The Recent Review and Changes to the National Council on Compensation Insurance’s Individual Risk Experience Rating Plan

By Jonathan Palmer Evans

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Abstract

NCCI recently completed an extended review of its Experience Rating (ER) Plan. Although no major changes had been made for many years, testing indicated that ER Plan performance was still generally good. The primary cause of deteriorating performance was the use of a fixed split point between primary and excess losses while average claim severity increased dramatically. The review process uncovered many interesting facets of actuarial methodology related to experience rating, but the changes coming out of the review did not fundamentally change the structure of the plan. NCCI has implemented an increase in the split point from $5,000 to $15,000+ inflation (over three years), and subsequent procedures to periodically increase the split point in the future corresponding to an index of claim severity. Along with the split point increase, the maximum cap on modification factors was changed. As part of the review, NCCI also made changes to several components of the calculation of primary and excess experience period expected losses to conform to changes in NCCI’s class ratemaking procedures. A well-constructed experience rating plan can perform very well for a very long time with appropriate indexation applied to components. Simplicity, consistency, transparency, and an automatic indexation are particularly important for industry-wide bureau plans such as the NCCI Experience Rating Plan.

Keywords: NCCI, individual risk rating, experience rating, workers compensation, credibility, split credibility

Citation

Evans, Jonathan Palmer, "The Recent Review and Changes to the National Council on Compensation Insurance’s Individual Risk Experience Rating Plan," Variance 9:1, 2015, pp. 36-53.

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Mission Statement

Variance (ISSN 1940-6452) is a peer-reviewed journal published by the Casualty Actuarial Society to disseminate work of interest to casualty actuaries worldwide. The focus of Variance is original practical and theoretical research in casualty actuarial science. Significant survey or similar articles are also considered for publication. Membership in the Casualty Actuarial Society is not a prerequisite for submitting papers to the journal and submissions by non-CAS members is encouraged.