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Specific Losses: A Case Study
by Tim Coomer, A.R.M

First of all, let's learn a little more about this sample company. XYZ Corporation has exposures in two states, Tennessee and Kentucky, and $216,646 in expected losses for the experience rating period. During the past few years, the organization has experienced a decrease in revenue, payroll, and profitability. The mod is currently 1.16 and has increased the past two years. The company's manual (or unmodified) premium is currently $100,000 per year.

This Analysis Is Easy
in ModMaster

The Specific Loss Sensitivity Report in ModMaster features all of the analysis data mentioned in this article. To use this report, you must enter the manual premium on the Company Setup page.

The manual premium is an estimate of the unmodified premium for the policy period for which the mod is effective. In our case study, the premium is for the 1/1/2002 - 1/1/2003 period. 

The Specific Loss Report is a sensitivity report that you can select from the list of available reports on the Reports screen. This report lists each:

• loss amount,

• the limited or adjusted loss (after application of a state loss limit or ERA adjustment), 

• what the mod would have been without the loss (N), 

• the impact of the loss on the mod (I), and

• the one-year, two-year and three-year premium cost of the loss (P, 2P, and 3P, respectively)

The Specific Loss Report for our case study shows that the largest claim, $32,500, increased the mod by 0.0535 points and resulted in additional premium payments of $16,500. The smaller claims show an even greater relationship between three-year premium cost and loss amount. 

The impact of each loss on the mod is calculated by taking the limited or adjusted loss (after a state loss limit or ERA adjustment has been applied) temporarily out of the mod calculation, determining the new mod N without that loss, and calculating the mod impact I as

I = M - N

where M is the original mod value. Although calculating I for each loss by hand might be a bit cumbersome, it can be easily accomplished with automation. ModMaster presents this information in its Specific Loss Report. You can view a partial snapshot of the report for this case study to augment the following explanation. 

With the calculation of I, we may be surprised to see that the impact of the $5,600 loss is .0063 while the impact of the $5,700 loss is 0.210, nearly the same impact as other losses in the $7,000 range!  

When we take the analysis a step further by calculating the premium cost C of this loss on the manual premium P, the full significance of this hits. The premium cost C is calculated by multiplying I by the manual premium estimate to determine the one year premium cost of the loss. 

C = I x P

C is then multiplied by 2 and 3, respectively, to determine the two and three-year costs.

In our example, the $5,600 claim, which was an IJ code 6 medical-only claim, was reduced by 70% to $1,680. This resulted in a three-year premium cost of only $1,890. But the $5,700 claim, with medical and indemnity losses, resulted in $6,300 in three-year premium cost. The client truly paid over 100% in premiums for this loss!

	This is your opportunity to get on your soapbox and point out to your client that the lack of an effective back-to-work program resulted in the $100
indemnity payment. The indemnity payment prevented the medical-only classification and thus resulted in $4,410 in additional premium payment!

While this may be an extreme example, it is still realistic. But only through analyzing specific losses can you see such eye-opening trends as this.