Pennsylvania Compensation Rating Bureau

Experience Rating Plan Changes ± April 1, 2004

A Guide for Carriers, Employers and Producers

PCRB Experience Rating Plan Changes April 1, 2004 This presentation addresses the following points pertaining to the above topic: ‡ Chronology of Events During the Study and Amendment of the Experience Rating Plan ‡ Reasons for Considering Experience Rating Plan Changes ‡ A Summary of Important Experience Rating Plan Changes Effective April 1, 2004 ‡ Important Features Retained From Legacy Plan ‡ Illustrative Experience Modifications Computed Using the Prior and Revised Experience Rating Plans

Indicating That Review of Classification Pricing and Experience Rating are Ongoing .PCRB Experience Rating Plan Changes April 1. 2004 Chronology of Events During the Study and Amendment of the Experience Rating Plan ‡ December 1992 ± Pennsylvania Insurance Department Initiates an Examination of the PCRB ‡ January 1995 ± Examination Report is Issued.

2004 Chronology of Events During the Study and Amendment of the Experience Rating Plan ‡ April 1998 ± New Classification Pricing Procedures are Implemented: ± Use of Five Years of Data Regardless of Classification Size ± Payroll Used as the Basis for Credibility (Rather than Expected Losses) ± Industry Group Relativities Become Limited to Reflecting Effects of Experience Rating.PCRB Experience Rating Plan Changes April 1. No Longer Measure Loss Ratio Differentials .

2004 Chronology of Events During the Study and Amendment of the Experience Rating Plan ‡ 1999 ± PCRB Tries Unsuccessfully to Compute Optimum Credibility Scale for Experience Rating ‡ 2000 & 2001 ± Alternative Testing Procedure for Measuring Experience Rating Plan Differences is Identified and Used in Preliminary Testing ‡ 2002 ± Experience Rating Plan Analysis is Expanded Across Hundreds of Different Plan Versions Across Multiple Test Periods .PCRB Experience Rating Plan Changes April 1.

2004 Chronology of Events During the Study and Amendment of the Experience Rating Plan ‡ June 2003 ± Proposal to Revise Experience Rating Plan Effective April 1. 2004 ± Revised Experience Rating Plan Filing Becomes Effective .PCRB Experience Rating Plan Changes April 1. 2004 is Filed with Pennsylvania Insurance Department ‡ December 2003 ± Experience Rating Plan Filing is Approved ‡ April 1.

PCRB Experience Rating Plan Changes April 1. Credibility Scale. It Appeared to Overcorrect for Prior Experience of Larger Risks . 2004 Reasons for Considering Experience Rating Plan Changes ‡ The Legacy Plan¶s Fundamental Design and Parametric Underpinnings Had Not Been Revised in Decades ‡ Many Features of the Plan (Eligibility Standards. Loss Limitations) Differed From Plans Used Elsewhere ‡ While the Plan Seemed to Correctly Identify Risks Deserving Debits and Credits.

2004 ‡ The Credibility Scale is Very Different ± Small Risks Have Higher Credibility. Up from a Starting Point of Five Percent in the Legacy Plan to 28 Percent in the Revised Plan ± Large Risks Have Somewhat Reduced Credibility. 2004 A Summary of Important Experience Rating Plan Changes Effective April 1. Down from 100 Percent in the Legacy Plan to 94 Percent in the Revised Plan .PCRB Experience Rating Plan Changes April 1.

980 ± In the Legacy Plan. Large Risks Had Loss Limitations Ranging Up to $324.500 ± In the Legacy Plan. Small Risks Had Loss Limitations Starting at $49. 2004 A Summary of Important Experience Rating Plan Changes Effective April 1.000 . 2004 ‡ Applicable Loss Limitations (the Maximum Amount Charged to Employer Experience for any Claim or Accident) are Lower ± Under the Revised Plan All Risks Have a Common Loss Limitation of $42.PCRB Experience Rating Plan Changes April 1.

