1. Workers Compensation Experience Rating Workshop Presented by Bill Wilson, CPCU, ARM, AIM, AAM Director, Big “I” Virtual University

2. Premise “What we have to learn to do, we learn by doing.” Aristotle

3. Impact Claim shown as $924,000… should have been $24,000 Claim closed the day after the stat card cut-off date Carrier applied a new higher mod in violation of a statute Cost to Insured $30,000 $16,000 $199,957

4. Preface Theoretical considerations Practical applications “Real life” examples Symbols Appendix document Take note Exercise 3

5. What You Will Learn Introductory concepts Sources of information needed How to decipher the worksheet How to calculate a mod How to check a mod How to monitor a mod Miscellaneous considerations 3

6. What WCER IS It compares an insured’s actual loss experience to that expected for an “average” risk of the same type. It is used to predict future loss experience. It provides an incentive for loss prevention. 6

7. What WCER Is NOT An agent asks: “How can NCCI justify a debit mod when the account has been profitable? How can you explain to an insured who has a 43% loss ratio during the three- year experience period that he has a 1.25 mod and a 25% surcharge in the assigned risk pool?”

8. What WCER Is NOT

9. Introduction The Concept of Experience Rating Eligibility for the WCERP Experience Period Experience Used and Ownership Changes

10. The Concept of ER Actual Losses Mod = ------------------------ Expected Losses Formula tempered by credibility Formula stabilized to prevent fluctuations 6

11. Eligibility for the ERP Minimum Basic Manual Premium –TOTAL premium developed in last 1-2 years of experience period = $9,000; OR –AVERAGE premium developed in last 3 years of experience period = $4,500 Eligibility and exceptions vary by state Caveat…monitor closely 7

12. Experience Period 3 years of experience ending one year prior to policy effective date. For example, the mod for a policy effective on 01/01/14 would be based on policy years 2010, 2011, and 2012, omitting 2013. Can use up to 3 ¾ years Can use only 1 year if insured for at least 2 consecutive years and meets the minimum premium requirement (e.g., $9,000) 7-8

13. Exercise Eligibility for WCERP MANUAL PREMIUMS ELIGIBLE? ------------------------- ----------- RISK 2010 2011 2012 2013 2014 2015 ---- ---- ---- ---- ---- ---- ---- A 5700 4500 6800 9200 Yes Yes B 8200 6000 2600 4300 Yes No C New 4700 5300 No Yes Total premium last 1-2 years = $9,000 Average premium last 3 years = $4,500 7

14. Experience Used All current and past operations within the state, including those discontinued or self- insured (interstate rating uses experience from most non-monopolistic states) All business of the insured under common majority ownership (see “Combination of Entities” in the WCERP manual) 8

15. Ownership Changes In general, the purchaser of a business “buys” the mod unless ALL of the following conditions are met: 1.Material change in ownership 2.Reclassification of governing class code 3.Change in process and hazard Material change in ownership = Complete change, OR Interest < 1/3 before, OR Interest < 1/2 after 8

16. Exercise Ownership Changes Rule 1 Rule 2 Rule 3 Change ---> Material Governing Process/ Ownership Class Code Hazard Change? Change? Change? NEW MOD --------- ---------- -------- ------- Entity #1 No No No *1.23 Entity #2 Yes No No ** Entity #3 Yes No No *1.23 Entity #4 Yes No No *1.23 Entity #5 No No No *1.23 * Use mod of purchased business or recalculate if experience can be broken out ** Recalculate, else mod of purchaser applies 8

17. Sources of Information WCERP Worksheet Stat Cards Loss Runs and Closed Claim Reports Final Audit Reports WCERP Manual 10

18. WCERP Worksheet Kennamer Karpentry Where errors are usually found –Column 1…class codes –Column 4…payroll –Column 7…claim data –Column 8…claim reserves –Column 9…actual incurred losses (These all come from the stat card.) 10

