© copyright 2007 national council on compensation insurance, inc. all rights reserved. 1 the new...

1© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

The New NCCI Hazard GroupsPresented by:Jonathan Evans, FCAS, MAAAActuaryNCCI


Today’s Outline:

Background on Hazard Groups

Item B-1403 and Subsequent Annual Updates

Impact of the New Hazard Groups

Next Steps—USL&HW


Today’s Outline:

Background on Hazard Groups

Item B-1403 and Subsequent Annual Item B-1403 and Subsequent Annual UpdatesUpdates

Impact of the New Hazard GroupsImpact of the New Hazard Groups

Next Steps—USL&HWNext Steps—USL&HW


What Are Hazard Groups? Each class code is assigned to a hazard group

(HG)

HGs capture the variation in large loss potential among class codes

Classes in HG A—least likelihood for large claims

Classes in HG G—greatest likelihood for large claims

HG A … … … … HG G

Likelihood of Large Claims


What Are Hazard Groups Used For?

Retrospective Rating

Excess Loss Factors (ELFs), used to determine the charge for an optional claim limit

State Hazard Group Relativities (SHGRs), used in determining the insurance charge



Deductible Credits

NCCI files small deductible programs based on hazard groups in the voluntary market in just over 20 states

NCCI does not file large deductible programs



Other Miscellaneous Uses for Hazard Groups:

Profiling premium distribution for reinsurance purposes

Reinsurance pricing

Underwriting guidelines

Predictive modeling


Today’s Outline:

Background on Hazard GroupsBackground on Hazard Groups

Item B-1403 and Subsequent Annual Updates




Item B-1403 Filing Contents

New mapping to both four and seven hazard groups

ELFs for most states State Hazard Group Relativities (SHGRs) Expected Loss Groups (ELGs) Deductible credits not included Approved in all states


Interaction of HG and Rate Filings

ELFs and deductible credits in rate filing depend on HG filing (B-1403)

New HGs took effect with approval of the first rate or loss cost filing on or after January 1, 2007*

* Separate effective dates were filed in CO and ME due to no loss cost filings in 2007 and in SC due to a delayed loss cost effective date


ELFs Effective in 2007 Loss cost states effective in first half of year

– AK, AL, AR, CO*, CT, GA, HI, IL, IN, KS, LA, MD, ME*, MO, MS, MT, NC, NE, NH, NM, NV, OK, OR, RI, SC*, SD, TN, VA, VT

– ELFs were in HG filing and loss cost filing

Loss cost states effective in second half of year– DC, KY, UT

– ELFs were in loss cost filing

Rate states– AZ, FL, IA, ID

– ELFs were in rate filing* No loss cost filing made in CO and ME with 2007 eff date; SC eff date delayed


ELFs Effective in 2008 and Subsequent

Loss cost states – ELFs filed annually in ELG/SHGR filing (mid-year)– Effective with loss cost filing– Continue to appear in loss cost filings as well

Rate states– ELFs in rate filing– Same as current practice


ELGs/SHGRs Effective in 2008 and

Subsequent

File annually at mid-year

Single January 1 effective date for all states


The New Hazard Groups The old four hazard groups labeled I through

IV were replaced with seven hazard groups labeled A through G

To accommodate carriers that preferred a four-hazard group system, there was also a new four-hazard-group option labeled 1 through 4


4 HG Option

Made available primarily for carriers who could not update their system in the time required.

Carriers that elected to use the new four-hazard-group option had to make a filing in each state to adopt it. Otherwise they are considered to have adopted the seven HGs.

New 7 Hazard Groups collapse into new 4. – New HG 1 = HGs A & B– New HG 2 = HGs C & D– New HG 3 = HGs E & F– New HG 4 – HG G


Hierarchical Collapsing of New HGs

A B C D E F G

1 2 3 4


Today’s Outline:


Item B-1403 and Subsequent Item B-1403 and Subsequent Annual UpdatesAnnual Updates

Impact of the New Hazard Groups



Old Hazard Groups

HG Number of

ClassesStandard Premium

% of Total Premium

I 40 1,262,958,374 0.9%

II 417 66,637,777,888 45.5%

III 303 74,858,646,647 51.1%

IV 100 3,633,449,434 2.5%

Total 860 146,392,832,343 100.00%


Old Mapping

II 417

III

303

IV 100 I

New Mapping

G

123

F

67E

198

D

67 C

193

A

B

176

3640

Number of Classes per Hazard Group

Old vs. New


New

A

B14%

C26%

D12%

E20%

F19% G

5%

Old

II 46%

III

51%

IV: 2%

I: 1%

4%

Percentage of Premium per Hazard Group

Old vs. New


New Hazard Groups Before Underwriting

Review

0.000

0.050

0.100

0.150

0.200

0.250

0.200 0.300 0.400 0.500 0.600 0.700

Excess Ratio at $100K

Ex

ce

ss

Ra

tio

at

$1

M

Each symbol represents a class

Each color represents a HG


Member companies surveyed

101 classes had full credibility, of which 53 received comments

61 classes had credibility of 75%–99%, of which 30 received comments

Of the remaining 700 classes, 200+ also received comments

Underwriting Review ofHazard Group Assignments



Much feedback pertained to dangers faced by employees, such as:

