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BASIC TECHNIQUES FORBASIC TECHNIQUES FORWORKERS COMPENSATIONWORKERS COMPENSATIONPresented byPresented by
Richard B. Moncher, NCCI, Inc.Richard B. Moncher, NCCI, Inc.
Andrew J. Doll, General CasualtyAndrew J. Doll, General Casualty
1999 CAS Seminar on Ratemaking1999 CAS Seminar on Ratemaking
Nashville, TennesseeNashville, Tennessee
March 12, 1999March 12, 1999
INT - 4INT - 4
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COURSE OUTLINECOURSE OUTLINE
RICH MONCHER:RICH MONCHER:
OverviewOverview
NCCI FilingNCCI Filing Overall Rate / LC Level ChangeOverall Rate / LC Level Change
Class Rate / LC ChangesClass Rate / LC Changes
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COURSE OUTLINECOURSE OUTLINE
ANDY DOLL:ANDY DOLL:
Other Bureau RatemakingOther Bureau Ratemaking
ExpensesExpenses Loss Cost MultipliersLoss Cost Multipliers
Company Pricing ProgramsCompany Pricing Programs
Current WC MarketCurrent WC Market
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WC RATING PROCEDUREWC RATING PROCEDURE
Exposure x Manual Rate = Manual PremiumExposure x Manual Rate = Manual Premium
Manual Premium x Experience ModManual Premium x Experience Mod
= Standard Earned Premium= Standard Earned Premium
- Premium Discount = Net Premium- Premium Discount = Net Premium
+ Expense Constant+ Expense Constant
3
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Example:Example:
Loss Cost = 1.60Loss Cost = 1.60 Expenses = 0.40Expenses = 0.40Rate = 1.60 + 0.40 = 2.00Rate = 1.60 + 0.40 = 2.00
1998 Payroll = 1,500,0001998 Payroll = 1,500,000
Exposure = Payroll / 100 = 15,000Exposure = Payroll / 100 = 15,000
1999 Manual Premium = Rate x Exposure1999 Manual Premium = Rate x Exposure
= 2.00 x 15,000 = 30,000= 2.00 x 15,000 = 30,000
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Example (contd)Example (contd)
1998 Payroll = 1,500,0001998 Payroll = 1,500,0001999 Payroll = 1,800,0001999 Payroll = 1,800,000
20% increase in Payroll20% increase in Payroll
If same $ 2.00 Rate, thenIf same $ 2.00 Rate, then
1999 Manual Premium = 18,000 x 2.00 = 36,0001999 Manual Premium = 18,000 x 2.00 = 36,000
So, 20% increase in PremiumSo, 20% increase in Premium
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W.C. DATA BASESW.C. DATA BASES
Financial Aggregate CallsFinancial Aggregate Calls
- Annual Data at Year End- Annual Data at Year End
- Statewide & Assigned Risk- Statewide & Assigned Risk
W.C. Statistical PlanW.C. Statistical Plan
- Class Detail (Approx. 600)- Class Detail (Approx. 600)
- Payroll & Losses- Payroll & Losses
- 18, 30, 42, 54, 66 Months after Effective Date- 18, 30, 42, 54, 66 Months after Effective Date
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FINANCIAL AGGREGATE CALLSFINANCIAL AGGREGATE CALLS ExperienceExperience
- By Policy Year- By Policy Year- By Calendar-Accident Year- By Calendar-Accident Year
Data ElementsData Elements
- Std. Earned Premium at DSR Level- Std. Earned Premium at DSR Level
- Std. Earned Premium at Company Level- Std. Earned Premium at Company Level- Net Earned Premium- Net Earned Premium
- Benefit Costs: Indemnity/Medical/Total- Benefit Costs: Indemnity/Medical/Total
- Payments (Paid Losses)- Payments (Paid Losses)
- Case Reserves- Case Reserves
- Bulk/IBNR Reserves- Bulk/IBNR Reserves
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FINANCIAL AGGREGATE CALLSFINANCIAL AGGREGATE CALLS
PurposesPurposes
- Overall Rate/Loss Cost Level Change- Overall Rate/Loss Cost Level Change
- Overall => Statewide, Voluntary, Assigned Risk- Overall => Statewide, Voluntary, Assigned Risk
- Trend Analyses- Trend Analyses
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VALUATION OF FINANCIAL DATAVALUATION OF FINANCIAL DATA
POLICY YEARPOLICY YEAR
ExpirationExpiration
DateDate
EffectiveEffective
DateDate
PolicyPolicy
YearYear19971997
1/1/971/1/97 12/31/9712/31/97 12/31/9812/31/98
(1st report)(1st report)12/31/9912/31/99
(2nd report)(2nd report)
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VALUATION OF FINANCIAL DATAVALUATION OF FINANCIAL DATAACCIDENT YEARACCIDENT YEAR
