B.15. ISO CGL Experience and Schedule Rating
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Experience Mod Formula
 Mod = Z * (AER  EER) / EER (nosplit plan)
 AER = Actual Experience Ratio = (Actual reported basic limits L&ALAE limited to MSL + Expected Unreported) / CSLC
 EER = Exp. Experience Ratio = Expected ultimate basic limit losses L&ALAE limited by MSL / CSLC
 note that EER = 1 if there is not MSL (similar to the concept of a Dratio)

Calculation of Company Subject Loss Cost
 CSLC = expected losses for the risk, subject to basic policy limits, with adjustments for trend levels and coverage basis (occurrence or claimsmade) so that expected losses are comparable to historical
 if exposures have been fairly steady, we use the standard method
 if there has been a dramatic change, we use either the present average company rate method, or the historical exposures at present company rates method

Standard Method
 Basic Limits Expected Losses_{SL} = company ELR * annual basic limits company premium_{SL}
 convert BLEL_{SL} up to an occurrence level if the policy is claimsmade (table 13B)
 convert BLEL_{SL} to remove loss cost related to midtail coverage (table 13C)
 detrend expected losses to be on the same trend level as actual losses (table 14, rule 5.B), which will adjust both pure premium and exposure trend

Present Average Company Rate Method
 first select a special underwriting exposure base
 for the policy being rated, calculate average annual basic limits premium by subline on this new exposure basis = annual basic limits cpy prem. by subline / exposure from step 1 for new period
 CSCL_{y, SL} = AvgPrem_{SL} * SpecialExposures_{y} * ELR * Table 13B PAF_{SL} * Table 13C PAF_{y, SL} * Detrend 5C_{y, SL}
 difference is that Detrend 5C factors adjust for premium trend only since exposure has been adjusted directly

Historical Exposures at Present Company Rates
 obtain the actual exposures by class and location for each year and subline
 multiply the exposures by the current basic limit company rates
 multiply result by ILFs at the basic per occurrence limits and actual policy annual aggregate limits
 sum results across classes and locations to get 1 premium for each subline / year
 multiply by ELR and detrend factor (5C), but not Table 13B/C since rates are already appropriate for the policy type in each year of the experience

Mod Calculation
 once we have CSLC, we can lookup the Expected Experience Ratio, MSL, Credibility (Table 16)
 if Credibility ≥ 0.03, risk is eligible for schedule rating; ≥ 0.07 = eligible for experience rating
 AER = (Actual L&ALAE limited by basic limit and MSL + Expected Future Loss Development) / CSLC

Actual L&ALAE Calculation
 basic limit loss = min[actual loss, applicable basic per occurrence limit (from Rule 5A if not given)]
 include L&LAE limited by MSL = min[basic limits loss + ALAE, MSL]

Expected Future Loss Development Calculation
 ExpectedDevelopment_{y, SL} = CSLC_{y, SL} * EER * LDF_{y, SL} where LDF = 1  1/CDF
 if claimsmade LDF = 0
 ExpectedDevelopment = ∑∑ExpectedDevelopment_{y, SL}

ISO vs NCCI WC  Basic Assumptions
 experience period: both 3 years, lagged 1 year
 experience mod: ISO need to add 1 to put in factor form
 credibility: up to 100% of limited loss experience, NCCI < 100%
 plan type: ISO = no split plan, NCCI = singlesplit plan

ISO vs NCCI WC  Expenses
 ALAE: ISO includes it in calculation, NCCI excluded
 Other expenses: excluded in both

ISO vs NCCI WC  Losses
 Trending of losses: both don’t trend actual losses, but detrend expected losses
 PAFs: ISO used for claimsmade, irrelevant in NCCI as WC has no claimsmade policies
 Loss development: ISO compares ultimate losses, NCCI compares undeveloped losses
 XS loss definition: ISO defines XS losses above basic limits and MSL; NCCI above split point
 Use of XS losses: ISO excluded, NCCI used but with different credibility
 Loss limits: ISO has basic limits and MSL; NCCI has SAL, multiclaim/disease

ISO vs NCCI WC  Others
 Responds to: ISO primarily responds to frequency, while NCCI responds to frequency & severity
 Benefit levels: not an issue for ISO, NCCI adjusts expected losses

Other noteworthy items in ISO manual
 Rule 5H: adjust historical experience to match deductible level of prospective policy
 Rule 8: if manual premium ELR ≠ risk ELR, multiply by EVF = manual premium ELR / actual ELR
 Rule 12: converting the plan from a loss cost basis to a premium basis

Schedule rating
 pricing mechanism that allows UWs to subjectively adjust the premium for individual risks based on risk characteristics that are not otherwise reflected in the premium calculation, including being reflected in the experience used in experience rating
 in ISO plan, a risk must have developed an experience rating credibility of at least 0.03 to qualify
 filed with set list of risk characteristics considered, along with max credit / debit allowed

Schedule rating categories (Rule 9)
 all listed in the ISO manual
 overall capped at +/ 25%
 again, only applied if not in experience (so credit would be fading out over time)