Reconsidering Truisms: the Case of Experience Rating

Transcription

1 Reconsidering Truisms: the Case of Experience Rating ISCRR Seminar Alan Clayton Melbourne 1 November 2012

2 Rise to Orthodoxy of Experience Rating origins in early years of insurance pricing methodology concerted justification as means of achieving safer workplaces stems from mid 1970s in US and from 1990s in Australia however the conceptual and empirical bases for this justification are very thin

3 Truisms

4 Overview Approaches to achieving safer workplaces Insurance pricing methodology Forms and origins of merit rating Purported rationales for experience rating Experience rating and work health and safety Alternative approaches to the use of economic incentives

5 Approaches to achieving safer workplaces Direct approaches adherence to standards Specification standards Performance standards Systems-based standards Indirect approaches use of incentives Experience rating Other approaches CRAM in France

6 Insurance pricing Fundamentally insurance is a price on risk Possible for flat-rated workers compensation premiums Generally workers compensation schemes price on differentiated risk Occupational rating Industry classification for risk rating Merit rating

7 Forms and origins of merit rating Schedule rating Earliest approach but effectively abandoned by 1934 in US for workers compensation However still important in commercial fire insurance

8 Forms and origins of merit rating Experience rating Central role of the Casualty Actuarial and Statistical Society

9 Forms and origins of merit rating Prospective experience rating introduced from 1915/16 controversial beginnings Retrospective experience rating emerged in the US from around 1936

10 Purported Rationales for Experience Rating User pays principle Facilitates competition among insurers Spur for achieving safer workplaces Position of the Industry Commission 1994 Report 1995 Report

11 Experience rating and workplace safety Claims as a proxy for workplace injury and illnesses Assumption that changes operate pari passu - ie changes in claims rates reflect changes in injury rates Despite its obviousness CLAIMS INJURIES/ ILLNESSES

12 NSW WorkCover

13 NSW WorkCover

14 Issues with Claims High level of under-claiming for compensable conditions Extreme situation with occupational diseases Occupationally related deaths

15 Maintaining a Sense of Perspective What is the nature of the price signal being sent? attenuation of the signal issue of small/ smaller employers Direct claims costs are dwarfed by indirect costs of injury and illness

16 What is being measured? Studies of experience rating attempt to establish the impact of premium costs on the injury/ fatality rate over time Industry Commission s major exhibit Richard Butler 1994 study in Workers Compensation Monitor included an attempt to correlate relationship between wc costs and work-related fatality rates concludes 10% increase in wc costs results in a 2% to 5% decrease in death rates

17 What is being measured? Methodological difficulties with Butler study and other studies coverage of death quality of the regression analysis especially the choice of independent or explanatory variables

18 Schumpeter s Gale

19 Work-related Fatality Studies NOHSC auspiced two studies of workrelated injury fatalities first covered period second, period Methodologically rigorous approach Comparison between the two studies suggested that 40% of the decline in fatality rate due to industry change.

20 Effects upon Claims Management Ontario s introduction of two experience rating schemes in 1984 and general experience rating in 1990 manipulation of claims reporting strategic use of short-term private disability cover Increased claims disputation

21 Effect on Claims Management South Australia bonus and penalty scheme introduced in July 1990 scheme designed on revenue neutral basis exclusion of secondary disability from assessable claims costs by 1998 these represented 40% of scheme costs and for some employers 100% of their total claims costs review in 1999 but little change deficit in BPS $7.3m (1997), $9.2m (2000) and c $50m (2009) discontinued from June 2010

22 Beneficial Incentive Approach Two French approaches Structure of French work injury compensation Premium penalty for non-compliance with notice Prevention contracts for SMEs

23 South Australia Epilogue initially looked to a more nuanced suite of premium incentives turned to a more sharply focused experience rating system with retro paid loss policies for large employers Experience rating as a cul de sac Need to embrace more sophisticated and targeted forms of economic incentive