NCCI Ratemaking Methodology Changes Effective October 1, 2009

Beginning with filings having an effective date of October 1, 2009, the National Council on Compensation Insurance (“NCCI”) will introduce the use of a revised methodology to determine class relativities in workers’ compensation loss cost filings. 

In “NCCI’s New Methodology,” a report by NCCI actuary Tom Daley, ACAS, MAAA, the research approach and analyses underlying NCCI’s modifications to several key class ratemaking components is explained.  To view the report, click here.

Related information from the NCCI, including an on-demand webinar, may be viewed by clicking here.

A National Underwriter guest column on the matter by Mr. Daley is reprinted below.

 

Should you have any questions or comments, please contact Colodny Fass.

 

Class Ratemaking for Workers’ Comp: NCCI’s New Methodology 

By Tom Daley, ACAS, MAAA

Published on September 16, 2009 in National Underwriter

This year, NCCI is introducing the first major changes to its class ratemaking methodology in nearly 40 years. The changes support the industry’s long-term goals of adequacy and stability of loss costs and rates, and help to consistently estimate class relativities from state-to-state in the ratemaking methodology.

The new methodology will be used in all of NCCI filings with an effective date of Oct. 1, 2009, and later. Approvals have already been received from regulators in Kentucky and the District of Columbia.

The previous class ratemaking methodology limited large claims for a class code at a loss equal to five times the state’s serious average cost per case. For NCCI states, these limits ranged from $500,000 to about $1.2M during the 2009 filing season. The prior loss development factors were dependent on a dollar amount, which varied by state referred to as the critical value. Claims underlying the loss development factors were unlimited, and the excess dollars removed from the individual class codes were distributed to the industry group to which the class code belonged.

In short, the previous class ratemaking methodology limited large claims on a class code basis and in most other aspects of the ratemaking, unlimited loss dollars were used. The new ratemaking methodology is changing much of that. The most noteworthy changes are:

• Standardizing the single claim loss limit for class codes across NCCI states to be $500,000.
• Eliminating the critical value, and instead basing loss development factors on combinations of the following three claim characteristics: The injured part of body, the injury type, and whether or not a claim is open or closed. These claims will also be limited at $500,000.
• Use of a multiplicative factor based on excess ratios to estimate the expected losses excess of $500,000 using excess ratios from the new seven hazard group mapping.
• Removing the unlimited-to-limited ratio from the class and industry group differential calculations, and replacing it with expected excess losses.

Positive Actuarial Enhancements

Implementing large modifications to class ratemaking brings with it many positive enhancements – including more stability from year-to-year on a class code level and better class equity.

Long-term loss cost adequacy should also be improved, and the use of new data elements such as injured body part helps to invigorate the methodologies.
 
Continuing Actuarial Innovation

The class ratemaking changes are just the latest innovative actuarial methodologies and practices NCCI has adopted on behalf of the industry.

In 2006, NCCI completed its revision of industrial classification codes into new hazard groups and expanded the number of groups from four to seven. This change makes it easier to differentiate excess loss potential between classes and make pricing more accurate. The benefits of creating additional hazard groups include:

• A more precise classification of risks
• Improved ability to distinguish between groups
• Improved individual risk equity
• The ability to more accurately distinguish risks with high excess loss potential from risks with low excess risk potential

The new groups are also important for the pricing of retrospective rating and deductible plans and are used by reinsurers in evaluating contracts.

In 2009, NCCI completed its five-year review of workplace classifications. The new and simplified classifications were designed to make it easier for insurers, agents, and insureds to properly classify their operations.

Going forward, NCCI will continue to work with all of our stakeholders in these times of economic uncertainty to help ensure that rates and loss costs are adequate, to provide unbiased quantification of the impacts of legislative reform proposals, and to strive for self-funded residual markets.

In addition, we will continue to produce pertinent and timely research to help stakeholders understand current and emerging trends impacting workers’ compensation. All these objectives will help to maintain a healthy workers’ compensation insurance market that is able to deliver the promised benefits quickly, fairly, and efficiently to the injured worker and provide the proper incentives to have the safest workplaces possible.

Tom Daley, ACAS, MAAA, is a director and actuary at NCCI Holdings, Inc. A full background description and rationale for the ratemaking changes – including a webinar and detailed actuarial analysis recently published by the Casualty Actuarial Society-may be found at ncci.com.

 

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