Transcript Pricing Excess Workers Compensation

Pricing Excess Workers Compensation
2003 CAS Ratemaking Seminar
Session REI-5
By
Natalie J. Rekittke, FCAS, MAAA
Midwest Employers Casualty Company
Pricing Excess Workers Compensation
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Estimate ultimate ground-up losses
Estimate excess portion of ultimate
losses
Consider qualitative information
Apply risk loadings including load for
terrorism
Pricing Excess Workers Compensation
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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
Loss Ratio Method Example
Accident
Year
On-Level
Earned
Premium
(1)
Unlimited
Incurred
Loss
Losses Development
@12/31/02
Factor
(2)
(3)
1998
1999
2000
2001
2002
Total
1,000,000
600,000
1,000,000
700,000
1,000,000
500,000
1,000,000
600,000
1,000,000
400,000
5,000,000 2,800,000
2003
1,000,000
1.120
1.150
1.200
1.300
1.700
(6) ELPPF @ 100,000
(7) 2003 Estimated Losses in
Excess of 100,000 = (4) x (6)
Trend to
2003
(4)
1.159
1.126
1.093
1.061
1.030
Trended
Unlimited
Ultimate
Loss
Losses
Ratio
(5)
(6)=(5)/(1)
=(2)x(3)x(4)
779,032
77.9%
906,035
90.6%
655,636
65.6%
827,502
82.8%
700,400
70.0%
3,868,605
77.4%
770,000
0.250
192,500
77.0%
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
• loss cost method does not contemplate changes in
mix of business historically or prospectively
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
Experience Modified Loss Cost Example
Accident
Year
Industry
Average
Loss Cost
(2)
1998
1999
2000
2001
2002
Total
40,000,000
42,000,000
44,000,000
46,000,000
48,000,000
3.00
2.90
2.80
2.70
2.60
Expected
Losses
(3)
=(1)x(2)/100
1,200,000
1,218,000
1,232,000
1,242,000
1,248,000
2003
50,000,000
2.50
1,250,000
Payroll
(1)
Expected
Percent
Reported
(4)
89.3%
87.0%
83.3%
76.9%
58.8%
Expected
Actual
Reported Reported Experience
Losses
Losses Modification
@12/31/02 @12/31/02
Factor
(5)=(3)x(4)
(6)
(7)=(6)/(5)
1,071,429
600,000
1,059,130
700,000
1,026,667
500,000
955,385
600,000
734,118
400,000
4,846,728 2,800,000
(8) 2003 Selected Ultimate Losses = (3) x (7 selected)
(9) ELPPF @ 100,000
(10) 2003 Estimated Losses in Excess of 100,000 = (8) x (9)
0.560
0.661
0.487
0.628
0.545
0.578
0.580
725,000
0.250
181,250
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
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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 groundup 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
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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?
Pricing Excess Workers Compensation
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Applying Risk Loadings
• High Retentions
• Terrorism
Pricing Excess Workers Compensation
• Risk Loading for High Retention
– Expected losses in high layers are low
– Underlying exposure to loss could be very
high
– If premium is close to expected losses, it
could take hundreds of policies to cover
one actual loss
– A risk load should be used
Pricing Excess Workers Compensation
• Loading for Terrorism
– NCCI filed primary loss cost loadings of
around $0.02 per $100 payroll
– A terrorism event would be considered a
single occurrence  excess insurance
would effectively turn into primary
insurance
– Excess insurance should apply similar
$0.02 loading
Pricing Excess Workers Compensation
• Terrorism loading example
Primary Policy
– $100M payroll
– Average rate of $2  premium of $2M
– Terrorism loading of $0.02  total premium of $2,020,000
– Terrorism load is 1%
Excess Policy
– $100M payroll
– Average manual rate of $2  manual premium of $2M
– SIR of $300,000
– Excess rate of 5%  excess premium of $100,000
– Terrorism loading of $0.02 (per $100 payroll)  total premium of $120,000
– Terrorism load is 20%
Pricing Excess Workers Compensation
• Managing Terrorism
– Load premium for terrorism
– Put specific limits on your policies
– Manage your concentration of risk by
knowing
• where your business is
• number of insured employees within a certain square mile
range
• probable maximum loss within a certain square mile range
• total loss your company is willing to bear