The Relationship between Standard Premium Loss Ratios and Firm Size in Workers’ Compensation Insurance

Abstract

The National Council on Compensation Insurance (NCCI) prospective experience rating plan is used in workers’ compensation pricing in a large majority of states. This plan commonly is applied to about 15 percent of employers, and approximately 90 percent of the labor force may be employed by these firms. The NCCI plan adjusts an individual employer’s manual premium based on its own loss experience during a three-year experience period to produce the standard premium for the firm. In principle, this process is designed to produce expected standard premium loss ratios for each class of employment that will equal the NCCI target for a state, which is called the standard permissible loss ratio. The standard premiums then are subject to premium discounts and the addition of an expense constant to incorporate differences in insurer expenses for firms of different sizes.¹ Hence, loss ratios based on net premiums, i.e., standard premiums adjusted by premium discounts and the expense constant, are expected to decline with increases in firm size.