97-03: Missouri WC Schedule Rating Plan Guidelines

Summary | Background | Reporting Guidelines

To:           Missouri Workers' Compensation Insurers

From:      Chlora Lindley-Myers, Supervisor, Property & Casualty Section

Re:          Missouri Workers' Compensation Schedule Rating Plan Guidelines

Date:       May 1, 1997

Executive Summary
The Missouri Department of Insurance has allowed insurers to use schedule rating plans for voluntary-market workers' compensation policies since January 1, 1994, at which time Missouri's new competitive rating laws went into effect. While schedule rating has helped foster vigorous competition during the transition from the old administered pricing system to the new competitive pricing system, both the number of and size of the schedule credits currently being offered are beginning to cause concerns. Rather than prohibit the continued use of schedule rating altogether, the Department has decided instead to require insurers to adhere to certain procedures when granting debits and credits, and to limit their maximum size; under this Bulletin, the maximum permissible size of these premium adjustments will be reduced to 50% beginning August 1, 1997, and gradually reduced thereafter to 25% by the year 2000.
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In theory, a schedule rating plan is a method of adjusting the normal premium applied to a risk (e.g. rate x payroll) in order to account for readily identifiable factors having a bearing on the probability or severity of future losses and other risk factors not accounted for by other rating adjustments. While insurers have other methods by which an actuary can adjust the premium charged to an insured based on an insured's previous loss history - such as through the use of experience modification factors - schedule debits or credits are theoretically applied by an underwriter at the time the premium for the policy is quoted, independent of any prior loss experience.

Under the prior administered pricing system, the Department authorized insurers to use schedule rating to adjust their approved manual rates. This authorization ended in 1987 after market conduct examinations revealed a lack of compliance by various insurers with the Department's requirements that insurers retain supporting documentation in their files for the debits and credits assigned to individual employers.

With the legislatively-mandated change to a competitive workers' compensation market in 1994, the Department decided to again permit the use of schedule rating as a way to enhance competition. The Department is generally pleased with the results; clearly, the application of schedule rating has been a major factor in reducing the premiums charged to employers since competitive rating began.

However, concerns have been voiced about specific aspects of the current implementation of schedule rating. These concerns have come from the Department's market conduct examiners and from a variety of carriers, including the largest carriers in the market and small, niche-market carriers. The Department has identified the following reasons for imposing some limitations on the use of schedule rating at this time:

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Reporting Guidelines
For the reasons listed above, the Department has decided to issue the following guidelines for the use of schedule rating plans. Please note that while there are several similarities to the standard schedule rating plan set forth by the NCCI in its Experience Rating Plan and to the Department's prior regulation, there are also many differences.

Policy Year
8/1/97 +/-50%
1/1/98 +/-45%
1/1/99 +/-35%
(and thereafter)

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Questions or Comments
Insurance companies should send any questions or comments regarding this Bulletin, including modifications to existing schedule rating plans to:

Jon Meyer or Karen Rimel, Workers' Compensation Product Analyst
Missouri Department of Insurance
P.O. Box 690
Jefferson City, MO 65102-0690
Telephone: (573) 751-3365
Fax: (573) 526-4839
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