1/1/971/1/97 1/1/981/1/98 12/31/9812/31/98
(1st report)(1st report)12/31/9912/31/99
(2nd report)(2nd report)
AccidentAccident
YearYear
19981998
ExpirationExpiration
DateDate
EffectiveEffective
DateDate
1
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RATEMAKING: BIG PICTURERATEMAKING: BIG PICTURE
We start with historical data (premium and losses) usually oneWe start with historical data (premium and losses) usually one
to two years oldto two years old
We use analysis and judgment to estimate the ultimate lossesWe use analysis and judgment to estimate the ultimate losses
by adjusting historical lossesby adjusting historical losses
We adjust the premium (excluding expenses for loss costWe adjust the premium (excluding expenses for loss cost
states) from the historical data to simulate the (pure) premiumstates) from the historical data to simulate the (pure) premium
currently in placecurrently in place
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RATEMAKING: BIG PICTURERATEMAKING: BIG PICTURE
We divide estimated losses by simulatedWe divide estimated losses by simulated
premium to see if current rates/loss costs arepremium to see if current rates/loss costs are
adequate (i.e. If losses/premium = 1.0, then weadequate (i.e. If losses/premium = 1.0, then we
have exactly enough premium to cover losses.have exactly enough premium to cover losses.
If not then we must make new rates/loss costs.)If not then we must make new rates/loss costs.)
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Does current premium level provideDoes current premium level provide
adequate funds for future benefits?adequate funds for future benefits?
14
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PREMIUM ON-LEVEL FACTORSPREMIUM ON-LEVEL FACTORS
Adjust historical premium to current rate/loss cost levelAdjust historical premium to current rate/loss cost level
based on subsequent rate/loss cost changesbased on subsequent rate/loss cost changes
PY 1997 Premium = $100MPY 1997 Premium = $100M
1/1/99 Loss Cost Change = - 5.0%1/1/99 Loss Cost Change = - 5.0%
PY 1997 Premium @ Current Loss Cost Level = $95MPY 1997 Premium @ Current Loss Cost Level = $95M
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LOSS ON-LEVEL FACTORSLOSS ON-LEVEL FACTORS
Adjust historical losses to current benefit level basedAdjust historical losses to current benefit level based
on subsequent benefit (law) changeson subsequent benefit (law) changes
PY 1997 Medical Losses = $100MPY 1997 Medical Losses = $100M
1/1/99 Medical Fee Schedule Change = 10% savings1/1/99 Medical Fee Schedule Change = 10% savings
PY 97 Medical Losses @ Current Benefit Level = $90MPY 97 Medical Losses @ Current Benefit Level = $90M
1
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Trend FactorsTrend Factors
- Compares movements in indemnity and medical- Compares movements in indemnity and medical
benefits to movements in payrollbenefits to movements in payroll- Applied to loss ratio =- Applied to loss ratio =
(Adjusted losses)/(adjusted premium)(Adjusted losses)/(adjusted premium)
Data inData in
FilingFilingTimeTime
}
FilingFilingEffectiveEffective
TrendTrend
PayrollPayroll
Benefit CostsBenefit Costs
1
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LOSS EXPERIENCE INDICATIONLOSS EXPERIENCE INDICATION
Estimate what the losses will be in 2000, and all theEstimate what the losses will be in 2000, and all the
premium at the current 1999 loss costspremium at the current 1999 loss costs
Divide the losses by the premium to see if we haveDivide the losses by the premium to see if we have
enough premium to cover all of the lossesenough premium to cover all of the losses
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LOSS EXPERIENCE INDICATIONLOSS EXPERIENCE INDICATION
This Ratio of losses to premium is called theThis Ratio of losses to premium is called the Loss RatioLoss Ratio
if there areif there are moremore losses than premiums (i.e. the losslosses than premiums (i.e. the loss
ratio > 1.00) then we needratio > 1.00) then we need more premiummore premium, so we have, so we have
toto raiseraise loss costs for 2000loss costs for 2000