19. Stat Cards Filed on all WC policies even if not experienced rated Important Deadlines: –01/01/14 Policy Inception Date –07/01/14 Stat Card Cut-Off Date (Claim Valuation Date) –09/01/14 Stat Card Due Date –11/01/14 Mod Promulgation Date –01/01/15 Policy Renewal Date “Aggravated Inequities” rule 10

20. Loss Runs & Claim Info Available from carrier or outside service such as www.mylossruns.com or www.lossrunner.comwww.mylossruns.com www.lossrunner.com Request “as of” (stat card valuation) date if possible Includes info on claims, claimants, class codes, paid losses, and reserves 11

21. Final Audit Reports Request from carrier or insured Includes info on class codes, payroll, manual rates, etc. 11

22. WCERP Manual Order directly from NCCI for under $100 for one state (less for annual renewals)… customer_service@ncci.com customer_service@ncci.com Includes information essential for checking, monitoring, and calculating mods…rules, ELRs, D-Ratios, “W” and “B” values, etc. 11

23. General Information Name of Risk Risk Identification Number State Policy Effective Date Page Number Mod Promulgation Date 12

24. Expected Loss Data Class Code & Audited Payroll Expected Loss Rate (ELR) Expected Losses & Total Expected Losses Discount Ratio (D-Ratio) Expected Primary Losses & Total Expected Primary Losses Expected Excess Losses

25. Class Codes & Payroll Classification Codes –Check for accuracy –Should be properly assigned to the risk Payroll –Should be final audit figures –Should meet the definition of “payroll” in the manual or state statutes –Should be properly assigned and prorated between class codes –Should not be over- or under-stated 13

26. ELRs Expected Loss Rates (ELRs) are analogous to manual rate “pure loss costs” (no LAE) Used to calculate Expected Losses for each class during the upcoming policy period per $100 payroll 13-14

27. Expected Losses and Total Expected Losses Expected Losses represent “average” losses anticipated for each class during the upcoming policy period Calculated from ELR and payroll for each class (see Column 5 formula) Total Expected Losses are entered in Item D on the worksheet and used to determine “W” and “B” values 14

28. D-Ratios Discount Ratios (D-Ratios) represent an actuarial estimate of what percentage (%) of Expected Losses are smaller “primary” losses (i.e., under $5,000) Used to calculate Expected Primary Losses for each class 14

29. Expected Primary Losses and Total Expected Primary Losses Expected Primary Losses represent the percentage (%) of Expected Losses anticipated to be less than $5,000 Calculated from D-Ratios and Expected Losses (see Column 6 formula) Total Expected Primary Losses are entered in Item E and Column 11 to directly reflect loss frequency (i.e., the entire amount of Expected Primary Losses goes into the mod calculation) 14-15

30. Expected Excess Losses Represent projected loss amounts in excess of “primary” losses Calculated by subtracting Item E from Item D Entered in Item C (see formula) and used in Columns 12 and 13 to reflect loss severity in the mod calculation 15

31. Exercise Expected Loss Data Webber Enterprises…using the “blank” worksheet for Webber and the Sample Manual Tables from the Appendix, complete Steps 1-4 of the mod calculation process Check your work against the “Webber Enterprises Solution” worksheet in the Appendix 15

32. Actual Loss Data Claim Data Claim Status Actual Incurred Losses & Total Actual Incurred Losses Actual Primary Losses & Total Actual Primary Losses Actual Excess Losses

33. Claim Data Claims ≤ $2,000 –Total number (“NO.”) of claims for policy year is shown in Column 7 and an asterisk (*) in Column 8 –Total amount of all policy year claims combined is shown in Column 9 Claims > $2,000 –Specific claim # is shown in Column 7 for tracking, IJ and O/F codes shown in Column 8, and actual claim amount in Column 9 –If the claim exceeds the state “per accident” limitation(s), a pound sign (#) appears to the left of the amount in Column 9 –When totaling the claims for Item H, any such state “cap” is used, not the actual claim amount shown on the worksheet 16

