B.15. ISO CGL Experience and Schedule Rating

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B.15. ISO CGL Experience and Schedule Rating
2015-09-14 12:13:55
ISO CGL Experience Rating Schedule

Insurance Services Office, Commercial General Liability Experience and Schedule Rating Plan
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  1. Experience Mod Formula
    • Mod = Z * (AER - EER) / EER (no-split 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 D-ratio)
  2. 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 claims-made) 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
  3. Standard Method
    • Basic Limits Expected LossesSL = company ELR * annual basic limits company premiumSL
    • convert BLELSL up to an occurrence level if the policy is claims-made (table 13B)
    • convert BLELSL to remove loss cost related to mid-tail 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
  4. 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
    • CSCLy, SL = AvgPremSL * SpecialExposuresy * ELR * Table 13B PAFSL * Table 13C PAFy, SL * Detrend 5Cy, SL
    • difference is that Detrend 5C factors adjust for premium trend only since exposure has been adjusted directly
  5. 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
  6. 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
  7. 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]
  8. Expected Future Loss Development Calculation
    • ExpectedDevelopmenty, SL = CSLCy, SL * EER * LDFy, SL where LDF = 1 - 1/CDF
    • if claims-made LDF = 0
    • ExpectedDevelopment = ∑∑ExpectedDevelopmenty, SL
  9. 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 = single-split plan
  10. ISO vs NCCI WC - Expenses
    • ALAE: ISO includes it in calculation, NCCI excluded
    • Other expenses: excluded in both
  11. ISO vs NCCI WC - Losses
    • Trending of losses: both don’t trend actual losses, but de-trend expected losses
    • PAFs: ISO used for claims-made, irrelevant in NCCI as WC has no claims-made 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, multi-claim/disease
  12. 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
  13. 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
  14. 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
  15. 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)