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Pricing Excess Workers Compensation. 2002 CAS Ratemaking Seminar Session WCP-17 By Natalie J. Rekittke, FCAS, MAAA Midwest Employers Casualty Company. Pricing Excess Workers Compensation. Estimate ultimate ground-up losses Estimate excess portion of ultimate losses - PowerPoint PPT Presentation
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Pricing Excess Workers Compensation
2002 CAS Ratemaking Seminar
Session WCP-17
By
Natalie J. Rekittke, FCAS, MAAA
Midwest Employers Casualty Company
Pricing Excess Workers Compensation
• Estimate ultimate ground-up losses
• Estimate excess portion of ultimate losses
• Consider qualitative information
Pricing Excess Workers Compensation
• Estimating Ultimate Ground-up Losses• Loss Ratio (or Loss Cost) Method• Experience Modified Loss Cost Method
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
Pricing Excess Workers Compensation
Unlimited TrendedOn-Level Incurred Loss Unlimited
Accident Earned Losses Development Trend to Ultimate LossYear Premium @12/31/01 Factor 2002 Losses Ratio
(1) (2) (3) (4) (5) (6)=(5)/(1)=(2)x(3)x(4)
1997 1,000,000 600,000 1.120 1.159 779,032 77.9%1998 1,000,000 700,000 1.150 1.126 906,035 90.6%1999 1,000,000 500,000 1.200 1.093 655,636 65.6%2000 1,000,000 600,000 1.300 1.061 827,502 82.8%2001 1,000,000 400,000 1.700 1.030 700,400 70.0%Total 5,000,000 2,800,000 3,868,605 77.4%
2002 1,000,000 770,000 77.0%
(6) ELPPF @ 100,000 0.250(7) 2002 Estimated Losses in 192,500 Excess of 100,000 = (4) x (6)
Loss Ratio Method Example
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• does not contemplate potential change in mix
of business
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
Pricing Excess Workers Compensation
Expected ActualIndustry Expected Reported Reported Experience
Accident Average Expected Percent Losses Losses ModificationYear Payroll Loss Cost Losses Reported @12/31/01 @12/31/01 Factor
(1) (2) (3) (4) (5)=(3)x(4) (6) (7)=(6)/(5)=(1)x(2)/100
1997 40,000,000 3.00 1,200,000 89.3% 1,071,429 600,000 0.5601998 42,000,000 2.90 1,218,000 87.0% 1,059,130 700,000 0.6611999 44,000,000 2.80 1,232,000 83.3% 1,026,667 500,000 0.4872000 46,000,000 2.70 1,242,000 76.9% 955,385 600,000 0.6282001 48,000,000 2.60 1,248,000 58.8% 734,118 400,000 0.545Total 4,846,728 2,800,000 0.578
2002 50,000,000 2.50 1,250,000 0.580
(8) 2002 Selected Ultimate Losses = (3) x (7 selected) 725,000(9) ELPPF @ 100,000 0.250(10) 2002 Estimated Losses in Excess of 100,000 = (8) x (9) 181,250
Experience Modified Loss Cost Example
Note: It is recommended that the calculations in columns (2) through (7) be performed capped at a working limit to reduce the impact of volatility due to large claims on the selection of the experience modification factor (mod). The final selected mod should be applied to expected unlimited losses to select ultimate unlimited losses.
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
Pricing Excess Workers Compensation
• Estimating excess portion of ultimate losses• Industry ELPPFs• Entity-Specific Excess Ratios• Large Loss Experience Method
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
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
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
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
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
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
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
Pricing Excess Workers Compensation
• Qualitative Considerations– Self-insured’s attitude/commitment regarding
its workers compensation program– Quality of third party claim administrator
(TPA)– Quality of loss control vendor/program
Pricing Excess Workers Compensation
• Self-Insured’s 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
Pricing Excess Workers Compensation
• Quality of TPA– Medical management– Lost time claim management– Catastrophic claim management– Case resolution/settlement philosophy– Case reserving practices
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
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?