NCCI 1

Question 1

Explain the experience period

Answer 1

Number of years of individual experience must balance stability and responsiveness.

NCCI experience plan uses 3 prior years of each insured’s actual loss experience (some exceptions e.g. new business)

Most recent year not used since still in effect when new policy is being quoted.

Question 2

Which adjustments are made to losses?

Answer 2

NCCI does not develop or trend actual losses or change them to latest benefit levels.

NCCI instead makes adjustments to expected losses to make comparable to historical actual losses.

Question 3

Explain the eligibility criterion for NCCI experience rating

Answer 3

Eligibility based on insured’s manual premium during experience period.

Experience rating is mandatory once insured meets eligibility requirements.

Need to satisfy 1 of these requirements:
1. Risk’s most recent 2y of experience period has total manual premium of at least amount in column A
2. Risk’s average annual manual premium over entire experience period (3y) is at least amount in column B
Amounts can be found in Rule 2 R5-R9

Question 4

What special adjustment must be done to NCCI Experience Mod?

Answer 4

Must be rounded to 2 decimals

Question 5

What is the Loss-Free Mod?

Answer 5

((1-Zp)Ep+(1-Ze)Ee)/E

A = 0

Question 6

Explain the Weighting Value (W)

Answer 6

Used to limit weight of actual losses

Depends on E(Loss)

Question 7

Explain the Ballast Value (B)

Answer 7

Provides stability by limiting impact of any single loss

Question 8

What are R11 - R12?

Answer 8

Limits on actual losses

Question 9

Explain the D-ratio

Answer 9

Expected primary % of expected losses (similar to LER)

Question 10

List 6 types of losses excluded from experience rating

Answer 10

1. Claims attributable to Covid-19
2. Claims resulting from rescue, recovery and clean-up work at World Trade Center
3. Claims directly attributable to Sept 11 attacks
4. Non-compensable claims
5. Fraudulent claims
6. Coal mine disease (black lung) claims

Question 11

Calculate W for interstate risk

Answer 11

1. Multiply each state W by state’s E
2. Sum results
3. Divide by Tot E
4. Round to 2 decimals

Question 12

Calculate B for interstate risk

Answer 12

1. Multiply each state B by state’s E
2. Sum results
3. Divide by Tot E
4. Round to neared whole number

Question 13

Explain 3 procedures NCCI uses to add stability to model

Answer 13

1. Limit/cap losses that enter into experience rating
   Capped because they are bad luck and should not be allowed to swing mod past a certain point.
2. Split losses between primary and excess
   Since primary losses are more stable, they receive more credibility.
   For very rare and catastrophic claims that are essentially all XS loss, frequency is not controllable so split is not appropriate.
3. Give greater weight to actual experience for larger risks
   The larger the risk, the more stable their expected losses are.
   If actual experience for small risks was given same weight as for larger risks, mods for small risks would be erratic.
4. Introduce Ballast Value to reduce impact of individual risk experience
5. Max/Min Mods

Question 14

Explain the assumption behind B and K being constant for all risk sizes.

Answer 14

According to law of large numbers, large risks should be more stable than small risks.

Keeping numbers constant gives much more credibility to large risks than small risks.

Question 15

Critique the theory that B and K should be constant for all risk sizes

Answer 15

WC loss experience does not follow law of large numbers due to the long-tail nature of business

Large insureds have more loss ratio variance due to diversity of operations and exposures

Question 16

Which of Zp and Ze is usually larger and why?

Answer 16

Zp is usually larger since primary loss experience tends to be more stable than excess loss experience and is more reflective of future loss potential.

Question 17

Calculate E

Answer 17

E = (Payroll/100)*ELR

Question 18

Calculate Ep

Answer 18

Ep = E * D-ratio

D-ratio = XS ratio