July 17, 2023 — Many years ago I was tasked with introducing the head actuary of a very large insurance company at a professional gathering. I concluded my intro with —" and he has the most extensive collection of actuary jokes I have ever heard. They're both hilarious." So why am I suggesting that you might actually enjoy reading a recent article from R&I (100 Years of Ratemaking (ncci.com)) about the National Council on Compensation Insurance's (NCCI) centenary as the premier rate-setter for workers' comp insurance in the US? It looks at the daunting task of figuring out how to set appropriate rates starting back when the claims data were sparse and often handwritten through our thankfully more automated processes today.
R&I's rendition of NCCI's story — not too long and crisply written — is really the story of all of us who try to make sense of the costs and trends in our comp programs, whether we are risk managers or underwriters. The story takes us through the development of all of the essentials, from understanding the subtleties of the exposure base to looking at claim year definitions to mapping trends with growing detail and sophistication. And what about cost drivers? Comp has been through more than one medical cost cycle in recent years. (Are we headed for another one? The omens are not clear, so stay tuned.)
In short, the history of NCCI ratemaking helps us conceptualize all the moving parts of analyzing comp costs today, whether we are looking at self-retained risks or a book of insured business. The article's conclusion speaks to us all:
It is said that to know where you are going, you must know where you've been. Since NCCI's inception, with an actuarial department of seven employees, the role of the ratemaking staff remained the same — to ensure rate adequacy. NCCI will continue to seek input and refine its methodologies. This includes actively reviewing topics such as alternative ratemaking methodologies, disease loads, large loss limiting methodologies, excess loss factors, and loss development by injury type tail factors, and standard wage distributions.
One matter that the article touches only lightly, but that we all need to be thinking about, is how we apply these evolving analytic methods to a rapidly changing industrial landscape. Back when NCCI began this adventure, they only needed three industrial classifications. Yeah — that changed a bunch. Looking at how NCCI has coped with 100 years of dramatic change will be extremely helpful as we look ahead at another century which promises to be even more turbulent.
And never forget the first law of actuarial science: Much of life is random, but thanks to the law of large numbers, doing something enough times can help you create your own luck*.
*On the other hand, never be afraid of uncertainty. A stochastic life is full of color and surprise.
Author
Dr. Gary Anderberg
Make Gallagher Bassett your dependable partner
When making the right decision at the right time is critical to minimize risk for your business, count on Gallagher Bassett's extensive experience and global network to deliver.