Formula and Calculations
The formula primarily used by the NCCI is the following.
The formula is broken down into 3 main categories or subsections for understanding.
- 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.
- 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.
- 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.
Read more about this topic: Experience Modifier
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