NCCI.Circular

Reading: National Council on Compensation Insurance, Circular CIF-2018-28, 06/21/2018. Filing Memorandum, Exhibits 1 — 7, 13.

Synopsis: This is the first of two articles on the NCCI Circular CIF-2018-28 reading. It covers the first part of the circular which is an overview of the NCCI approach to retrospective rating. The second part of the NCCI Circular reading is available at NCCI.InformationalExhibits.

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Estimated study time: 1 day (not including subsequent review time)

BattleTable

This is a new reading and due to the CAS no longer publishing past exams there are no prior exam questions available. At BattleActs we feel 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)
Currently no prior exam questions

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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 NCCI Circular CIF-2018-28 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 circular. Lastly, please remember this material is for exam purposes only — you shouldn't use these wiki articles for work purposes!"

This is the first of two articles which constitute the NCCI Circular reading; part 2 is available here.

The NCCI Circular describes the NCCI approach to retrospective rating. It uses a newer methodology which improves the accuracy of the insurance charge. In particular, due to recent increases in computational power, the NCCI now offers real-time calculation of factors which negates the need for copious numbers of lookup tables. Since you can't (yet) access the real-time look-up in the exam, the NCCI also has a table of countrywide factors that is available in the study kit.

One of the important things to note is the terminology in the NCCI Circular is slightly different from what you've so far encountered in the Fisher readings. Here's a summary of the main changes you should pay close attention to:

Fisher	NCCI Circular
Insurance Charge	Aggregate Excess Loss Factor (AELF)
Insurance Savings	Aggregate Minimum Loss Factor
Net Insurance Charge	Net Aggregate Loss Factor

The NCCI revised its retrospective rating methodology primarily to revamp the tables used in their rating algorithm. The revision uses more recent data, removes some approximations that were used and increased the accuracy and fairness (equity) of the insurance charges both within a state and countrywide. Rather than producing many tables for the various state/hazard group combinations (see Robertson.HazardGroups for a quick refresher if needed), the NCCI has developed an online application which allows you to produce Aggregate Loss Factors (ALFs) on Demand. The ALFs on demand are produced after entering estimated claim count and severity distributions for the state/hazard group in question and can even handle interstate risks across multiple hazard groups.

In recognition that not everyone has permanent internet access, and that insurers may need time to implement the necessary IT/system changes, the NCCI provides the Table of Aggregate Loss Factors which replaces the previous tables of insurance charges. The table of aggregate loss factors is a countrywide alternative to the ALFs on demand.

Question: What are some of the benefits of using the table of aggregate loss factors over the previous table of net insurance charges?

Solution:

• The table of aggregate loss factors shares the methodology improvements of the ALFs on demand so are more accurate.
• It automatically accounts for claim size inflation over time .
• Removes the need for updates to hazard group differentials and the expected loss group ranges.

Question: What is a disadvantage of using the table of aggregate loss factors?

Solution:

• The table of aggregate loss factors is countrywide so doesn't reflect the state and hazard group severity distribution differences. (Alice: "The ALFs on demand do pick this up, so get online!")

Background & Definitions

The NCCI Circular uses the retrospective rating formula we've seen in the Fisher Risk Sharing article, namely [math]R=(B+cL)\cdot T[/math]. Here R is the retrospective premium (subject to min. and max. amounts), B is the basic premium, c is the loss conversion factor, L is the actual incurred loss, and T is the tax multiplier.

As we did in the Fisher articles, you'll use entry ratios (defined as the ratio of the loss limit to the expected losses) to price policies.

The basic premium, B, is a percentage of the standard premium and is calculated by the insurer by multiplying the standard premium by the basic premium factor which we'll show you how to calculate later in this article.

Question: What is included in the basic premium?

Solution:

The basic premium includes the following:

• General insurer admin costs.
• Cost of related loss control services.
• Net aggregate loss factor.

Question: What is NOT included in the basic premium?

Solution:

The basic premium doesn't include:

• Premium taxes (found in the tax multiplier). Or,
• Claims adjustment expenses (found in the loss conversion factor)

Excess Loss Premium

If the insured chooses a loss limitation such as per-claim or per-occurrence limit then the charge for this is added into the retrospective rating formula after the basic premium component. This charge is called the Excess Loss Premium (ELP). This is defined as [math]ELP=\mbox{(Excess Loss Factor)}\cdot\mbox{(Standard Premium)}\cdot\mbox{(Loss Conversion Factor)}[/math].

The NCCI files either excess loss factors (in rate states) or excess loss pure premium factors (in loss cost states). The latter may or may not include a provision for allocated loss adjustment expenses (ALAE). To calculate the ELP you must have an excess loss factor so in loss cost states you need to perform a conversion first.

To convert to an excess loss factor (or excess loss and allocated expense factor if ALAE is included), multiply the excess loss pure premium factor (or excess loss and allocated expense pure premium factor) by [math]\mbox{ELR}\cdot(1+\mbox{Loss Adjustment Expense %} + \mbox{Loss Assessment %)}[/math].

The Expected Loss Ratio (ELR) is the ratio of pure losses (no LAE) to premium and is determined by the insurer. The loss adjustment expense percentage and loss assessment percentage are found in the appropriate NCCI state filing. The resulting excess loss factor varies by hazard group and the loss limitation chosen.

If a policy has exposures across several hazard groups then use the product of the policy excess ratio with the expected loss ratio instead. The Policy Excess Ratio is the total expected excess loss divided by the total expected loss.

Tables Included in the Circular

The circular can seem quite daunting in the study kit but that's largely because of the number of table pages given. Exhibit 4 contains Appendix A which has two tables, one for looking up the expected claim count group based on the expected number of claims, and the other for looking up the relevant sub-table based on the excess ratio range. Exhibit 5 contains the huge Appendix B that has tables of aggregate excess loss factors grouped by sub-table and expected claim count group with values ordered by increasing entry ratio from 0 to 10 in steps of 0.01.

Alice: "The study kit currently only includes sub-table 6 yet Appendix B is still 40 pages of tiny print - bring a magnifying glass!"

Basic Premium Factor Calculation

This is the main calculation for the application of the circular. There are a lot of steps involved but if you memorize them well this should be straight forward points on the exam.

Alice: "The PDF below shows you how to calculate the basic premium factor. You should have this open in another browser tab so you can follow the line by line commentary in this wiki article."

Calculate the NCCI Basic Premium Factor

Alice: "To break this example into manageable pieces we've colour-coded the example as follows: Grey - information provided. Yellow - information you'll calculate on the way. Blue - information you'll look up based on intermediate values. Green - the final answer! You should read the commentary below as you work through the example."

Line by Line Commentary

Alice: "Wow, that is a lot to digest. Time to put it into practice!"

Practice Problem: Calculate the NCCI Basic Premium Factor

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