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’s Variable Split Point Experience Rating Plan
Proposed to be Effective January 1, 2017
July 30, 2015
The webinar will begin shortly.
Notice
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Webinar Presenters
Dave Bellusci
Ward Brooks
Chief Actuary, EVP, COO
VP, Actuary
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Background
 Experience rating is a merit rating system that benchmarks an
employer against others in its industry based on historical claim
experience
 Approved by the Insurance Commissioner
 Provides a direct financial incentive for employers to reduce
accidents
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Background (continued)
 Approximately 20% of policies are experience rated, representing
almost 90% of premium
 Not a recoupment program—past experience is used only to the
extent it is predictive of future experience
 Intended to equitably distribute cost of workers’ compensation
among employers in an industry
 Pure premium neutral as it is not intended to increase or decrease
overall premiums
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Experience Rating Issues
Use of experience rating beyond its intended use
Large impact of a single claim on smaller employers
One type of plan may not fit all sizes of employers
Declining claim frequency has resulted in more claim-free risks
being experience rated and greater difficulty predicting future
experience
 Complexity of plan




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Experience Rating Issues – Recent & Planned Enhancements




2013 – Updated Credibility Values
2015 – Limitation of Impact of Single Claim
2016 – Acceleration of Process to Issue January Modifications
2017 (proposed) – Variable Split Plan
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Percent of Risks Claim-Free During Experience Period
60%
Risks with Approximately $10,000 in 2011 Premium
All Risks
Percent of Employers
50%
40%
30%
20%
10%
0%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Policy Projection Year
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Development of the Variable Split Plan
 2007 WCIRB research shows optimal split point varies with the size
of the employer
 2013-2014 research based on policy years 2010 and 2011
confirmed the potential to enhance experience rating by varying
primary/excess split point by size of employer.
– Smaller split points for small employers; larger split points for large
employers
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Principal Features of the Variable Split Experience Rating Plan
 Split point proposed to vary from $4,500 to $75,000
 Variable split plan enhances accuracy, especially for smaller
employers.
 Impact of large shock loss is generally reduced
 Credibility for claims in excess of the variable split is zero
– Only small share of employers have claims larger than indicated
variable split point and, of those, most have only one or two claims
 Potential to simplify formula at later time.
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Indicated Variable Primary/Excess Split Points by Policy Size
Approx. 2011
Written
Premium
Indicated Variable
Primary/Excess
Split Point
$5.5 mm.
$70,000
$425,000
$40,000
$100,000
$23,000
$55,000
$17,500
$30,000
$12,000
$25,000
$11,000
$17,000
$ 8,500
$13,000
$7,000
$10,000
$6,000
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Potential Future Simplification of Experience Rating Formula
Current Formula:
[(Ap x Cp) + (Ep x (1-Cp))] + [(Ae x Ce) + (Ee x (1 – Ce))]
E
Potential Future Formula:
[Ap + Ee]
E
Current variable split indications are for 100% primary credibility (Cp) and 0% excess credibility (Ce).
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Variable Split Relative to the Current Experience Rating Plan
 If variable split plan is not adopted, the credibilities of current fixed
($7,000) split plan should be updated to reflect most current data
 The impact of updating the current fixed split plan will be large for
some employers.
 Modifications of claim-free employers will tend to increase as the
indicated credits for claim-free experience are less.
– Today, claim-free experience is the norm for most smaller employers.
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Impacts of Transitioning to a Variable Split Plan
 No overall pure premium impact (no impact on average
modification)
 Combined impact of updating experience rating credibilities and
transitioning to variable split plan expected to be modest for most
employers
 Net movements of modifications above/below key thresholds, such
as credit/debit, 125% and 200% are expected to generally be less
than 1%.
 Debit mods over 200% for small risks will be significantly reduced
 Recognizing the lesser predictive value of claim severity, the
variable split plan would generally be less volatile:
– More sensitive to claim frequency
– Less sensitive to large claims
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Distribution of Modification Changes from Transitioning from
Current Plan Credibilities to a Variable Split Plan
Current (Unoptimized) $7,000 Split to Variable Split
30%
Percent of Employers
25%
20%
15%
10%
5%
0%
<
-14 -13 -12 -11 -10 -9
-8
-7
-6
-5
-4
-3
-2
-1
0
+1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 >
Percentage Change in Modification
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Example X-Mods for Employer with 2011 Written Premium of $25,000
Variable Split: $11,000
160%
Current $7,000 Split Plan
Variable Split Plan
141%
140%
119%
120%
119%
111%
100%
80%
74%
72%
60%
40%
20%
0%
Claim-Free
Five $500 Claims & $25,000 Claim
Five $500 Claims & $150,000 Claim
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Example X-Mods for Employer with 2011 Written Premium of $40,000
Variable Split: $14,500
140%
Current $7,000 Split Plan
133%
Variable Split Plan
120%
109%
109%
100%
100%
80%
70%
67%
60%
40%
20%
0%
Claim-Free
Ten $500 Claims & $25,000 Claim
Ten $500 Claims & $150,000 Claim
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Example X-Mods for Employer with 2011 Written Premium of $100,000
Variable Split: $23,000
120%
Current $7,000 Split Plan
Variable Split Plan
104%
100%
84%
84%
79%
80%
61%
60%
56%
40%
20%
0%
Claim-Free
Twenty $500 Claims & $25,000 Claim Twenty $500 Claims & $150,000 Claim
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Status of the Variable Split Experience Rating Plan
 Stakeholder input from WCIRB technical committees and a working
group of employer, employee and producer representatives
reflected throughout process
 Variable split plan approved by WCIRB committees
 The WCIRB submitted proposed variable split plan to Insurance
Commissioner June 26, 2015 to be effective 1/1/17
 Stakeholder input can be provided to Insurance Commissioner
 Pending Commissioner approval, education and outreach will be
conducted in late 2015 and 2016
 Final variable split plan values will be updated and proposed to
Insurance Commissioner in 2016
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