The following incentive program for servicing carriers in Massachusetts has
been developed based on paid loss ratio relativities. For each servicing
carrier, paid loss ratio relativities will be calculated by policy year for
Massachusetts assigned risks by dividing the servicing carriers' paid loss
ratio (to written minus uncollectible premium) by the average paid loss
ratio for all servicing carriers in the Massachusetts Pool.
Program Applicability
A servicing carrier with premium less than $2.5 million in the Massachusetts Pool is not subject to any incentive or disincentive in this Commonwealth. This is meant to reduce the administration cost in dealing with a relatively small servicing carrier.
This program will be effective beginning with policy year 1993. In other words, the first year of paid loss ratios evaluated will be policy year 1993.
Calculation of Incentives and Disincentives
There is an aggregate limit on incentives/disincentives of 9% of premium subject to the program. The formulas for calculating the incentives and disincentives are in Exhibit 1.
Annual Evaluation of Paid Loss Ratios
Each policy year will have five annual evaluations. The first evaluation
will be at the completion of the policy year (policy year 1993 at 12/31/94,
etc.). The final evaluation for policy year 1993 will be based on experience
reported as of 12/31/98.
Incentives/disincentives will be calculated on an annual
basis in accordance with the page entitled "Determining the Servicing
Carrier Fee." To avoid the back and forth transfer of funds and to consider
the fact that more immature data is less reliable, not all of the calculated
incentive/disincentive will be dispensed/billed for preliminary adjustments.
The portion of the incentive/disincentive dispensed will depend upon the
evaluation number. See the chart below as an example for policy year 1993.
| Evaluation Number |
Date |
Portion of Incentive/
Disincentive Dispensed |
1
2
3
4
5 (Final) |
December 31, 1994
December 31, 1995
December 31, 1996
December 31, 1997
December 31, 1998 |
20%
40%
60%
80%
100% |
Each evaluation for a policy year considers losses paid
since the beginning of the policy year. Because of this, the
incentive/disincentive calculated on a subsequent evaluation will net out
any payments made or received from earlier evaluations.
Experience Used
The experience data referred to is the assigned risk portion of business
for servicing carriers. The data used for calculating incentives will be
servicing carrier paid losses, written premium, and uncollectible premium as
reported quarterly.
Loss ratios will be calculated to written premium minus
uncollectible premium. However, to the extent that Massachusetts Pool rules
for a given policy year allow appeals, any uncollectible premium which the
servicing carrier appeals to obtain servicing carrier allowance and wins,
will be included.
Medical Cost
Containment Expenses/Allocated Loss Adjustment Expense
To the extent Massachusetts pool rules for a given policy year provide
for reimbursements of servicing carriers for medical cost containment,
allocated loss adjustment expenses, etc., reimbursed expenses will be added
to paid losses to calculate the relativities. Since such expenses should
serve to lower losses, the addition of any such reimbursed expenses should
not adversely impact a servicing carrier. The average pool paid loss ratios
would also be adjusted to include any such reimbursed expenses. The purpose
of including reimbursed expenses would be to discourage servicing carriers
from requesting reimbursement of costs which are not effective in reducing
losses. The statewide average servicing carrier fee will be adjusted to the
extent that any reimbursements are made for such expenses. [See items 1 and
2 on the page entitled "Determining the Servicing Carrier Fee."]
Capping of Losses
In order to limit the impact of very large losses, paid losses will be
capped at $250,000 per claim/$500,000 per occurrence. Losses will be capped
at $100,000 per claim/$200,000 per occurrence for preliminary adjustments at
the first and second evaluations.
For several reasons, the limit on large losses used in
the calculation is lower for earlier evaluations of a policy year. Very
large losses are not considered in earlier evaluations to avoid discouraging
servicing carriers from making lump sum payments. Additionally, a very large
paid loss could have a bigger impact on a servicing carrier's paid loss
ratio when the policy year is immature.
Since cumulative paid loss amounts are not reported by
claim, this would require servicing carriers to report losses which should
be capped. The loss cap was selected large enough so that the administrative
burden of reporting individual large paid loss amounts is not burdensome.
Carriers
This program will be applied on a group basis. The definition of a group
is to be found in the Pool Plan of Operation.
|
Formula for Calculating Incentives and Disincentives |
|
Definition of Variables
|
|
|
MR
|
=
|
Maximum Relativity Factor
|
|
|
mR
|
=
|
Minimum Relativity Factor
|
|
|
P
|
=
|
Carrier written premium minus uncollected premium
|
|
|
SLR
|
=
|
State average paid plus case loss ratio
|
|
|
Carrier Rel
|
=
=
|
Carrier paid loss relativity
Carrier paid loss ratio/ state average paid loss ratio
|
|
|
If MR < Carrier Rel,
|
|
|
|
=
|
P x SLR x (Carrier Rel - MR)
|
|
Incentive
|
|
|
If mR > Carrier Rel,
|
|
|
|
=
|
P x SLR x (mR - Carrier Rel)
|
Note: The maximum Incentive/Disincentive is capped at
9% of premium subject to this program.
Program Reference:
Notice to Pool Carriers No. 06-2 dated November 17, 2006 - Revision to
the Paid Loss Ratio Incentive Program to include Maritime and USL&H
Experience