The Actuarial Subcommittee of the WCRB convenes each February to review the methodology to be used to calculate the rates for the annual rate filing, which is effective October 1 of each year. This Subcommittee is comprised of eight actuarial representatives from member insurance carriers, and is also attended by representatives from the Office of the Commissioner of Insurance, the WCRB, and, on occasion, by companies who are not Subcommittee members. The group discusses and reviews various loss, claim count and trend diagnostic information. The goal of the Subcommittee is to select a ratemaking method and trends that the Subcommittee feels will most accurately predict the experience of the period during which the new rates will be in effect based on the experience reviewed.
The current methodology selected to project the experience incorporates a weighting of the latest two policy years of paid losses developed to their ultimate settlement value with the average of the last two paid loss development factors (LDFs) and a weighting of the latest two years policy years of paid + case losses developed to their ultimate settlement value with the average of the last three year LDFs. A policy year summarizes the experience of all the policies with an effective date in a given calendar year. (For example, policy year 2010 reflects the experience of all policies issued between 1/1/10 and 12/31/10).
The WCRB then coordinates the request for, and receipt of, aggregate financial calls from all member companies. This is accomplished via a web-based application entitled
WIFDRA, or the Wisconsin Financial Data Reporting Application. A total of eight calls are collected, which includes the initial “Acknowledgement Form”. As each call is received, it must pass basic automated edits to ensure completeness and accuracy. Each call must be received and pass basic edits by the WCRB no later than the due date, or the company is subject to fines of $50 per day, to a maximum of $5000 per licensed company. The financial call information is then accessed by Milliman, Inc., WCRB’s contracted actuarial vendor for ratemaking, who conducts extensive actuarial edits to further ensure the accuracy and reliability of the data.
Milliman then uses the data received via the financial calls to determine the overall rate change needed based upon the methodology and trends selected by the Actuarial Subcommittee at the February meeting. Note that the methodology and trends are selected prior to the receipt of the financial call data. Changes are made only if the current year data suggests that the selected methodology is not accurately reflecting current trends. The overall rate change needed is then presented to the WCRB Rating Committee and Governing Board in May of each year for approval/disapproval.
In addition to reporting aggregate financial call data to the WCRB, member companies are also required to report the experience of each of their accounts to the WCRB according to the
WI Statistical Plan Manual. The experience provided by account is at the individual classification code level by year.
After determining the required changes needed for the overall premium level, the next step in the ratemaking process is to distribute these changes among the various classifications based on the filing’s assumptions and the experience of the individual classes. The process of calculating the individual class rates is complicated. Each individual class is assigned to one of five industry groups: Manufacturing, Contracting, Office & Clerical, Goods & Services, and Miscellaneous. Based on the experience of each group, the overall rate level increase needed is more equitably distributed to each of the industry groups.
After determining the required changes in premium level, the next step in the ratemaking procedure is to distribute these changes among the various occupational classifications. In order to do this, the pure premiums by classification must be adjusted, by policy period, industry group, or on an overall basis, to incorporate the changes proposed in the filing. (The pure premium for a class is the ratio of the losses divided by the payroll. It is the portion of rate needed to cover losses.)
There are two sets of pure premiums for each classification: indicated and present on rate level. The indicated pure premiums are calculated from the payroll and loss data reported, by class code and policy period for the latest available five policy periods. Various adjustments are made to these pure premiums to put them at the level proposed in the filing. The pure premiums present on rate level are the pure premiums underlying the current manual rate, adjusted to the proposed level.
For each class a weighted average of the indicated pure premium and the pure premium present on rate level is calculated to produce a formula pure premium. (The weight used depends on how much experience is in the class.) The class formula pure premiums are then adjusted to reflect the rate change, the impact of the experience rating plan and the expenses to produce the rates.
On a final note, class rates are capped for stability purposes. However, the final rates use an adjustment or correction factor to adjust the rates that are not capped so the overall rate level change is realized.