An Actuarial Analysis of the NCCI Revised Experience Rating Plan

Recently the National Council on Compensation Insurance has significantly revised the Experience Rating Plan for Workers' Compensation. The new plan is referred to as the Revised Experience Rating Plan. It is a practical application of credibility theory using parameter uncertainty and risk heterogeneity. This paper compares the revised plan to the prior experience rating plan, with particular emphasis on a comparison of the credibility formulas used in the two plans. Examples are shown to illustrate the overall pattern and general conclusions concerning the differences between the prior and revised plans. The dependence of credibility on size of risk is discussed from a more theoretical point of view in an Appendix.