if there areif there are lessless losses than premium (i.e. the losslosses than premium (i.e. the loss
ratio < 1.00) then we haveratio < 1.00) then we have too muchtoo much premium, so wepremium, so we
have tohave to lowerlowerloss costs for 2000loss costs for 2000
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OVERALL CHANGE TO INDUSTRYOVERALL CHANGE TO INDUSTRY
GROUPSGROUPS
Overall change is distributed to industry groups andOverall change is distributed to industry groups and
then to individual classesthen to individual classes
ManufacturingManufacturing- TextilesTextiles- CabinetsCabinets- AutomobilesAutomobiles
Office &Office &
ClericalClerical- ClericalClerical
officeoffice
employeesemployees
- OutsideOutsidesalessales
ContractingContracting- PlumbingPlumbing- RoadsRoads- HousesHouses
Goods &Goods &
ServicesServices- RestaurantsRestaurants- Retail salesRetail sales- NursingNursing
MiscellaneousMiscellaneous- TruckingTrucking- LoggingLogging- Surface coalSurface coal
miningmining
20
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MANUFACTURING INDUSTRY GROUPMANUFACTURING INDUSTRY GROUP
CHANGECHANGEAnalysis shows that:Analysis shows that: Overall (statewide) change is +10%Overall (statewide) change is +10%
Manufacturing industry group experience is 10% worseManufacturing industry group experience is 10% worse
that statewide so,that statewide so,
Mfg. IndustryMfg. Industry
Group ChangeGroup Change==
StatewideStatewide
ChangeChangexx
Industry GroupIndustry Group
DifferentialDifferential
== (1.1) (1.1) - 1(1.1) (1.1) - 1
== 1.21 - 11.21 - 1
== 21%21%
-- 11
21
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W.C. STATISTICAL PLANW.C. STATISTICAL PLAN
Experience by PolicyExperience by Policy
Classification DetailsClassification Details
- Exposure / Premium / Exper. Mod- Exposure / Premium / Exper. Mod- Individual Claim Records- Individual Claim Records
Indemnity / MedicalIndemnity / Medical
Case Incurred ValuesCase Incurred Values
By Injury Type (Fatal, PT, etc.)By Injury Type (Fatal, PT, etc.)
2
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W.C. STATISTICAL PLANW.C. STATISTICAL PLAN
PurposesPurposes
- Classification Relativities- Classification Relativities
- Experience Rating- Experience Rating
- Retrospective Rating- Retrospective Rating- Research- Research
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VALUATION OF W.C. STATISTICAL PLANVALUATION OF W.C. STATISTICAL PLAN
DATADATA
7/1/987/1/98PolicyPolicy
EffectiveEffective
1/1/951/1/95
7/1/967/1/96 7/1/977/1/97 7/1/997/1/99 7/1/007/1/00
1st1st
ReportReport
ValuationValuation
2nd2nd
ReportReport
ValuationValuation
3rd3rd
ReportReport
ValuationValuation
4th4th
ReportReport
ValuationValuation
5th5th
ReportReport
ValuationValuation
2
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DISTRIBUTION OF INDUSTRY GROUPDISTRIBUTION OF INDUSTRY GROUP
CHANGE TO CLASSCHANGE TO CLASS
Unit ReportsUnit Reports
Relativities (between classes)Relativities (between classes)
- five years of WCSP data- five years of WCSP data
- current loss cost/rate - adjusted- current loss cost/rate - adjusted
- adjusted national experience for class- adjusted national experience for class
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BASIC TECHNIQUES FORBASIC TECHNIQUES FOR
WORKERS COMPENSATIONWORKERS COMPENSATION
Company PerspectiveCompany Perspective
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INDEPENDENT BUREAU VS.INDEPENDENT BUREAU VS.
NCCI FILING ACTIVITIESNCCI FILING ACTIVITIESq CaliforniaCalifornia
q MassachusettsMassachusetts
q MinnesotaMinnesotaq New JerseyNew Jersey
q New YorkNew York
q Pennsylvania/DelawarePennsylvania/Delaware
q TexasTexas
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LOSS COSTS - WHY?LOSS COSTS - WHY?q McCarran-Ferguson DebateMcCarran-Ferguson Debate
q Antitrust ConcernsAntitrust Concerns
q Ease of Developing Final RatesEase of Developing Final Rates
Note: 15 years ago all states were rate states.Note: 15 years ago all states were rate states.
Now, almost all NCCI states are loss costs.Now, almost all NCCI states are loss costs.
