WernerD.WC

Reading: BASIC RATEMAKING, Fifth Edition, May 2016, Geoff Werner, FCAS, MAAA & Claudine Modlin, FCAS, MAAA Willis Towers Watson

Appendix D: Workers Compensation Indication

Study Tips

Alice's Mega-Pro-Tip 1:   Appendix D contains new material not covered in the main chapters of Werner.

Forum   This appendix, which is a loss ratio rate indication for Worker's Compensation, introduces concepts specific to WC that are not discussed elsewhere in the text. There are 2 prior exam problems available in the BattleTable and you would not be able to solve the 2014 problem unless you had studied this appendix. The 2016 problem however is solvable using methods from earlier chapters. The given data for the 2016 problem is for a WC insurer but you don't have to know anything special about WC rate indications to solve it.

I'm wondering if this very specific type of WC problem covered in Appendix D has fallen out of favor with the exam committee. If you read the examiner's report for the 2014, you'll see that most candidates struggled with the WC-related aspects the problem, and as of Fall 2019 that type of problem has not appeared again.

If you look at Appendix D in Werner, you'll see that the WC indication is 12 pages, far too long to be tested fully on the exam. What I present in the wiki is a simplified version that nevertheless incorporates key WC-specific concepts. After you've studied this simplified example, you'll be able to solve the 2014 problem and any similar problem that may appear on future exams.

Alice's Mega-Pro-Tip 2:   This material is LOT of work for no gain, if it doesn't appear on the exam. If you are pressed for time, I'd advise skipping it. (You didn't hear that from Alice!)

Estimate study time: 2 days (not including subsequent review time)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• loss ratio method for rate indications from earlier chapters
• WC-specific rate indication methods including how to deal separately with medical & indemnity components

reference	part (a)	part (b)	part (c)	part (d)
E (2016.Spring #13)	teritorial relativities - calculate	%-change by territory - revenue-neutral
E (2014.Spring #2)	WC ultimate loss & LAE - calculate

Full BattleQuiz

In Plain English!

The ideal exam strategy is to have plenty of time to thoroughly study everything on the syllabus. Ha! How often does that ever work out? If it does, then great. But if you're like most people and you're running short of time, just skip this material. I think this type of problem is unlikely to appear on the exam and it requires a fair bit of effort to learn how to do it. If you get a WC problem that requires specific knowledge of WC indications, you can still get pretty good partial credit by doing "normal" things like applying development factors and trends, even if you can't complete the problem. With that said, here's an example. There are 3 steps:

[1] calculate the projected loss cost premium by applying various adjustments

→ the loss cost premium is basically just the premium used in the denominator of the loss ratio

→ the given loss cost premium is already at current rate level

→ the adjustments applied here account for exposure trend and wage level increases

[2] calculate the projected medical loss ratio

→ medical costs are split between 'fees' and 'other' and the split is given by the percentage assigned to the 'fees'

[3] calculate industry & company indicated rate changes

→ calculate the industry indicated change using the medical loss ratio (from step 2) and the indemnity loss ratio (which is simply given in my example)

→ use the company's deviation from industry along with some company-specific information to get the company indicated rate change.

Note that the example in the text has a separate calculation for the indemnity piece.

Example: Simplified WC Loss Ratio Indication

WC practice problems:  (shout-out to jj96)!

Practice: 2 Simplified WC Loss Ratio Indications

You should take a stab at the 2014 problem. The first step is essentially the same as in my example. The second step however asks you to calculate the indemnity losses rather than the medical losses ratio as in my example. The third step isn't necessary because all you have to do is calculate the ultimate loss & LAE ratio. They do not ask for the indicated rate change and do not provide an effective date. The trend period in the first step takes the losses to the AAD (Average Accident Date) of the latest year in the experience period rather than the AAD of the effective period.

E (2014.Spring #2)

The quiz is just these 2 exam problems:

mini BattleQuiz 1

Full BattleQuiz