Group Retrospective Rating Plan – State of Washington Industrial Insurance Fund CANW March 22, 2013 Bill Vasek, FCAS Russell Frank, FCAS, MAAA

2 Agenda  Introduction to retrospective rating  30+ year history: group retrospective rating of workers’ compensation insurance  Features unique to Washington State  Nine Washington State Hazard groups  Washington State Insurance Charges

3 Introduction to retrospective rating  Individual (and grouped) risk rating  Risks are self-rated retrospectively  Premiums are limited for unexpected large single and aggregated claim costs  Minimums to help offset insurance charges  Retrospective premium = Sum of charges for:  Actual limited losses  Administrative expenses  Net Loss limitation insurance  Refund = Standard premium – Retrospective premium  Annual premium evaluation until finaled

4 History in Washington State  State fund for workers’ compensation created in 1911  Legislature gave the State fund authority for WC rating systems in 1971 (previously done by legislature)  Group: self-insurance, dividend, or retrospective rating plan?  Retrospective rating program began in 1981 –Groups rated as a single entity –Tables based on published NCCI table M  Targeting of overall refunds began in 1985  Medical aid rating began in 1987  Interest added to overall refunds in 1995  Hazard groups introduced in 2011 –Tables based on WA data

5 Groups rated as a single entity  One method –Each member of a business group would get rated individually –Entire group rated by a single insurer –Each member of this group would then receive a refund check or additional premium assessment  Method used in Washington State –All participating members grouped as one entity –The business association gets the refund check or additional premium assessment –Business association has the responsibility of distributing refunds or additional premium assessment to the participating members –All business association members need not participate

6 Targeted annual net refund  Net Refund = Refund – Additional premiums  Total annual net refund of the program based on percentage loss ratio differences between the aggregates of Retro participants and those not enrolled in Retro  Think of targeted annual net refund as a dividend pool  Refund/additional premiums are distributed to participants based on their relative performance  Accomplished via a factor to losses and insurance charges  This targeting results in somewhat stable total net refunds  Projected future annual refund built into the manual premium rates

7 Plan participation and average refund Participation since 1996 has been close to 45% of total standard premiums Net refunds have ranged from 14% to 31% since 1985 $648 Million of standard premiums for 2010 enrollments

8 Other unique features  Third annual adjustment is final  $1.5 Million minimum size for new groups  Three final additional assessments and you’re out  Hazard group assignment based on an index

9 Hazard Index = 4,895,290 / 5,736,000 =.853 Assigned Hazard Group = 5 Example of Hazard Group Assignment

10 Hazard Groups  Excess loss factor at $250,000 selected as basic hazard index  Washington risk classification system does not follow the NCCI –Need to develop hazard group assignments from scratch, with reference to NCCI and California only as a check on reasonableness  Nine Hazard Groups –More hazard groups reduce the jump at the boundary

11 Assigning Risk Classes to Hazard Groups  Based on excess loss factor (ELF) at $250K –Frequency and severity by claim type, credibility  ELF as complement of credibility based on Serious ratio (serious pure premium / total pure premium)  Credibility weight based on expected loss size

12 ELF calculation for classes

13 Division into Hazard Groups  Risk classes were ordered by selected ELF, and divided into 9 Hazard Groups of approximately equal size. Examples:

14 Average ELF at $250K by Hazard Group

15 Other major 2011 revisions made when Hazard Groups were introduced  New Table of Insurance Charges –Based on Washington experience –New size group structure  New plan choices –Several single loss limits, including unlimited –Maximum and minimum loss ratios

16 Construction of Insurance Charge Table  Use Fourier transform (Heckman-Meyers algorithm) to construct aggregate distribution –Fitted severity distributions by claim type for each hazard group –Coherent set of negative binomial parameters for claim frequency by size and hazard group  “Overlap” eliminated by creating these tables separately by single loss limit (see Gillam, The 1999 Table of Insurance Charges, CAS Proceedings, 1999)

17 No More “Ruinous Tide of Paper”  No longer any penalty for large number of tables. Separate charge and savings tables by –Hazard group –Single loss limit  Published tables give final charges using –LAE = 7.0% of loss –Other Admin expense = 4.8% of premium  Excel tool: search for “retro premium calculator” on L&I’s web site and un-hide sheets

18 Questions?