The Regulatory Filing Process

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1 W o r k e r s C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a WCIRB Talks The Regulatory Filing Process The webinar will begin shortly. Notice The information provided in this Presentation was developed by the Workers Compensation Insurance Rating Bureau of California (WCIRB) solely for the purpose of discussion during this Presentation. The WCIRB shall not be liable for any damages, of any kind, whether direct, indirect, incidental, punitive or consequential, arising from the use, inability to use, or reliance upon information provided in this Presentation Workers Compensation Insurance Rating Bureau of California. All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted by federal copyright law. No copyright is claimed in the text of statutes and regulations quoted within this work. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Connect, X- Direct, escad and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRB s prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies. To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the Workers Compensation Insurance Rating Bureau of California at customerservice@wcirb.com. Webinar Agenda WCIRB Talks is a series of 30-minute webinar discussions on the 2017 changes to experience rating. Today s session includes: A summary of recent changes to experience rating in California The Regulatory Filing process What to expect in the WCIRB s January 1, 2017 Regulatory Filing Question and answer session 3 1

2 Recent Changes to Experience Rating in California 2007 The Experience Rating Task Force formed at the behest of the Insurance Commissioner, and recommendations were issued in a report dated July 8, The experience rating formula was changed to consider the first $7,000 of each claim as primary, with the remainder of the incurred cost of the claim up to $175,000 considered excess 2012 B and W Values were replaced with Credibility Primary and Credibility Excess Values 2012 Loss-Free Rating was added to the experience rating worksheet to reflect the experience modification that the employer would have received if they were claim free during the experience period 5 Recent Changes to Experience Rating in California 2015 Formula was amended to limit experience modifications for employers with only a single claim in the experience period to be no more than 25 percentage points above the loss free rating 2016 The Experience Rating Plan uses expected loss rates instead of advisory pure premium rates to determine eligibility for experience rating 2017 The Experience Rating Plan replaces the fixed $7,000 primary and excess loss split point with a variable split point that changes based on the size of the employer Potential Future Changes Eliminating the first $250 of each claim to address the underreporting of first aid claims Simplifying the experience rating formula to eliminate the credibility terms 6 2

3 What is the WCIRB s Role? The WCIRB is a licensed rating organization and the California Insurance Commissioner s designated statistical agent, as defined by the California Insurance Code Administers and proposes amendments to the Insurance Commissioner s workers compensation regulations Uniform Statistical Reporting Plan Experience Rating Plan 7 The WCIRB s Process for Proposing Changes to Experience Rating WCIRB Research WCIRB issues experience modifications Review by WCIRB committees Insurance Commissioner s decision WCIRB submits Regulatory Filing to CDI Public Hearing / Public Comment Period 8 3

4 Development of the Variable Split Plan 2007 Early WCIRB research showed the optimal split point varied with the size of the employer WCIRB research based on policy year 2010 found that variable split plan would enhance experience rating accuracy Research based on policy year 2011 confirmed potential to enhance experience rating by varying primary/excess split point by size of employer 2014 Feedback solicited from representatives of employers, workers, insurers and producers 2015 Variable split plan reviewed and recommended by WCIRB committees September 2015 Approved by Insurance Commissioner to be effective with January 1, 2017 experience modifications June 2016 Actual 2017 plan values filed with the Insurance Commissioner 9 What Losses are Used in Experience Rating? Losses used in experience rating are limited to $175,000 Loss amounts in excess of $175,000 are not used The split point (or primary threshold) separates each claim s value into primary and excess values Up to the split point is its primary value Above the split point is its excess value The primary share of each loss represents the component of the loss that is more controllable by the employer and predictive of future losses Primary values are used fully in experience rating formula Excess values are used in the formula in limited ways 10 4

5 Primary Threshold ( Split Point ) Prior to 2010, the split point was formulaic determining the primary and excess shares of a claim required the use of a formula or reference to tables that pre-calculated the primary and excess values In 2010, the split point was simplified to a $7,000 fixed split Each claim s value up to $7,000 is considered primary Each claim s value above $7,000 is considered excess Example: For a $10,000 claim, the first $7,000 is considered primary and the remaining $3,000 is considered excess Change to a Variable Split X- Formula In 2017, the split point will vary based on the size of an employer as measured by three year expected losses Small employers will have smaller split points as low as $4,500 Large employers will have larger split points as large as $75,000 Why vary the split point? The one size fits all fixed split approach was determined to be less predictive and a source of X- volatility for small employers Varying the split point by size of employer Reduces volatility arising from each large claim Significantly increases actuarial accuracy of the plan Allows for future plan simplification 12 5

