Introduction
Reducing the Weight on Medical-Only Losses
     Why Make This Change?
     Where Will I See These Changes?
Increasing the Weight on Excess Losses
     Why Make This Change?
     Where Will I See These Changes?
Inflation-Sensitive Primary-Excess Split of Actual Losses
     Why Make This Change?
     Where Will I See These Changes?
Adjustments in the ELR and D-Ratios
ModMaster 2000 and the ERA

Introduction

The Experience Rating methodology is a model utilized by rating bureaus to forecast whether a risk will incur losses greater than average or less than average. As with any forecasting model, data concerning the performance of the model's forecasts versus actual losses is collected over time. NCCI continuously collects and analyzes this data and occasionally makes adjustments in various components of the model. The most recent set of changes is referred to as the Experience Rating Adjustment (ERA). There are three main components to ERA. However, in our research of ERA, we have discovered that there is an additional change that complicates the determination of a given risk's final impact.

The change in the Experience Rating Adjustment (ERA) formula will impact all companies. However, there are no simple guidelines to use in determining whether a particular company's mod will increase or decrease as a result of this new formula. This article will outline the changes in the formula, discuss the types of risks that are most likely to be impacted by each change, and provide some specifications for estimating the impact on a specific type of risk.

When companies pay their own claims, the losses are not reported to NCCI and therefore not utilized in the calculation of the experience modifier. Many states have laws that prohibit companies from not reporting lost–time claims. Therefore, the majority of claims that go unreported are medical–only claims. NCCI has adjusted the experience rating formula to reduce the impact that medical–only losses have on the mod. The intent is to eliminate the incentive that companies presently have to pay these claims. This is accomplished by computing the primary and excess portions of all medical–only losses. These amounts are then reduced 70%. Thus a $3,000 dollar medical–only loss is entered as a $900 loss in the calculation of the experience modifier. A $7000 medical–only claim ($5000 primary and $2000 excess) would be reduced to $1500 primary and $600 excess in the calculation of the experience modifier.

NCCI and other carriers believe that a company's administrator or insurance carrier is best qualified to manage claims. In addition, having information about all claims helps the actuarial process to ensure better rate setting and experience rating models.

In an attempt to increase the predictive value of the plan, the table of weighting values has been modified. The adjustment to this table increases the weighting value slightly at low levels of expected losses and more dramatically for high levels of expected losses.

These changes are driven by NCCI's analysis of historical data. The experience rating formula is a mathematical model designed to predict the relative loss experience of an employer. As NCCI gains additional data from actual experience, they continuously evaluate whether or not the experience rating model is producing the most useful mods possible. The analysis that led to this experience rating adjustment indicated that more reliability should be placed on the excess loss experienced by large risks.

The changes will occur in the table of weighting values. For risks with high levels of expected losses, the weighting value will be higher. This results in a larger portion of the actual excess losses being accounted for in the experience rating formula. Therefore, the mod may increase for large risks with mods greater than 1.0.

For several years, the point at which losses are split between primary and excess has been $5,000. However, as the cost of claims increase, the split between primary and excess must also increase.

If the primary/excess split point is not indexed over time, then the percentage of actual primary loss compared to the total loss will decrease over time due to inflation. To compensate, the D–ratios would then be decreased. The net result is more excess losses going into the mod calculation and mods being driven upward. Increasing the split point and the D–ratio over time, as dictated by inflationary pressures, will keep mods at the appropriate levels.

In 1998, the primary/excess split will remain at $5,000. Therefore, it is not yet of concern in the computation of the mod. The split point may be indexed in 1999. The impact of a change in the split point will impact the computation of actual primary and excess losses on the mod worksheet.

Because the Experience Rating Adjustment (ERA) reduces the actual losses included in the calculation of the mod, the Expected Loss Rate (ELR) and D–ratio also decreases. The ELR and D–ratio determine the computed expected losses and primary losses for a given risk. Lower expected losses will increase the mod for risks that do not have many medical–only claims. However, risks with a significant amount of medical–only claims will probably have lower actual versus expected losses, so the mod will decrease.