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EXPENSE COMPONENTSEXPENSE COMPONENTSq ProductionProduction - commissions, premium- commissions, premium
collection, underwritingcollection, underwriting
q
Taxes, Licenses, and FeesTaxes, Licenses, and Fees - various- variouspremium taxes, bureau and filing feespremium taxes, bureau and filing fees
q GeneralGeneral - overhead, audits, general- overhead, audits, general
administrationadministration
q Profit and contingenciesProfit and contingencies - combined with- combined with
investment incomeinvestment income
3
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COSTS AS A PERCENTAGE OF FIRSTCOSTS AS A PERCENTAGE OF FIRST
$5,000 OF STANDARD PREMIUM$5,000 OF STANDARD PREMIUM
Profit
Taxes
General
Production
Loss & Loss
AdjustmentLoss
Assessments
31
EVALUATION OF THE NEEDSEVALUATION OF THE NEEDS
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EVALUATION OF THE NEEDSEVALUATION OF THE NEEDS
OUTSIDE OF THE LOSS COSTOUTSIDE OF THE LOSS COSTItems always Outside the Loss CostItems always Outside the Loss Cost
q ProductionProductionq Taxes, Licenses, and FeesTaxes, Licenses, and Fees
q GeneralGeneral
q Profit and ContingenciesProfit and Contingencies
Items sometimes Outside the Loss CostItems sometimes Outside the Loss Costq Loss Adjustment ExpensesLoss Adjustment Expenses
q Loss Based AssessmentsLoss Based Assessments
Items rarely Outside the Loss Cost (MN)Items rarely Outside the Loss Cost (MN)q TrendTrend
q Loss Development beyond 8th reportLoss Development beyond 8th report3
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COMPONENTS OF A RATE IN OR OUTCOMPONENTS OF A RATE IN OR OUT
OF THE LOSS COSTOF THE LOSS COST
Losses
Loss
Adjustment
Expense
Expense and
Profit
Loss
Assessments
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HOW TO ACCOUNT FOR ITEMSHOW TO ACCOUNT FOR ITEMS
OUTSIDE THE LOSS COSTOUTSIDE THE LOSS COST
The Loss Cost Multiplier (LCM)The Loss Cost Multiplier (LCM)
q Factor to multiply loss costs by to load in insurersFactor to multiply loss costs by to load in insurers
expense and profitexpense and profit
q Must also consider other items not included in theMust also consider other items not included in the
Loss CostLoss Cost
q Loss Cost x LCM = RateLoss Cost x LCM = Rate
q Insurance Companies must file LCMs for approvalInsurance Companies must file LCMs for approval
in loss cost statesin loss cost states
q Also known as a Pure Premium MultiplierAlso known as a Pure Premium Multiplier
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DERIVATION OF A LOSS COSTDERIVATION OF A LOSS COST
MULTIPLIERMULTIPLIERq State A:State A: Loss Cost includes Loss, LossLoss Cost includes Loss, Loss
Adjustment expense, and AssessmentsAdjustment expense, and Assessments
q State B:State B: Loss Cost includes Loss and LossLoss Cost includes Loss and Loss
Adjustment expenseAdjustment expenseq State C:State C: Loss Cost includes LossLoss Cost includes Loss
In all three cases, loss includes full trend andIn all three cases, loss includes full trend and
loss developmentloss development
3
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DERIVATION OF A LOSS COSTDERIVATION OF A LOSS COST
MULTIPLIERMULTIPLIER
Portion of Standard PremiumPortion of Standard Premium
StateState
A B CA B C
Expenses .275Expenses .275
Profit .025Profit .025
Total of Items to Load on Loss Cost .300Total of Items to Load on Loss Cost .300
Indicated Loss Cost Multiplier 1.429Indicated Loss Cost Multiplier 1.429
= 1/(1 - Load Needed)= 1/(1 - Load Needed) 36
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DERIVATION OF A LOSS COSTDERIVATION OF A LOSS COST
MULTIPLIERMULTIPLIER
Portion of Standard PremiumPortion of Standard Premium
StateState
A B CA B C
Expenses .275 .275 .275Expenses .275 .275 .275
Profit .025 .025 .025Profit .025 .025 .025
Loss Assessments (% Prem) .020 .020Loss Assessments (% Prem) .020 .020
Loss Adj. Expense (% Prem) .080Loss Adj. Expense (% Prem) .080
Total of Items to Load on Loss Cost .300 .320 .400Total of Items to Load on Loss Cost .300 .320 .400
Indicated Loss Cost Multiplier 1.429 1.471 1.667Indicated Loss Cost Multiplier 1.429 1.471 1.667
= 1/(1 - Load Needed)= 1/(1 - Load Needed)37
DERIVATION OF A LOSS COSTDERIVATION OF A LOSS COST
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DERIVATION OF A LOSS COSTDERIVATION OF A LOSS COST
MULTIPLIER - ALTERNATIVE APPROACHMULTIPLIER - ALTERNATIVE APPROACH
q Prior methodology assumes that all items included in thePrior methodology assumes that all items included in theLCM are related to PremiumLCM are related to Premium
q Loss Adjustment Expenses and Assessments may notLoss Adjustment Expenses and Assessments may not
have a stable relationship to Premiumhave a stable relationship to Premium
q
An alternative approach for states that require a loadingAn alternative approach for states that require a loading
for loss related items is:for loss related items is:
1 + Loss Related Items (% Loss)1 + Loss Related Items (% Loss)
LCM =LCM =
1 - Premium Related Items (% Premium)1 - Premium Related Items (% Premium)
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ADDITIONAL CONSIDERATIONS FORADDITIONAL CONSIDERATIONS FOR
THE LOSS COST MULTIPLIERTHE LOSS COST MULTIPLIERq Administered Pricing vs. Competitive RatingAdministered Pricing vs. Competitive Rating
When to use a LCM?When to use a LCM?
