1. Rate Reform: Split-Plan Overview Wednesday, February 10

2. Objectives: Re-introduction to split-rating plan - Reason for rating change - Split-Plan Example - Potential Benefits Review split-plan parameters currently being considered - Primary/Excess Split Points (single vs. multi) - Use of Credibility - Medical only claims Define next steps and 2010 deliverable dates

3. What is the importance of an accurate experience rating system? Should produce a premium that best reflects the employers exposure Should use a premium calculation based on sound insurance principles and the employer’s own data

4. Key risk factors to consider for an accurate rating plan The cost of a specific accident is statistically less predictive than the occurrence of an accident - The greater importance should be that an accident occurred As a result, greater weight should be given to the frequency of claims than to accident severity - Employers with higher frequency of claims will generally have higher future workers compensation claims cost. - However, a small number of costly claims should not be ignored

5. A split-experience rating plan uses a measure of both frequency and severity to assess employer risk Uses a per claim split point to distinguish primary and excess losses - Primary – represents claim frequency - Excess – represents claim severity More emphasis is put on the primary loss bucket (frequency) while still recognizing the costs of a claim How does a split-rating plan recognize these risk factors

6. Other benefits of implementing a split-rating plan Better accuracy in determining individual employer premiums based on the risk they present Less volatility from one significant claim Greater incentive to prevent workplace injuries More consistency with the rating plans in other states

7. Rating plan example Consider two employers: - Employer A - 1 loss of $175,000 in the 4 year experience period - Employer B - 10 losses totaling $175,000 in the 4 year exp. period Generally speaking, which risk would you expect to produce lower future costs?

8. Split-rating plan example The current rating system would view these employers as having the same risk -Employer A and Employer B would both have the $175,000 applied to their experience equally Under the split-rating plan, with a $10,000 split point, employer B would receive a higher EM than employer A -Employer A would have $10,000 applied to primary losses and $165,000 to excess losses -Employer B would have $100,000 applied to primary losses and $75,000 to excess losses

9. Preliminary split-plan structure Experience period - Same as current (oldest 4 of last 5 calendar years) Expected loss calculation - Expected loss rates will be separated into primary and excess buckets - Primary expected loss: E p = ELR p * payroll/100 - Excess expected loss: E e = ELR e * payroll/100 - Total expected loss: E = Primary + Excess

10. Preliminary split-plan structure Actual loss calculation - Ratable losses will include the same costs as today with the exception being the maximum single loss (MSL) point and medical only claims MSL point: $175,000 for all employers Medical only claims: -Exclude costs from the experience calculation up to a dollar threshold -Will include transition rule impacts (medical reserves) - A per claim dollar amount will be established as a split point Primary loss = sum of all ratable losses below the split limit. Excess loss = sum of all ratable losses above the split limit. Credibility calculation - Separate credibility weights will be applied to both primary and excess losses Greater credibility will be given to primary losses

11. Split-rating plan preliminary formula Z p = Primary Credibility Z e = Excess Credibility A p = Actual Primary Loss A e = Actual Excess Loss E p = Expected Primary Loss E e = Expected Excess Loss E = E p + E e

12. Split-plan parameters in development Defining appropriate split point(s) - Impacts of using a single split point vs. multiple-split points by size of risk The calculation of actuarially appropriate credibility values - Primary and excess credibility values - Credibility based on years of operation An employer with one year of experience may receive less credibility than another with 2, 3 or 4 years of experience Treatment of medical-only claims - Appropriate threshold to exclude from the experience calculation (e.g. $1,000) This encourages reporting of all medical claims and costs

13. Performance measures It is critical to define key performance measures associated with testing and analysis. - The results should produce similar performance across any segment of employers. - This similar performance will indicate that we are charging employers an appropriate premium level relative to the risk they bring to the system. Determining employer impacts Stability of the rating plan Ease of use/understanding for employers

14. Where do groups fit into the new split-rating plan? The primary focus in developing the split rating plan is to allow BWC to accurately rate individual policies The performance of groups under the new rating plan will be analyzed once this goal is achieved

15. Split-plan deliverable dates Feb. - June 2010Test split-plan parameters and finalize structure June 2010Split-plan design complete July – August 2010Run split-plan model parallel to current system to determine impacts September 2010Policy impacts will be made available July 2011Split-plan effective for PA employers

16. Rate Reform: Split-Plan Overview Wednesday, February 10