NCCI Circular

Question 1

Briefly describe the NCCI Circular Plan

Answer 1

Retro-rating plan available for WC policies in US where NCCI is the designated bureau.

Plan is optional (unlike NCCI Experience Rating Plan) with eligibility requirements based on Standard P.

Question 2

Insurer and Insured must agree on which 5 elements?

Answer 2

1. Whether eatable losses include ALAE
2. Amount of c
3. Max/Min premium factors (H/P and G/P)
4. Whether or not per-occurrence limit applies
5. Whether or not plan will use estimated ultimate losses for first 3 retro premium adjusted (instead of incurred losses)

Question 3

Explain an alternative to NCCI retro plan rating

Answer 3

Insurers can instead now enter certain policy information into an application on NCCI’s website (called Aggregate Loss Factors on Demand) and be provided with more accurate policy-specific outputs.

Question 4

Discuss 3 enhancements made to NCCI plan with this circular.

Answer 4

1. NCCI introduced Limited Table M so that ICRLL procedure is no longer needed when policy has rateable loss limit.
2. Risk size is now based on expected claim counts (instead of expected losses) which do not require updated mapping based on inflation.
3. More recent data used

AELFs (Ins charge) now vary by entry ratio, expected cc group and XS ratio range.

Question 5

Calculate Retro Premium using NCCI formula

Answer 5

R = (B + cA + PcV)T

NCCI requires plan to be balanced so:
B = e - (c-1)E + cI

P is Standard P

V is an optional component called Retrospective development factor

Diff in ratios = (G-H) / cET

Diff in charges = (e+E)T - H / cET = (GCP-H) / cET

Question 6

Describe V (retrospective development factor)

Answer 6

Is used to stabilize premium adjustments, bringing them closer to ultimate such that premium paid upfront is closer to final.

This reduces credit risk of collecting subsequent premiums from adjustments.

Question 7

Explain how to do a Table M search

Answer 7

1. Calculate diff in ratios and diff in charges.
2. Need to find a pair of entry ratios in table that have exact same difference and having charge difference as close as possible as one calculated in step 1.

Question 8

If Loss Limit, what are the new NCCI Retro rating formulas

Answer 8

R* = (B_LM + cAd + PcF + PcV)T

F = E(XS Losses)/P

E(Ad) = E(A) - PF

B_LM = e - (c-1)E + cI_LM

I_LM = E(Ad)(phi(rG) - psi(r*H))

Diff in ratios = (G-H) / cE(Ad)T

Diff in charges = (e+E)T - H / cE(Ad)T

Question 9

How do you calculated Expected Claim Count Group

Answer 9

1. Expected cc = Expected Losses / AvgCostPerCase
2. Lookup group

Question 10

Briefly describe an alternative to ALFs on Demand

Answer 10

For insurers that will not use ALFs on Demand, they can still obtain needed values using tables published by NCCI in manual.

Question 11

Briefly describe how NCCI determined XS ratio ranges for each subtable

Answer 11

To determine the XS ratio ranges, 18 loss limits were chosen ranging from $5K to $50M, each representing a subtable.

Countrywide XS ratio was calculated for each of these limits.

XS ratio ranges were then selected to reach halfway to next XS ratio

Question 12

Briefly describe how NCCI determined ECG mapping

Answer 12

Expected claim count groups (ECGs) are determined by a Grid of AELFs over a range of risk sizes based on expected occurrences E(N)_PO, loss limits and entry ratios.

AELFs are computed as described in Exhibit 1 except parameters are countrywide (do not vary by state or HG)

The E(N)_PC ranges in a given ECG are based on AELF values at entry ratio of 1.0 with loss limit of $50M (NCCI cat threshold).

E(N)_PC = a * E(N)_PO
a = 1.01278 (given in manual)

Question 13

Briefly explain how NCCI populated table of AELFs

Answer 13

A subset of grid points (lattice) were used to define a piecewise exponential parametric function which is used to compute AELF values.

NCCI defined Piecewise Exponential Parametric Representation (PEPR) using points from Grid with subset of entry ratios:
ri = i/100 if i = 0,1,…,9
ri = (i-9)/10 if i = 10,11,…, 29
ri = (i-19)/5 if i = 30,…, 69

This resulted in ri = (0, 0.01, 0.02,…, 0.09, 0.1, 0.2,…, 1.9, 2, 2.2,…, 9.6, 9.8, 10) instead of every 0.01 as in Grid.

Variable yi is used to denote AELF at corresponding ri.

Variable mi is used to denote negative of survival probability at ri.

To approximate XS ratios at some entry ratio r not on table, NCCI used interpolation formulas.

Question 14

Identify 3 desirable properties of AELFs

Answer 14

1. As r increases, AELF decreases monotonically at decreasing rate (1st derivative negative and second positive)
2. As loss limit increases, AELF for given r monotonically increases
3. As risk size increases, AELF for given r monotonically decreases at decreasing rate.

Question 15

Explain 4 benefits of Table of ALFs

Answer 15

1. No need to adjust for overlap between loss limit and aggregate loss limit
2. Eliminates need for updates for claim inflation (XS ratio lookups incorporate inflation)
3. Values in Tables are consistent with methodology underlying ALFs on Demand
4. Provides much-needed update of Table of Ins Charges created in 1990s

Question 16

Explain why Table of ALFs varies by ECG

Answer 16

Because there is more variance in LR distribution for smaller insureds than for larger insureds, so there will be more variance in entry distribution as well.

Increasing ECG puts downward pressure on AELFs for given limit.

Using single distribution for all insureds would result in overcharging large insureds and undercharging small insureds.

Question 17

If X is Uniform, calculate Net Insurance Charge

Answer 17

Charge = Prob(XS) * E(XS)
Savings = Prob(shortfall) * E(Shortfall)

Prob(XS) = (b - LG)/(b-a)
E(XS) = (b-LG)/2

Prob(shortfall) = (LH-a)/(b-a)
E(Shortfall) = (LH-a)/2

I = Charge - Savings