6 What s Included in the Regulatory Filing? The WCIRB s January 1, 2017 Regulatory Filing will include the following 2017 experience rating values: Primary thresholds ( split points ) by employer size D-Ratios for each primary threshold and each classification Expected loss rates by classification Eligibility threshold Credibility primary (Cp) and credibility excess (Ce) values 13 Primary Thresholds Approximately 90 Primary Threshold split points Values range from $4,500 to $75,000 Ranges based on employer s total expected losses in the experience period Final values will be proposed to Insurance Commissioner in June Final values will be proposed to Insurance Commissioner in June. 14 6

7 D-Ratios D-Ratios separate the expected loss rates into primary and excess shares for the appropriate primary threshold. Each split point will have a unique corresponding table of D-Ratio values (approximately 90 tables). Only one table of D- Ratios, appropriate to the employer s size, is used for each employer. Final values will be proposed to the Insurance Commissioner in June 15 Expected Loss Rates and Eligibility Threshold Eligibility in 2016 is based on approved expected loss rates Expected loss rates are included in WCIRB Regulatory Filing January 2016 modifications issued in September 2015 In 2016, the threshold for experience rating eligibility is $10,300 The eligibility threshold is updated annually for inflation and the 2017 value will be included in the Regulatory Filing The calculation to determine eligibility for experience rating is the same calculation used to determine the employer s primary threshold 16 7

8 Calculation to Determine Total Expected Losses Policy Period Class Code Reported Payroll 2016 Expected Loss Rate Totals 1/1/14 1/1/ (-) 300, $9,690 1/1/13 1/1/ (-) 200, $6,460 1/1/12 1/1/ (-) 100, $3,230 Total Expected Losses $19,380 The total expected losses exceeds the 2016 eligibility threshold of $10,300, so this employer qualifies to be experience rated. The employer s total expected losses will also determine their primary threshold or split point 17 Determining the Primary Threshold For this example, the total expected losses are $19,380 Based on the table, this employer s primary threshold is 8,

9 Credibility Primary and Credibility Excess Values Under the 2017 variable split plan: Primary losses are used fully in the X- formula This means credibility primary values (Cp) are 100% for all primary losses Excess losses are not used in the X- formula This means credibility excess values (Ce) are all 0% for all excess losses Allows for future simplification of the experience rating formula 19 The Experience ification Formula Current Formula: Cp Ep 1 Cp Ae Ce 1 Ce E Ap = Actual Primary Losses Ae = Actual Excess Losses Cp = Credibility Primary Value Ce = Credibility Excess Value Ep = Expected Primary losses Ee = Expected Excess Losses E = Expected losses *Current variable split indications are for 100% primary credibility (Cp) and 0% excess credibility (Ce). 20 9

10 Potential Future Simplification of the Formula With Cp = 1 and Ce = 0, the experience rating formula simplifies to: Ap Ee E Ap = Actual Primary Losses Ee = Expected Excess Losses E = Expected losses Changes to Experience Rating Summary of Differences Current Fixed Split Plan 2017 Variable Split Plan One split point for all sizes of employers Split point varies based on the size of the employer (total expected losses) Split point = $7,000 Split points from $4,500 to $75,000 1 split point + 1 table of D-Ratio values for each classification code Large impact of a single claim on smaller employers Weight given to claims in excess of $7,000 ranges from 0.00 to 0.78 Complicated formula Claim frequency is weighted more heavily than claim severity Approximately 90 split points, each with a unique table of D-Ratio values Impact of large shock loss is generally reduced No weight given to claims in excess of the variable split point Potential to simplify formula to 3 terms Even more weight given to claim frequency and less to claim severity 24 10

11 2017 Changes to Experience Rating What to Expect this Year Feb 25 Talks #1 April 7 Talks #2 May 26 Talks #3 June Proposed 2017 rating values X- Calculator July 28 Talks #4 September Earliest issuance of January 2017 mods Sep 29 Talks #5 Nov 17 Talks #6 25 Register for the Next Webinar WCIRB Talks Proposed 2017 Rating Values and the X- Calculator Thursday, July 28 at 10am Summary of the WCIRB s January 1, 2017 Regulatory Filing and the proposed 2017 experience rating values Demo of the WCIRB s new X- Calculator Register at