– Extensive driving– Heavy machinery– Dangerous materials

Feedback also reflected reasoning by analogy:– Suggesting classes with similar operations be assigned to

the same HG– Suggesting a small class be mapped to the same HG as a

larger class with similar operations


Final HG assignments based on:

– Statistically indicated mapping

– Survey comments

– Internal Underwriting review

– Statistical credibility of class

– Statistical ambiguity of class (e.g., was indicated mapping between 2 HGs?)



Class Movement FromOld to New 4 HGs

Nu

mb

er o

f C

lass

es

3511

586

219

0

100

200

300

400

500

600

700

Down 2HGs

Down 1 HG NoMovement

Up 1 HG Up 2 HGs


Revenue Neutrality

General increase in ELFs when comparing the old 4 HGs to the new 4 HGs (e.g., old HG I to new HG 1).

General movement of classes to lower HGs.

These two results offset each other, and the overall average ELFs are unaffected across all hazard groups and prior to trend. Therefore, there is no overall premium effect.


Percentage Change in Average Cost per Case

Old vs. New 4 HGs

Injury Type

Hazard Group

1 2 3 4

Fatal +48.6% +14.0% +2.2% -5.3%

PT +18.7% +4.0% +3.4% +29.2%

PP +2.1% +9.1% +2.8% -6.0%

TT -3.3% +4.8% +1.1% -5.8%

Med Only

-6.8% +2.9% +1.4% -9.5%


PT Average Cost per CaseOld HG IV vs. New HG 4

HG IV

$413,376

HG 4

$533,913

$ 214,619 $ 573,275$ 450,789


Percentage Change in Injury Type WeightsOld vs. New 4 HGs

Injury Type

Hazard Group

1 2 3 4

Fatal +133.3% +30.0% +3.8% -23.4%

PT +12.1% +8.2% 0.0% +39.4%

PP -1.6% +2.7% +0.7% -1.5%

TT -4.7% -3.3% -1.3% -2.3%

Med Only +15.2% -13.2% -5.2% -29.2%


PT Weight Old HG IV vs. New HG 4

HG IV

10.4%

HG 4

14.5%

4.1% 15.7%12.0%


Change Due to New Mapping

-12%

-6%

0%

6%

12%

18%

24%

30%

HG I to 1 HG II to 2 HG III to 3 HG IV to 4

$1M Attachment Point

Per

cen

tag

e C

han

ge

in E

xces

s R

atio

Change in Excess RatiosOld to New 4 HGs

Each symbol represents a state


Change in Excess RatiosHG I to HG 1

$1,000,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

AR NM VA SC MT HI ME MS OR SD NV MD NC TN LA NH RI IN VT AK KS CO NE OK IL CT MO

State

Per

cen

tag

e C

han

ge

in E

xces

s R

atio

s

Total Change in B-1403 Change Due To Remapping


$1,000,000

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

MT AR OR SC NV NM SD VA HI TN MS AK NC ME NE VT LA CO RI MD OK NH IN KS CT IL MO

State

Per

cen

tag

e C

han

ge

in E

xce

ss R

atio

s


Change in Excess RatiosHG II to HG 2


$1,000,000

-5%

0%

5%

10%

15%

20%

MT AR OR SC SD NM NV OK AK NE HI LA VA CO ME TN MD MS NH VT IN RI NC KS MO CT IL

State

Perc

enta

ge

Ch

ang

e in

Exce

ss

Rat

ios


Change in Excess RatiosHG III to HG 3


$1,000,000

-10%

0%

10%

20%

30%

40%

50%

RI SD NH ME AK HI OK VA MD NE LA CT SC NM VT MT NC MS OR IL MO NV AR KS TN IN CO

State

Perc

en

tag

e C

han

ge i

n E

xcess R

ati

os


Change in Excess RatiosHG IV to HG 4


Countrywide Excess Ratios

0.000

0.020

0.040

0.060

0.080

0.100

0.120

0.140

0.160

0.180

0.200

0.250 0.300 0.350 0.400 0.450 0.500 0.550 0.600 0.650

Excess Ratio at $100 K

Ex

ce

ss

Ra

tio

at

$ 1

mill

ion HG I

HG II

HG III

HG IV

HG A

HG B

HG C

HG D

HG E

HG F

HG G

Old and New HGsCountrywide Average Excess Ratios


Key TransitionsOld Mapping

Hazard Group I II III IV Total

Number of Classes 40 417 303 100 860Percent of Premium 0.9% 45.5% 51.1% 2.5% 100%

