ISO Experience

Question 1

ISO manual is used for

Answer 1

experience and schedule rating of GL policies

Question 2

EER is conceptually similar to

Answer 2

NCCI’s D-ratio

Question 3

to get factor form

Answer 3

need to add 1 to the Mod

Question 4

ISO is _ plan

Answer 4

• ISO is no-split plan
• while ISO plan is no-split, it only uses basic policy limits effectively ignoring excess losses above those limits
• additional capping mechanism = MSL

Question 5

ISO plan responds primarily to

Answer 5

frequency of prior losses and less so to severity

Question 6

ISO mod uses _ years of actual experience

Answer 6

3

and is typically the same experience period as you would use for NCCI experience mod

Question 7

3 methods to calculate CSLC

Answer 7

standard, present average company rate, historical exposure at present company rates methods

depending on whether there has been a dramatic change in exposures during or since the experience period for reasons other than inflation

• if exposures have been fairly steady, use standard method
• if dramatic changes, use present average company rate or historical exposure at present company rates methods

Question 8

standard methods

Answer 8

• need to obtain annual premium for each subline for policy being rated for prospective policy period at basic limits
• these premiums would be prior to any individual risk modifications such as experience rating or schedule rating
• use insurer’s ELR to get basic limits expected losses for each subline
• need to make 3 initial adjustments to make these expected losses more comparable with actual losses from experience period
• after multiplying BLEL for each subline for each year in experience period by appropriate 3 factors, sum up BLEL across all sublines and years to get CSLC

Question 9

standard method: 3 initial adjustments to make these expected losses more comparable with actual losses from experience period

Answer 9

1. convert BLEL by subline up to occurrence level, in case policy being rated is a claims made policy
2. convert BLEL by subline (now at occurrence level) to level matching actual level from each historical experience period
3. detrend expected losses to be same trend level as actual losses from experience period

Question 10

Present Average Company Rate Method

Answer 10

1. select a special UW exposure base and calculate exposures on this basis for both policy period being rated and for all experience periods
2. for policy period being rated, calculate average annual basic limits premium by subline on this new exposure basis as annual basic limits company premium by subline for new policy period divided by exposures on exposure base from step 1 for new policy period
3. calculate CSLC

Question 11

Historical Exposures at Present Company Rates Method

Answer 11

1. obtain actual exposures by class and location for each year and subline of experience period
2. multiply exposures by current basic limit company rates
3. multiply results in 2 by ILFs at basic per occurrence limits and actual policy annual aggregate limits
4. sum results of 3 across classes and locations to get 1 premium amount for each combo of subline and year
5. calculate CSLC
   - note that since historical exposures are used, use rule 5C of Table14 for detrend factors

Question 12

credibility for schedule and experience rating

Answer 12

• if credibility is > 0.03, risk is eligible for schedule rating
• if credibility is > 0.07, risk is eligible for experience rating

Question 13

AER numerator

Answer 13

is just BF estimate of ultimate basic limits losses & ALAE limited by MSL

• AER numerator consists of 2 components:
  1. actual historical loss & ALAE limited by basic limits & MSL
  2. expected future loss development from experience period loss & ALAE

Question 14

to obtain first component of AER numerator (actual historical loss & ALAE limited by basic limits & MSL)

Answer 14

need to obtain historical loss & ALAE data for experience period

• will need to cap historical losses, need historical claim level details and need each claim split into loss & ALAE
• each loss should be capped in 2 steps:
  1. basic limits loss = min[actual loss, applicable basic per occurrent limit]
  2. includable loss & ALAE limited by MSL = min[basic limits loss+ALAE, MSL]

Question 15

to obtain second component of AER numerator (expected future loss development from experience period loss & ALAE)

Answer 15

don’t use actual historical losses

• LDFs are really %unreported
• age to use for each LDF for each historical period is measured from start of historical policy term to data evaluation date
• LDFS can be either company LDFs or LDFs from ISO in Table15
• if historical policy is claims made policy, always use LDF of 0 instead

Question 16

comparing General Liability and the Workers Compensation experience rating plans?

Answer 16

Both plans detrend the expected losses so that they are at the same level as the experience period.

Neither plan gives full credibility to excess losses.

ISO develops losses to ultimate, but the NCCI plan compares undeveloped losses.

NCCI has a premium threshold for eligibility. ISO Risks are eligible for experience rating if their credibility is greater than or equal to 0.07.

Question 17

why the plan uses basic limits losses, and limits losses and allocated loss adjustment
expenses to a maximum single loss limitation (MSL).

Answer 17

limits prevent any large individual claims from overly influencing the experience mod.
They also make the plan more responsive to the frequency of losses rather than the severity.

Question 18

why the MSL increases as the size of the risk (as measured by premium or credibility)
increases.

Answer 18

The larger the risk, the larger expected losses, and the less impact a loss of a given size will have on the mod. As such, the MSL will increase to allow for more credibility to be given to the actual experience.