34. Claim Status Injury (IJ) Identification Codes –See workbook listing…usually 1, 2, 5, 6, or 9 –IJ and O/F codes are shown only for claims above $2,000…otherwise only an asterisk (*) appears O/F Codes –“O” = Open claim –“F” = Final settlement (closed claim) Common errors –Reserve closed or lowered without stat card submission –Reserve amounts consistently excessive –Caveat…review 7-9 months in advance of renewal date! 16-17

35. Actual Incurred Losses and Total Actual Incurred Losses Actual Incurred Losses include both closed claims (paid) and open claims (reserved) and medical and indemnity payments If a claim exceeds the state “per accident” limitation (see workbook), a pound sign (#) appears to the left of the amount in Column 9 Total Actual Losses are entered in Item H on the worksheet 17-18

36. Actual Primary Losses and Total Actual Primary Losses Actual Primary Losses –Claims ≤ $2,000…entire combined amount from Column 9 is shown in Column 10 –Claims > $2,000 but ≤ $5,000…entire amount of each individual claim in Column 9 is shown in Column 10 –Claims > $5,000…Column 10 entry is capped at $5,000 ($10,000 for “multiple claim” accidents) Total Actual Primary Losses are entered in Item I and Column 11 to directly reflect loss frequency (i.e., the entire amount of Actual Primary Losses goes into the mod calculation) 18-19

37. Actual Excess Losses Calculated by subtracting Item I from Item H Entered in Item F (see formula) and used in Column 13 to reflect loss severity in the mod calculation (though minimal for most insureds) 19

38. Exercise Actual Loss Data Webber Enterprises…complete Steps 5- 8 of the mod calculation process (be careful in Step 5!) Check your work against the “Webber Enterprises Solution” worksheet in the Appendix 19

39. Mod Calculation Weighting Value Ballast Value Ratable Excess Losses Calculation Stabilizing Value Calculation Adjusted Actual & Expected Total Calculation Experience Mod Calculation

40. “W” Value Reflects the credibility of the insured’s loss experience (based on Item D) Ratable Excess (Column 13) is directly proportional to “W” value Stabilizing Value (Column 12) is indirectly proportional to “W” value 20

41. “B” Value Minimizes the effect of individual large losses on the mod (based on Item D) Stabilizes fluctuations in the mod from policy period to the next Stabilizing Value is directly proportional to the “B” value 20

42. Exercise “W” & “B” Values Webber Enterprises…complete Steps 9- 10 of the mod calculation process Check your work against the “Webber Enterprises Solution” worksheet in the Appendix 20

43. Ratable Excess Losses Determines the impact of larger losses on the mod Incorporates a percentage of Excess Losses (Items C & F) into the mod calculation, depending on the credibility (“W” value) of the insured’s loss experience 21

44. Stabilizing Value Minimizes the impact of large losses on the mod Minimizes mod fluctuations from one policy period to the next by adding the same value to both the numerator and denominator of the calculation 21

45. Adjusted Actual & Expected Totals Form the numerator and denominator of the mod calculation Add the “Actual” numbers from Columns 11, 12, and 13 and enter in Item J under Column 14 Add the “Expected” numbers from Columns 11, 12, and 13 and enter in Item K under Column 14 21

46. Mod Calculation Divide Item J by Item K and enter the result in Column 15, rounded to two decimal places A mod over 1.00 is called a “debit” mod and a mod under 1.00 is called a “credit” mod Mods of smaller insureds are subject to maximums (see workbook), so be sure debit mods are properly capped 21-22

47. Exercise Mod Calculation Webber Enterprises…complete Steps 11-14 of the mod calculation process Check your work against the “Webber Enterprises Solution” worksheet in the Appendix 22

48. Final Adjusted Premium Determine manual premium Apply increased employers’ liability coverage factor, if applicable Apply experience mod Apply assigned risk plan surcharge, if applicable Apply schedule credits/debits, if applicable Apply premium discount, if applicable Add expense constant Apply any applicable rules for minimum premiums, deposit premiums, etc. 22

49. Questions?

50. Misc. Considerations When Changes Can Be Made in Mods The Effect of Loss Frequency on the Mod Deductible Plans The Importance of Loss Control Interstate Experience Rating