Hazard Group26 10 0 0 36

0.4% 3.9% 0.0% 0.0% 4.3%

10 165 1 0 1760.4% 13.0% 0.1% 0.0% 13.6%

1 178 14 0 1930.0% 21.7% 3.7% 0.0% 25.5%

1 42 24 0 670.0% 5.2% 7.1% 0.0% 12.3%

2 17 178 1 1980.0% 1.5% 18.4% 0.0% 19.9%

0 4 58 5 670.0% 0.2% 18.9% 0.3% 19.3%

0 1 28 94 1230.0% 0.0% 2.9% 2.2% 5.1%

New

Map

ping

F

G

A

B

C

D

E


Largest Class Codes Transitioning From II to B

Class Code

DescriptionPremium Size

(8810 = 1000)

8017 Store: Retail NOC 451*

8018 Store: Wholesale NOC 271

8868College: Professional Employees and Clerical

223

9052Hotel: All Other Employees and Salespersons, Drivers

219

9101College or School: All Other Employees

162

*Indicates premium 45.1% of 8810 premium.


Largest Class Codes Transitioning From II to C

Class Code


(8810 = 1000)

8810 Clerical Office Employees NOC 1000

8829Convalescent or Nursing Home—All Employees

293

8033Store: Meat, Grocery and Provision (Combined)—Retail—NOC

248

8833 Hospital: Professional Employees 214

9014Buildings—Operation by Contractors

189


Change in Excess RatiosFrom Old HG II to …

Change Due to New Mapping … excluding trend

-30%

-20%

-10%

0%

10%

20%

30%

HG 2 HG B HG C


Pe

rce

nta

ge

Ch

an

ge

in

Ex

ce

ss

Ra

tio

Change Due to New Mapping—Excluding Trend



Largest Class Codes Transitioning From III to E

Class Code


(8810 = 1000)

8742Salespersons, Collectors or Messengers—Outside

453

5190Electrical Wiring—Within Buildings and Drivers

399

5183 Plumbing NOC and Drivers 366

7228Trucking—Local Hauling Only—All Employees and Drivers

325

5221Concrete or Cement Work—Floors, Driveways, Yards or Sidewalks—and Drivers

250


Largest Class Codes Transitioning From III to F

Class Code

DescriptionPremium Size (8810 = 1000)

5645Carpentry—Detached One or Two Family Dwellings

500

7229Trucking—Long-Distance Hauling—All Employees and Drivers

416

5403 Carpentry NOC 289

5022 Masonry NOC 285

3724Machinery or Equipment Erection or Repair NOC and Drivers

272


Change in Excess RatiosFrom Old HG III to …

-30%

-20%

-10%

0%

10%

20%

30%

HG 3 HG E HG F


Perc

en

tag

e C

han

ge in

Excess R

ati

o

Change Due to New Mapping—Excluding Trend



Impact on Small Deductibles

NCCI files deductible credits that vary by HG in just over 20 states in the voluntary market and in just over 10 states in the residual market

For deductibles of $5,000 or less, the impact of the revised credit on the loss cost premium of most risks is less than 5%


B I II C E IIIF IV GA

D0%

5%

10%

15%

20%

25%

$500 Deductible Amount

Ded

uct

ible

Cre

dit

Countrywide Average $500 Deductible Credits


Today’s Outline:


Item B-1403 and Subsequent Item B-1403 and Subsequent Annual UpdatesAnnual Updates


Next Steps—USL&HW


Current USL&HW ELFs

Countrywide

Last filed in 1999

Not updated annually

Based on F-class data


Countrywide vs. state-specific ELFs– USL&HW indemnity benefits are countrywide,

but medical probably varies by state– Even half of the indemnity losses are paid at

state benefit level in typical F-class

Minimal data available

Minimal use expected– Very few retro policies with USL exposure are

being written

Key Considerations


Use state ELFs– Typically half of indemnity paid at state level– Medical probably varies by state and accounts for

majority of large losses

Make use of USL percentage to derive state-specific USL ELFs– USL ELFs that vary by state could be derived by

assuming USL costs exceed each specific state’s costs by the USL percentage, or some portion of the USL percentage

Possible Options


Summary of New HGs

New 7 HGs provide a greater spread in ELFs

Classes are more evenly spread across the new HGs vs the old

General increase in ELFs, partly due to inflation over time

Increase in ELFs offset by movement to lower HG for many classes

© copyright 2007 national council on compensation insurance, inc. all rights reserved. 1 the new...

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