Changing Payroll

1. Changing Payroll Imagine that you are reviewing a mod sheet from the NCCI and you discover that payroll is missing when you compare the mod sheet to the applicable audits. Somehow $100,000 worth of payroll is missing. You want to calculate the effect on the mod, as well as, illustrate your competency in this area to the detriment of the competing broker. Overview: • We must calculate the expected losses in respects to the amount of payroll we are adding or subtracting. • This is calculated by putting the payroll through the mod formula and then simply re-doing the aggregate mod calculation by adding or subtracting this value based on what we are trying to accomplish. So, if we are adding payroll we will add the value to the calculation. If we are subtracting payroll we will subtract the value from the calculation. • In this example lets imagine we are adding $100,000 of payroll for code 3724 in New York for the 01/01/2007 effective date.

2. Total expected losses Step 1: • We must first calculate the “totalexpected losses” for the payroll we are adding. • Go to the mod sheet and identify the year and the class code that you want to change. For example class code 3724 for the 2007 Eff. Date for New York. • Note that there will be a number under the column “ELR” (this stands for the “expected loss rate”). Move the decimal point two places to the left. Then multiply this times the payroll calculated in step one ($100,000). The product equals the “Total Expected losses.” This figure represents the losses per 100 dollars of payroll expected for that code based on an actuarial review of all losses in that code for that state. • .0309 X $100,000 = 3090 of Total Expected Losses

3. Expected primary losses Step 2: • We must calculate the “primary expected losses” for the payroll we are adding. • Go to the same place on the worksheet identified under step one, see below. • Note that there will be a number under the column tilted “D-ratio” (this stands for developmental ratio). Multiply this times the “Total Expected losses” calculated in step 2 to calculate the expected primary losses. • .18 X 3090 = 556

4. Ratable expected excess losses Step 3: • We must calculate the “ratable expected excess losses” this is a two part calculation. • Part 1: Subtract the Exp Prim losses from the total expected losses calculated in step 3. • 3090-556 = 2534 expected excess losses (this is the gross amount) • Part 2: 2,534 X the W factor. See below from page 1 of 5 of the mod sheet to calculate the “W” factor (Wash Away Factor). • 2,534 X .09 = 228 of ratable expected losses.

5. Expected primary losses Step 4: • Add the primary expected losses from step 2, 556, to the ratable expected losses from step 3, 228, for the expected total losses of 784. • This amount, 784, represents $100,000 of payroll for class code 3724 for this mod. • Now, if we want to add this payroll to the mod and see the effect, we must find the mod formula and simply add it in. Go to step five.

6. The Final Calculation Step 5: • This part of the calculation, see below, from page 1 of 5 is called the foot totals. It contains the aggregate of all payroll and losses in the format of the mod formula. The mod formula is simply Actual/Expected= the mod • You can see that the expectedtotal is 72,759. So simply add the Mod baseline value for the $100,000 payroll, 784, and redo the calculation. • 72,759+784= 73,543 • 68,091/73,543=.9258 rounded off to .93 • Therefore, by adding in $100,000 of payroll, the mod is reduced by one point. Remember that the mod is made up of the last four years not including the most recent. So if this payroll error was never caught the affect would have been over three years for a total of 3pts X the premium for three years. Assume three years of $100,000 in premium for a savings of $3,000 based upon us uncovering this mistake.