Experience Modifier - Formula and Calculations

Formula and Calculations

The formula primarily used by the NCCI is the following.

\frac{I+(C*(1-A)+G)+(A*F)}{E+(C*(1-A)+G)+(A*C)}

A = Weight Factor G = Ballast I = Actual Primary Losses H = Actual Incurred Losses F = Actual Excess Losses (H-I) E = Expected Primary Losses D = Expected Incurred Losses C = Expected Excess Losses (D-E)

The formula is broken down into 3 main categories or subsections for understanding.

  1. Primary Losses
    • Primary losses show up as both I and E in the above formula, E is for "Expected" primary losses vs actual. This expected value is determined based on a company's payroll cost with a little actuarial calculations.
  2. Stabilizing Value
    • This is a calculation based on expected excess losses, a mysterious weighting factor, and a mysterious Ballast factor.
    • The weighting factor and Ballast factor are called mysterious since they are determined again with actuarial voodoo and the method for determining them is not published publicly.
  3. Ratable Excess
    • Using the weighting factor the Ratable excess is simply the excess losses times this factor.

These 3 categories are summed up, with Actual numbers divided by Expected numbers, notice that the Stabilizing value does not change between the numerator and denominator.

\frac{ActualPrimaryLosses + StabilizingValue + ActualRatableExcess}{ExpectedPrimaryLosses + StabilizingValue + ExpectedRatableExcess}

Read more about this topic:  Experience Modifier

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