by Jeff Adcock, SIGMA Actuarial Consulting Group
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Editor’s note: In today’s blog, Jeff Adcock, consulting actuary with our affiliate SIGMA Actuarial Consulting Group, shares his analysis of the recent ratemaking change announced by NCCI. Jeff, once an intern at NCCI, contacted NCCI’s Tom Daley directly to confirm his understanding of this change. Thanks to both Tom and Jeff for their insight – and if you’re an employer, scroll on down to the “As-Plain-English-As-We-Can-Get-It Summary!”
It’s a bit confusing to understand the likely impact of the new NCCI ratemaking change. But businesses, such as contractors, which are required to have a mod of 1.0 (or other value) in order to bid on jobs will want to be especially careful to anticipate this change and minimize any losses that do occur through good injury management and claims management efforts.
Many of you may have seen the recent article “Class Ratemaking for Workers Compensation: NCCI’s New Methodology” by Tom Daley, ACAS, MAAA, posted July 1, 2009, on NCCI’s website. This article describes the changes that NCCI will be making to their class ratemaking methodology beginning in the fall of this year. The actual effective date of these changes will depend on the filing date of the state and of course is subject to regulatory approval. The changes specifically relate to the annual loss cost and related factor filings of NCCI, typically filed annually.
We have recently received questions concerning the impact that this new methodology will have on experience rating. We have confirmed with Tom Daley that the experience rating formula is not changing as part of the change in the class ratemaking methodology. The expected loss rates (ELRs) and D-Ratios used in the experience rating formula will change to the extent that the loss cost by class code changes. The ELRs and D-Ratios are updated by class code as part of NCCI’s annual filings. Changes to the ELRs and D-Ratios by class code could be more significant with the upcoming filings because of the change in the class ratemaking methodology.
Before implementing this change, NCCI has obviously done significant analysis of the impact. On Exhibit 22b on page 128 of the article, they show that for a very large state, 453 out of 546 class codes had a change in the loss costs of between -7.5% and +7.5%. Similar changes will be seen in the ELRs and D-Ratios in those states. For some classes the ELRs and D-Ratios will go up, driven by the change in methodology. For other classes the ELRs and D-Ratios will go down, again driven by the change in the methodology. The indicated changes by class code in loss costs, ELRs, and D-Ratios will not be known until NCCI makes the filing in each state. The impact will vary by state.
The bottom of page 49 and top of page 50 provide a summary of the impetus for NCCI to make changes to their class ratemaking process –
· “To improve the predictive ability and adequacy of loss costs by class code
· To provide year-to-year stability of loss costs changes by class code
· To explore the potential of new data elements that NCCI began collecting in the 1996 Unit Report Expansion (URE), and try to utilize them accordingly”
One other clarification related to experience rating: The bottom of page 50 and the top of page 51 provide a summary of the six significant changes in the methodology. It specifically mentions in #3 that “large claims will be capped at $500,000 and expected excess factors (derived from the new seven hazard group mapping by class code) will be used to calculate ultimate losses”. This is not a new large loss limit for experience rating. This is the large loss cap that will be used as part of the class ratemaking process. Losses are limited as part of the class ratemaking process.
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| The As-Plain-English-As-We-Can-Get-It Summary for Employers NCCI has recently introduced a new methodology for ratemaking, the process which ultimately affects the “manual rate” you pay on your workers comp premium. This new ratemaking methodology does not impact the actual experience mod formula. However, for some class codes, significant changes in the filed loss costs, driven by the new ratemaking methodology, will lead NCCI to also adjust expected loss rates (ELRs) and D-ratios by class code. This in turn may cause your mod to change, even if all other data (payroll and losses) stayed the same.
Although the overall intent of these changes is to keep most mods – and the premium you pay – at about the same level, the exact impact on your mod – either positive or negative – won’t be known until NCCI’s filings for the state(s) you do business in are published. Businesses which are required to have a mod of 1.0 (or other value) in order to bid on jobs will want to be especially careful to anticipate this change and minimize any losses that do occur through good injury management and claims management efforts.
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Again, follow this link to the complete article by Tom Daley with technical detail.
Filed under: Experience Rating (the Mod) | Tagged: D-ratio, ELR, loss cost, NCCI, ratemaking
I wanted to say that it’s nice to know that someone else also mentioned this as I had trouble finding the same info elsewhere. This was the first place that told me the answer. Thanks.