51. Mod Changes Permissible Reasons –Most clerical errors –Most subrogation recoveries –Claim determined to be non-compensable –Risk reclassification –Certain (unlikely) changes in ownership –Employer refuses to cooperate Application of Change –Mod Decreases…apply retroactively to policy inception or Anniversary Rating Date –Mod Increases…apply retroactively in first 90 days, pro rata thereafter Caveat…reasons and timing of changes may vary greatly from state to state 23-24

52. Loss Frequency Kennamer Karpentry “Effect of Loss Control on the Mod” Compare to original Kennamer Karpentry worksheet Total amount of claims (Item H) are identical, but the amount in Year 3 came from 23 (rather than 2) claims Result is a dramatic increase in the mod due to an increase in “primary” losses (see Item I and Column 11) from $7,221 to $22,944 24

53. Deductible Plans Kennamer Karpentry “Mod Impact of a $5,000 Net Reporting Deductible Plan” Vary from state to state… –May not have a deductible plan –May not apply to residual market –May vary from company to company –Only large deductibles may be available –Most states use a gross reporting basis Review workbook discussion “Unofficial” deductible plans 25

54. Loss Control NOCENT Bank “The Importance of Loss Control” Review workbook discussion Important to all, NOT just high-risk insureds “Experience Ratio” Rule Make sure your clients understand! 26

55. Interstate Rating Apex Manufacturing “Interstate Rating Example” Review workbook discussion Procedures for calculating an interstate mod are basically the same as an intrastate mod except that the “W” and “B” values are prorated 27

56. Exercise Mod Verification & Calculation “Wilson Enterprises Original” worksheet Use worksheet and final audit reports, loss run, and supplementary information in workbook to identify four (4) errors, correct them, and recalculate the mod Check your work using the “Wilson Enterprises Corrected” worksheet 28-29

57. Exercise Results Error #1 Year 1 payroll is understated for Code 5221 –Worksheet shows $216,292 –Final audit shows $225,246 All things being equal, the higher the payroll, the lower the mod

58. Exercise Results Error #2 Year 3 payroll is understated for Code 8227 –Worksheet shows $124,653 –Final audit shows $424,653 All things being equal, the higher the payroll, the lower the mod

59. Exercise Results Error #3 Year 3 Codes 5221 and 8227 and payroll are transposed –Code 8227 payroll should be $40,852 as shown on final audit report –Code 5221 payroll should be $424,653 as per audit and corrected payroll amount All things being equal, the higher the payroll and associated ELR, the lower the mod

60. Exercise Results Error #4 Year 2 claim reserve was not capped at state limit –Pound (#) sign should appear next to reserve amount in Column 9 –Total Actual (Item H) should be $89,911, not $99,783, to reflect $54,500 cap The more claim reserves are overstated, the higher the mod

61. Exercise Results Non-Error #5 Year 2 claim # 1010101 was closed at $40,133, according to the Supplementary Information in the workbook Important Dates: –12/14/11 1 st stat card cut-off on Year 2 $64,372 open claim –12/14/12 2 nd stat card cut-off on Year 2 open claim –01/10/13 Claim closed at $40,133 (see loss run) –02/08/13 Mod promulgation date (from worksheet) –06/14/13 Upcoming policy renewal date –12/14/13 3 rd stat card cut-off on closed Year 2 claim –06/14/14 $40,133 closed claim amount reflected in mod Wilson Enterprises “If Life Was Fair” worksheet

62. Exercise Another example… October residual market renewal $29,000 reserve on injured hand Claim settled earlier in year on May 1 for $5,000 Stat card cut-off date was April 28…3 days earlier Mod was 1.37 + 30% ARP surcharge… could/should have been 1.08 with no surcharge Cost to insured: $23,145

63. Questions?

64. Appendix Worksheets, tables, and other information How to “Monitor the Mod” Online resources 30

65. Virtual University www.bigivu.com www.bigivu.com Research library Online courses and webinars “Ask an Expert” Free newsletter Other features…. Free access to Big “I” members Email: logon@iiaba.netlogon@iiaba.net