Up or Down ± The New Modification Cannot Be Higher Than 125 Percent of the Prior Modification ± The New Modification Cannot Be Lower Than 75 Percent of the Prior Modification ± These ³Swing Limits´ Are Expected to Be a Permanent Part of the Experience Rating Plan in Future Years . 2004 ‡ When Experience Modifications are Computed Under the New Plan. There Will Be a Limit on How Much the Prior Policy¶s Modification Can Be Changed.PCRB Experience Rating Plan Changes April 1. 2004 A Summary of Important Experience Rating Plan Changes Effective April 1.

PCRB Experience Rating Plan Changes April 1. 2004 A Summary of Important Experience Rating Plan Changes Effective April 1. 2004 ‡ Because of the Combined Effects of the New Credibility Scale and the New Loss Limitations: ± The New Experience Rating Plan Will Be MORE Responsive to the Prior Experience of Small to Medium-Sized Risks Than was the Legacy Plan ± The New Experience Rating Plan will be LESS Responsive to the Prior Experience of Large Risks Than Was the Legacy Plan .

Developed by Extending Rating Period Exposures Times Current PCRB Loss Costs .PCRB Experience Rating Plan Changes April 1.000 in Expected Losses. 2004 Important Features Retained From Legacy Plan ‡ Eligibility Threshold for Experience Rating Remains at $10.

2004 Important Features Retained From Legacy Plan ‡ Experience Modification Formula Is The Same As for the Legacy Plan: M = {AxC + Ex(LxC) + Ex(1.PCRB Experience Rating Plan Changes April 1. and LxC = Loss Limitation Charge (from Table B) . C = Credibility (from Table B).0-C)} / E Where: A = Actual Limited Losses. E = Expected Losses.

000 Annual Payroll in Code 601. Road Construction ‡ ³Medium-Sized Risk´ ± Employer With $1.000 Annual Payroll in Code 601.000 Annual Payroll in Code 601. 2004 Illustrative Experience Modifications Calculated Using the Legacy and New Experience Rating Plans For Purposes of the following slides. Road Construction . Road Construction ‡ ³Large Risk´ ± Employer With $10.PCRB Experience Rating Plan Changes April 1.000.000. the following hypothetical risk descriptions were used: ‡ ³Small Risk´ ± Employer With $40.

or Greater Than 1.113 (Cap on Decrease) ± Note New Plan is More Responsive to Small Risk Experience Than Legacy Plan .967 ± New Plan Indicated Experience Modification: 0.835 ± Limitation or ³Capping´ of New Plan Indicated Modification Would Apply if the Prior Modification Was Either Less Than 0.PCRB Experience Rating Plan Changes April 1. Loss-Free ± Legacy Plan Experience Modification: 0.668 (Cap on Increase). 2004 Illustrative Experience Modifications Calculated Using the Legacy and New Experience Rating Plans ‡ Case 1: Small Rated Risk.

065 ± Limitation or ³Capping´ of New Plan Indicated Modification Would Apply if the Prior Modification Was Either Less Than 1. Single $25.000 Loss ± Legacy Plan Experience Modification: 1. or Greater Than 2.184 ± New Plan Indicated Experience Modification: 2.652 (Cap on Increase). 2004 Illustrative Experience Modifications Calculated Using the Legacy and New Experience Rating Plans ‡ Case 2: Small Rated Risk.PCRB Experience Rating Plan Changes April 1.753 (Cap on Decrease) ± Note New Plan is More Responsive to Small Risk Experience Than Legacy Plan .

926 ± Limitation or ³Capping´ of New Plan Indicated Modification Would Apply if the Prior Modification Was Either Less Than 2. or Greater Than 3.341 (Cap on Increase).PCRB Experience Rating Plan Changes April 1.000 Loss ± Legacy Plan Experience Modification: 1.901 (Cap on Decrease) ± Note New Plan is More Responsive to Small Risk Experience Than Legacy Plan . Single $250. 2004 Illustrative Experience Modifications Calculated Using the Legacy and New Experience Rating Plans ‡ Case 3: Small Rated Risk.402 ± New Plan Indicated Experience Modification: 2.

