improving ohio’s experience rating and strengthening the ohio group-rating program

Restoring Operational Excellence

Improving Ohio’s Experience Rating and Strengthening the Ohio Group-Rating Program

1

June 26, 2008

Project Plan Proposal

BWC Board of Directors, Actuarial Committee

John Pedrick, BWC Chief Actuarial Officer, FCAS, MAAA


Comprehensive, Customer-Focused Reformo Stable Costs o Better Serviceso Accurate Rates o Safe Workplaces

Reforms Include:o Transition to a New Claims Reserving Systemo Improvements to Experience Rating Plan o Strengthening Ohio’s Group Rating Program

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Board Resolution to Reduce Credibility, Develop Long-Term Plan by June 2008

o Reduced credibility from 90% to 85% on Nov. 21, 2007o Consider adopting split experience rating plano Develop rules to improve continuity and governance

Overview

BWC Project Plan Proposalo Improves rating accuracy & equityo Reduces premium volatilityo Improves service options for employerso Makes Ohio more competitive with neighboring states

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Restoring Operational ExcellenceOverview

Key Recommendations

#1. Implement split experience rating by 2011 with transitional credibility reductions

#2. Moderate premium volatility by capping increases

#3. Create performance-based safety incentive, discount options

#4. Further analysis on continuity and group rules

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Restoring Operational ExcellenceOverview

Recommendations will Fundamentally Improve Ohio’s Overall Premium Rating Method

o Improves rating accuracy by using both frequency and severity

o Provides stability by distinguishing random accidents from consistently unsafe workplaces

o Establishes equity among employer groups by aligning premiums with costs for individual employers

o Sets performance targets and utilizes ongoing testing, analysis

o Loss ratio is a key performance measure

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Recommendation #1

Loss Ratio PerformanceSplit plan improves equity among employer segments

Policy Year 2003 Policy Year 2004 Policy Year 2005

Employers by

Premium Size

Current

Plan

Split

Plan

Current

Plan

Split

Plan

Current

Plan

Split

Plan

Greater than

$4,500,000148.5% 86.9% 156.2% 84.0% 126.8% 76.4%

$1,000,001 to

$4,500,000124.2% 83.3% 95.1% 68.2% 103.4% 73.1%

$250,001 to

$1,000,00062.1% 76.0% 49.8% 62.1% 60.3% 71.9%

$50,001 to

$250,00061.8% 79.3% 53.7% 70.6% 54.6% 70.3%

Less than or equal

to $50,00069.1% 86.9% 59.1% 75.3% 56.7% 68.5%

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Current plan loss ratios use actual payroll and claims from each policy year using 85% table to develop EM’s and base rates. These ratios do not reflect claim costs charged to the surplus fund (e.g. handicapped claims), which are the included rates.

Oliver Wyman (2008). Development of a Split Plan for Experience Rating Private Employers. Exhibit N-2


Recommendation #1

Policy Year 2003 Policy Year 2004 Policy Year 2005

Employers by

Premium Size

Current

Plan

Split

Plan

Current

Plan

Split

Plan

Current

Plan

Split

Plan

Greater than

$4,500,000

1.66 1.03 2.07 1.16 1.71 1.06

$1,000,001 to

$4,500,000

1.39 0.99 1.26 0.94 1.40 1.01

$250,001 to

$1,000,000

0.70 0.90 0.66 0.86 0.81 1.00

$50,001 to

$250,000

0.69 0.94 0.71 0.98 0.74 0.98

Less than or

equal to $50,000

0.78 1.03 0.78 1.04 0.77 0.95

Loss Ratio Relativities Split plan improves equity among employer segments

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Oliver Wyman (2008). Development of a Split Plan for Experience Rating Private Employers; Exhibit N-2


Recommendation #1

Transitional Credibility Reductions Improve Equity

Improvement in the relationship of group loss ratios to non group shows that the past credibility changes have progressed in the right direction to improving equity, however there is still a large gap remaining between these policy segments.

Past Credibility Estimated Group loss ratios compared to Non-group

100 percent 2.24 X’s higher





Recommended Estimated Group loss ratios compared to Non-group


65 percent 1.11 X’s higherOliver Wyman (2008). Experience Rating Plan Options and Considerations; page 20

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Recommendation #1

Transitional Credibility ReductionsImpact at maximum discount level

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Recommendation #2

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Moderate Premium Volatility by Capping or Limiting Premium Increases


Recommendation #2

Group Employers

by Premium Size

Total

number of

risks

Total

number of

risks

capped

Avg.

Premium

with 85%

table

Avg.

Premium

with 77%

table

Avg.

Premium

with 77%

after

capping

% impact

after

capping

$0 - $500 30,368 21,433 $241 $301 $282 17.0%

$501 - $999 15,086 11,697 $721 $920 $852 18.2%

$1,000 – $2,499 18,774 13,152 $1,613 $2,018 $1,886 16.9%

$2,500 – $4,999 10,974 6,195 $3,552 $4,296 $4,081 14.9%

$5,000 – $9,999 7,642 3,105 $7,077 $8,216 $7,941 12.2%

$10,000 + 12,151 2,128 $45,307 $47,374 $47,001 3.7%

Total 94,995 57,710 $7,285 $7,858 $7,720

Oliver Wyman (2008). Premium Capping Impacts of the Transition to a New Experience Plan; Exhibit I-2009G

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Moderate Premium Volatility by Capping or Limiting Premium Increases


Recommendation #2

Overall Impact to Employer Community as a result of 85% to 77% reduction with capping

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Oliver Wyman (2008) Premium Capping

Impacts of the Transition to a New

Experience Plan; Exhibit G, p. 2.


# of Employers

120,000

100,000

80,000

60,000

40,000

20,000

Premium Decreases by %

Recommendation #2

[+1% to 10%][-19% to -10%] 0% [+11% to 20%][-9% to 0%]

Premium Increases by %

1097,703 11,579

124,957

11,740

71,567

1,042

Group

Non Group

13

3,211

Oliver Wyman (2008) Premium Capping

Impacts of the Transition to a New

Experience Plan; Exhibit G, p. 2.

Increases/decreases over 20% not include in

this illustration.

Overall Impact to Employer Community as a result of 85% to 77% reduction with capping


Recommendation #3

Create New Performance-based Safety Incentive and Discount Options for Employers

o Provide menu of discount, incentive options for employers to better manage risks and premium costs

o Provides claims management service opportunities to entire employer market

o Allows employers to share risk and more effectively reduce costs

Deductible

Program

Group Retro

Safety Dividend

Shared Savings

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Recommendation #4

Further Analysis of Continuity Strategies and Group Rating Rules

o Continue workgroup with stakeholders o Develop recommendations and report to Board

Proposed Schedule of Reporting Deliverables

o Dec. 31, 2008: Group Continuity & Group Homogeneityo Mar. 31, 2009: Develop consumer guide & Improve re-ratingo June 30, 2009: Improve enforcement of sponsor requirementso Sept. 30, 2009: Strengthen group employer requirementso Dec. 31, 2009: Establish complaint resolution process

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Outcomes & Conclusion

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Improving Ohio’s Experience Rating and Strengthening the Ohio Group-Rating Program

o Outreach o Next Stepso Questions?

June 26, 2008

Project Plan Proposal

BWC Board of Directors, Actuarial Committee

John Pedrick, BWC Chief Actuarial Officer, FCAS, MAAA

improving ohio’s experience rating and strengthening the ohio group-rating program

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