NCCI Circular Flashcards
Briefly describe the NCCI Circular Plan
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.
Insurer and Insured must agree on which 5 elements?
- Whether eatable losses include ALAE
- Amount of c
- Max/Min premium factors (H/P and G/P)
- Whether or not per-occurrence limit applies
- Whether or not plan will use estimated ultimate losses for first 3 retro premium adjusted (instead of incurred losses)
Explain an alternative to NCCI retro plan rating
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.
Discuss 3 enhancements made to NCCI plan with this circular.
- NCCI introduced Limited Table M so that ICRLL procedure is no longer needed when policy has rateable loss limit.
- Risk size is now based on expected claim counts (instead of expected losses) which do not require updated mapping based on inflation.
- More recent data used
AELFs (Ins charge) now vary by entry ratio, expected cc group and XS ratio range.
Calculate Retro Premium using NCCI formula
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
Describe V (retrospective development factor)
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.
Explain how to do a Table M search
- Calculate diff in ratios and diff in charges.
- 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.
If Loss Limit, what are the new NCCI Retro rating formulas
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
How do you calculated Expected Claim Count Group
- Expected cc = Expected Losses / AvgCostPerCase
- Lookup group
Briefly describe an alternative to ALFs on Demand
For insurers that will not use ALFs on Demand, they can still obtain needed values using tables published by NCCI in manual.
Identify 3 desirable properties of AELFs
- As r increases, AELF decreases monotonically at decreasing rate (1st derivative negative and second positive)
- As loss limit increases, AELF for given r monotonically increases
- As risk size increases, AELF for given r monotonically decreases at decreasing rate.
Explain 4 benefits of Table of ALFs
- No need to adjust for overlap between loss limit and aggregate loss limit
- Eliminates need for updates for claim inflation (XS ratio lookups incorporate inflation)
- Values in Tables are consistent with methodology underlying ALFs on Demand
- Provides much-needed update of Table of Ins Charges created in 1990s
Explain why Table of ALFs varies by ECG
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.
If X is Uniform, calculate Net Insurance Charge
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
