Document nkG4jwm704bd8a8DL7wY88wwa

WORKMEN'S COMPENSATION AND INSURANCE The three general types of merit rating plans are 1 Schedule rating 2 Experience rating 3 Retrospective rating Schedule rating Schedule rating has been abandoned in all states except California, but at one tune was generally used Basically, it was a method of recognizing variations m physi cal items and in administrative items among risks of the same classification, based on an engineering inspection First, a so-called ``standard" risk for a particular classification was established, then the individual nsk was compared with that standard nsk After the physical and administrative items had been checked by engineering inspection, a credit or charge was applied to the rate depending upon whether the nsk was found to be better or worse than standard Credits or debits were assigned to each item, and the total credit or debit was usually limited to a maximum percentage Experience rating Experience rating recognizes good loss experience on the part of the better-thanaverage nsk and penalizes the worse-thanaverage nsk This method rehes on experi ence rather than on the physical character istics of the nsk The manual rate is supposed to provide sufficient premium to cover the average loss and expense within a classification Hus average loss experience is created by good, average, and bad nsks, and if there were no further modifications to the rating pro cedure, the employer with good expenence would have to pay the same rates as would an average or poor expenence employer. In expenence rating, on the one hand there is the manual rate and on the other hand there is the expenence of the indi vidual nsk from which a rate may be deter mined The evidence must be weighed in order to amve at a compromise between the manual and the nsk rates. In general, the greater the payroll, the more dependa ble becomes the expenence Expenence rating is not appropriate for the small nsk whose expenence possesses little credibility As risks decrease m size, their credibility also decreases, and the differentials do not accurately reflect the real hazards of the nsks In such cases, the manual rate is the most accurate rate to apply As nsks increase in size, more and more recognition is given to their own expenence until the point of self-rating is reached and expenence determines rates Expenence rating is not applied unless the premium exceeds a minimum figure, which vanes by state Generally, only nsks that develop a minimum premium of $1,500 for the latest year or an average of $750 in premiums in two or more of the three years immediately preceding applica tion for expenence rating are eligible for this type of rating The manual rate is increased or de creased in accordance with the risk's loss record over a period of 36 months How ever, the latest year's expenence is not available for use because a large proportion of the losses in that year would not have been settled, and the rate is developed six months pnor to the inception date of the policy If the policy for a nsk expires on January 1, 1964, the expenence for the re newal effective January 1, 1964, would be modified based on the expenence during the 1960, 1961, and 1962 policy years Under expenence rating, the expenence of each year has equal weight Thus, the accident record of each of the three years past is ]ust as important as that of the most recent year Retrospective rating In expenence rating, three years' expen ence is the basis upon which a rate that will be adequate and equitable for the fu ture is determined Retrospective rating requires a review of the latest year's ex penence upon expiration of the policy, and the premium then is revised to correspond with the ament loss expenence. Certain deficiencies under an expenence rating plan are overcome by retrospective rating The first deficiency is that expen ence rating considers only past expenence. Thus, a risk that has unproved its expen ence through effective safety programs and training will receive limited benefit for this effort until the years of unfavorable expen ence have passed from the three-year ex penence period Second, the current year 11-15