, this would be 1/1/96 to 12/31/98 evaluated 6/30/99.
Calculation of Primary and Excess Losses
In General:
Individual Case Incurred Loss Amount
= Primary Loss + Excess Loss + Unrated Loss
Primary losses are the first dollars of loss that reflect the claim frequency.
Excess Loss = Capped Loss – Primary Loss
(Loss capped by the Maximum Claim Value)
Oregon (1999) and other NCCI states (Single split plan):
Primary Loss = Loss if Loss < 5,000
5,000 if 5,000 < Loss.
The maximum loss size to calculate excess losses is 91,000 (Oregon).
California (1995) (Multi-split plan):
Primary Loss = Loss if Loss < 2,000
Loss X 9,000 / (Loss + 7,000)
if 2,000 < Loss.
The maximum primary loss is 9,000.
The maximum loss size to calculate excess losses is 175,000.
Washington State (2000) (Multi-split plan):
Primary Loss = Loss if Loss < 10,504
Loss X 26,260 / (Loss + 15,756)
if 10,504 < Loss < 262,600.
24,774 if 262,600 < Loss.
(The maximum claim value)
Pennsylvania (1997) (No split plan):
Maximum claim value varies by size of firm (from 49,980 to 324,000)
See exhibit 4 (Histogram of Primary Losses)
Eligibility for Experience Rating
Washington State - Any firm with at least $1 of premium with the State Fund during the three year experience period gets experience rated. Small firms without compensable claims get a claim-free discounted modification factor.
Other states - To be eligible for experience rating, a firm must exceed a set minimum premium standard, based on the latest two or three year portion of the experience period.
Examples: Oregon - at least $5,000 in the latest two years or an average of $2,500 over three years.
California- at least $15,700 based on three years payroll times pure premium rates.
Small firms typically get an experience modification factor of 1.
Oregon has a claim-free discount also for small firms.
Credibility of the Firm’s Experience
The firm’s experience is credibility weighted to the expected experience.
Typically, Experience Modification Factor = [ Z X A + (1 – Z) X E ] / E
In Workers’ Compensation, we split the losses:
Experience Modification Factor = {[ Zp X Ap + (1 – Zp) X Ep ] +
[ Ze X Ae + (1 - Ze) X Ee] } / [ Ep + Ee]
This is equivalent to the traditional formula:
Experience Modification Factor = [ Ap + W X Ae + (1-W) X Ee + B] /
[ E + B ]
Where:
Zp = E / [ E + B ]
Ze = E / [ E + K ] and W = [E + B] / [E + K]
= W X Zp
B & W are not constant and vary by size of firm.
______
Notation:
Z Credibility
E Expected Loss
A Actual Loss
p primary portion
e excess portion
Credibility of the Firm’s Experience
Washington State and the pre-1990s NCCI credibilities:
Designed so that:
1) The largest size group of firms is self-rated.
2) The swing in the experience modification factor is fixed (50% in WA.) for the smallest size group of employers for a claim of maximum value. (It is at most 10% for the largest size group.)
1999 NCCI credibilities:
Based on a least squares credibility methodology.
Parameters for all states based on a study of several states and the average claim size within each state.
California credibility:
Uses a least squares credibility methodology assuming:
Parameters based on a California study.
4
WA. Dept. of Labor & Industries