NCCI.ExperienceRating

Reading: National Council on Compensation Insurance, Experience Rating Plan Manual for Workers Compensation and Employers Liability Insurance.

Synopsis: To follow...

Study Tips

To follow...

Estimated study time: 2 days (not including subsequent review time)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

Questions are held out from most recent exam. (Use these to have a fresh exam to practice on later. For links to these questions see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2016.Fall #10)	Experience Modification - calculate
E (2014.Fall #10)	Experience Concepts - evaluate proposed change	Experience Concepts - apply to scenario
E (2014.Fall #11)	Ballast & Weight - explain assumptions	Ballast & Weight - critique assumptions	Evaluate Plan - discuss method	Competitive Markets - evaluate in context
E (2012.Fall #13)	Stability Processes - evaluate in scenario	Stability Processes - critique
E (2011.Fall #12)	NCCI Plan Changes - discuss impacts

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In Plain English!

Overview

Alice: "The National Council on Compensation Insurance (NCCI) has a strict copyright policy on the materials they provide in the CAS study kit. What follows here is our interpretation of these materials for the purposes of helping you learn the content of the NCCI Experience Rating Plan to get you through the CAS exam. As such, we'll provide any figures you require but they may not match those available in the latest study kit or NCCI manual. Nor is there any guarantee this material exhaustively covers the manual. Lastly, please remember this material is for exam purposes only — you shouldn't use this wiki article for work purposes!"

The NCCI Experience Rating Plan ("the plan") uses a risk's historical payroll and losses to estimate future losses. The resulting experience modification reflects the difference between an individual risk and the average risk within the risk class to which the individual belongs. In general, the plan applies the experience modification for at least 3-months but no more than 15-months.

Experience Used

The plan assumes policies are effective for at most one year. Policies effective for at most one year and 16 days are considered a one-year policy. If a policy is effective for more than one year and 16 days then it is broken into consecutive blocks of 12-months, each of which is treated as its own separate one-year policy. Any partial period of less than 12-months is a short-term policy.

The experience period used in the plan is based on the policy effective dates. Only prior policies which had an effective date between 21 and 57 months prior to the prospective policy effective date are considered. Further, at most 45 months of data may be used. In practice, this means for annual policies we use the three previous years lagged by one assuming this data is available. That is, for an annual policy effective 1/1/21 we use the data for the policies which were effective January 1st 2019, 2018 and 2017.

If there are multiple prior policies with effective dates between 21 and 57 months prior to the prospective effective date and the associated experience is more than 45 months then you should start by including the most recent experience and working backwards until adding an older policy would cause the 45-month limit to be exceeded.

Eligibility

To determine eligibility the plan provides a table with two columns of thresholds which vary by state. Column A contains the minimum total subject premium the most recent two years, while column B contains the minimum average premium for the experience period. A risk qualifies for experience rating under the plan if it meets at least one of the following two conditions.

1. The sum of the subject premium for the two most recent years in the experience period exceeds the threshold in column A. Or,
2. The average subject premium over the entire experience period exceeds the threshold in column B.

The subject premium is also known as the manual premium. It is the premium for the risk prior to any experience or schedule modification being applied.

Question: An Alabama (AL) risk has subject premiums of $6,000, $3,000, and $6,600 for annual policies effective January 1st 2013, 2014 and 2015. The column A and B amounts for AL are $10,000 and $5,000 respectively. Does the risk qualify for experience rating under the NCCI plan for a policy effective 1/1/2017?

Solution

Based on the 1/1/17 effective date the sum of the latest two years of subject premiums is $9,600 which is less than $10,000 so the first condition is not met. However, the average of the three years in the experience period is $5,200 which is greater than the column B amount of $5,000. Since at least one of the conditions is met the risk qualifies for experience rating.

Alice: "We'll often use Alabama risks as our example because the tables included in the study kit are for AL only. You'll need to pay close attention though because currently the study kit contains two sets of tables for AL and they only differ by the effective dates. You'll want to make sure you use the tables with the later effective date unless told otherwise.

Useful Definitions

The average annual subject premium is the sum of the subject premium for the experience period, divided by the number of months in the period (excluding any gaps) and then multiplied by 12.

Intrastate rating occurs when a risk operates in a single state and qualifies for experience rating under the eligibility requirements for that state.

Interstate rating occurs when a risk operates (has experience) in more than one state. To qualify for interstate rating a risk must have experience in more than one state and meet the intrastate eligibility requirement for at least one of those states.

An experience modification developed for an interstate risk applies to all operations/states.

The Expected Loss Rate (ELR) is a factor we'll look up in the tables provided based on the risk's class code. It applies per $100 of payroll.

The NCCI experience rating plan is an example of a split-plan as losses are split into primary or excess. The split occurs at $5,000.

Alice: "In what follows you need to pay close attention to the rounding specified."

Expected Losses

The Expected Losses is calculated as the ELR multiplied by the payroll divided by 100 and rounded to the nearest integer.

The expected losses are split into expected primary and excess losses. The expected primary losses are the expected losses multiplied by the discount ratio and rounded to the nearest integer. The Discount ratio is looked up in the tables provided based on the risk's class code. The discount ratio may also be referred to as the D-ratio.

The expected excess losses is the difference between the expected losses and the expected primary losses. It is the expected amount of losses over $5,000 for the risk class.

The risk's actual loss experience will be benchmarked against its expected risk class experience to determine the experience modification.

Experience Modification

Maximum Debit

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