q Evaluation of the Bureau Loss Cost FilingEvaluation of the Bureau Loss Cost Filing
Do you agree with the various assumptions?Do you agree with the various assumptions?
How does your book compare?How does your book compare?
Is there additional, more current info?Is there additional, more current info?
q Consideration of the Companys experienceConsideration of the Companys experience
How does your experience compare?How does your experience compare?
Are there changes to consider?Are there changes to consider?When will you be implementing a change?When will you be implementing a change?
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MANUAL RATE IS STARTING POINT FORMANUAL RATE IS STARTING POINT FOR
DETERMINING COST OF WORKERSDETERMINING COST OF WORKERS
COMPENSATION INSURANCECOMPENSATION INSURANCEAdditional FactorsAdditional Factors
q Prospective Experience RatingProspective Experience Rating
q Premium DiscountsPremium Discountsq DeviationsDeviations
q Schedule RatingSchedule Rating
q Retrospective RatingRetrospective Rating
q Dividend PlansDividend Plans
q Deductibles (Small and Large)Deductibles (Small and Large)
40
PROGRAMS THAT CAN BE USED TO BETTERPROGRAMS THAT CAN BE USED TO BETTER
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PROGRAMS THAT CAN BE USED TO BETTERPROGRAMS THAT CAN BE USED TO BETTER
REFLECT INDIVIDUAL RISK CHARACTERISTICSREFLECT INDIVIDUAL RISK CHARACTERISTICSq Experience RatingExperience Rating - mandatory tool that compares actual- mandatory tool that compares actual
and expected lossesand expected losses
q Premium DiscountsPremium Discounts - by policy size; reflects that relative- by policy size; reflects that relative
expense is less for larger insuredsexpense is less for larger insureds
q Expense ConstantExpense Constant - reflects expense gradation for- reflects expense gradation for
smaller insuredssmaller insuredsq DeviationsDeviations - filed by companies (LCM or rate) to reflect- filed by companies (LCM or rate) to reflect
anticipated experience differencesanticipated experience differences
q Schedule RatingSchedule Rating - reflects characteristics not reflected by- reflects characteristics not reflected by
experience ratingexperience rating
q Dividend PlansDividend Plans - means to reflect favorable experience;- means to reflect favorable experience;
similar to schedule or retro ratingsimilar to schedule or retro rating 41
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WORKERS COMPENSATION CLIMATE AND THEWORKERS COMPENSATION CLIMATE AND THE
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WORKERS COMPENSATION CLIMATE AND THEWORKERS COMPENSATION CLIMATE AND THE
ROLE OF THE ACTUARYROLE OF THE ACTUARY
q
Rates/Loss Costs continue to decrease in manyRates/Loss Costs continue to decrease in manyjurisdictions, but starting to moderatejurisdictions, but starting to moderate
q Market remains relatively soft, with continued use ofMarket remains relatively soft, with continued use of
pricing tools (schedule rating, dividends)pricing tools (schedule rating, dividends)
q Industry results deteriorating on an accident yearIndustry results deteriorating on an accident year
basisbasisq Actuaries must be aware of changing environments,Actuaries must be aware of changing environments,
how pricing tools are used, and how that will impacthow pricing tools are used, and how that will impact
resultsresults
q
Actuaries must communicate findings withActuaries must communicate findings withmanagementmanagement
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