Guy Carpenter Unveils Reveal for Workers’ Comp Risks

October 27, 2004

Guy Carpenter & Company Inc. has announced the introduction of the Reveal model, a refined exposure rating tool that helps to identify the drivers of costly excess losses within workers’ compensation portfolios.

In recent years, the costs associated with the medical component of workers’ comp claims have reportedly increased at an average annual rate of more than twice that for medical care in general, contributing to an increase in the overall cost of workers’ comp claims. While all writers of workers’ comp risk are exposed to serious claims, those risk carriers with a disproportionate number of such claims could reportedly see an adverse effect on their profitability.

“Given the current environment, risk carriers have a real need to fully understand the potential for excess losses in their portfolios. To date, insurers have not had an effective tool to predict excess losses. The Reveal model helps to fill that gap in our understanding of workers’ compensation risk,” said Michael Carlino, senior vice president and head of Guy Carpenter’s Workers’ Compensation Specialty Practice.

Currently, the industry uses an exposure classification system created by the National Council on Compensation Insurance, the industry’s primary rate-making bureau. Within this system, more than 1,600 individual job classifications are identified through the use of individual class codes, and rating bureaus establish and publish ground-up rates by state at this refined class code level.

However, carriers do not reportedly have a comparably detailed method to predict excess losses. Potential excess loss exposure is determined by mapping all individual class codes into four Hazard Groups, with frequency and severity of losses increasing from Hazard Group I through Hazard Group IV.

Each Hazard Group has an expected distribution of claims frequency by injury type (fatal, permanent total, etc.) and the relative incidence ratio of serious injuries to minor injuries logically increases by Hazard Group.

However, Guy Carpenter’s research reportedly showed that certain classes within each Hazard Group had a significantly greater number of serious injuries than their respective Hazard Group average. This suggests that a risk carrier exposed to those classes at the most severe end of each Hazard Group has considerably greater excess loss exposure than the current methodology indicates.

The Reveal model was developed using five years of historical industry data – including reported claim count information by injury type at the class code level – collected from 44 states. Importantly, extensive testing demonstrated that the historical relative incidence ratios by class code may be of significant value in predicting future experience at the class level. Exposure to classes that have historically experienced a disproportionate number of catastrophic claims will generally introduce greater excess loss volatility than previously realized.

The Reveal model’s output may assist an insurer in determining the appropriate reinsurance retention level for a book of workers’ comp insurance and may provide insight in estimating proper reinsurance layer pricing. And, because specific loss trends are identified for various groups of exposures, it may also be helpful for portfolio optimization techniques and decisions regarding how claim and loss control resources are allocated.

“Since fatal and permanent total claims tend to account for most of the excess loss experience for any given class code, any insight into predicting these losses can be valuable,” said Carlino.

For more information about the Reveal model, contact Carlino at michael.j.carlino@guycarp.com.

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