498 (Cap on Increase). Loss-Free Record ± Legacy Plan Experience Modification: 0.684 ± New Plan Indicated Experience Modification: 0.623 ± Limitation or ³Capping´ of New Plan Indicated Modification Would Apply if the Prior Modification Was Either Less Than 0. 2004 Illustrative Experience Modifications Calculated Using the Legacy and New Experience Rating Plans ‡ Case 4: Medium-Size Rated Risk.831 (Cap on Decrease) ± Note New Plan is More Responsive to This Risk¶s Experience Than Legacy Plan .PCRB Experience Rating Plan Changes April 1. or Greater Than 0.

or Greater Than 2.432 ± New Plan Indicated Experience Modification: 1.330 (Cap on Decrease) ± Note New Plan is More Responsive to This Risk¶s Experience Than Legacy Plan .PCRB Experience Rating Plan Changes April 1.000 in Losses (No Limited Losses) ± Legacy Plan Experience Modification: 1. 2004 Illustrative Experience Modifications Calculated Using the Legacy and New Experience Rating Plans ‡ Case 5: Medium-Size Rated Risk.748 ± Limitation or ³Capping´ of New Plan Indicated Modification Would Apply if the Prior Modification Was Either Less Than 1.398 (Cap on Increase). $250.

000 Loss ± Legacy Plan Experience Modification: 0.933 ± New Plan Indicated Experience Modification: 0. Single $250.086 (Cap on Decrease) ± Note New Plan is Slightly More Responsive to This Risk¶s Experience Than Legacy Plan . 2004 Illustrative Experience Modifications Calculated Using the Legacy and New Experience Rating Plans ‡ Case 6: Medium-Size Rated Risk.651 (Cap on Increase).PCRB Experience Rating Plan Changes April 1. or Greater Than 1.814 ± Limitation or ³Capping´ of New Plan Indicated Modification Would Apply if the Prior Modification Was Either Less Than 0.

2004 Illustrative Experience Modifications Calculated Using the Legacy and New Experience Rating Plans ‡ Case 7: Large Rated Risk.397 (Cap on Increase). or Greater Than 0. Loss-Free Record ± Legacy Plan Experience Modification: 0.162 ± New Plan Indicated Experience Modification: 0.PCRB Experience Rating Plan Changes April 1.496 ± Limitation or ³Capping´ of New Plan Indicated Modification Would Apply if the Prior Modification Was Either Less Than 0.661 (Cap on Decrease) ± Note New Plan is Less Responsive to This Risk¶s Experience Than Legacy Plan .

or Greater Than 1.797 ± Limitation or ³Capping´ of New Plan Indicated Modification Would Apply if the Prior Modification Was Either Less Than 0.PCRB Experience Rating Plan Changes April 1.470 ± New Plan Indicated Experience Modification: 0. $500.637 (Cap on Increase).000 in Losses (No Limited Losses) ± Legacy Plan Experience Modification: 0.062 (Cap on Decrease) ± Note New Plan is Less Responsive to This Risk¶s Experience Than Legacy Plan . 2004 Illustrative Experience Modifications Calculated Using the Legacy and New Experience Rating Plans ‡ Case 8: Large Rated Risk.

522 ± Limitation or ³Capping´ of New Plan Indicated Modification Would Apply if the Prior Modification Was Either Less Than 0. or Greater Than 0.373 ± New Plan Indicated Experience Modification: 0. Single $500.000 Loss ± Legacy Plan Experience Modification: 0.695 (Cap on Decrease) ± Note New Plan is Less Responsive to This Risk¶s Experience Than Legacy Plan .417 (Cap on Increase).PCRB Experience Rating Plan Changes April 1. 2004 Illustrative Experience Modifications Calculated Using the Legacy and New Experience Rating Plans ‡ Case 9: Large Rated Risk.

2004 Additional Information Can Be Obtained from the PCRB Web Site ± See Especially Sections on ³Manuals´. ³Filings´ and ³Circulars´ Questions May be Directed to: Betty Ann Campbell (215) 568-2371.com . Extension 4425 bcampbell@pcrb.PCRB Experience Rating Plan Changes April 1.

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