A hazard group is a collection of workers compensation classifications that have relatively similar expected excess loss factors over a broad range of limits.
The number of hazard groups was increased from four to seven in Item Filing B-1403, effective January 1, 2007. Some carriers may elect to retain the prior four Hazard Groups (I, II, III, and IV).
The new hazard groups are not simply a subdivision of the previous four; they are a substantially different mapping of classes to hazard group.
Hazard group assignments are used to establish the proper Excess Loss Factor (ELF) for risks electing a loss limitation under a retrospective rating plan. They also may be used to determine the appropriate premium reduction percentage for risks electing deductible insurance.
Class codes are assigned to hazard groups based on their ELFs. This effectively categorizes the relative extent to which workers are exposed to serious injuries. The factors are developed on a state-by-state basis and are representative of the varying degrees of severity of exposure to occupational hazards inherent to operations within those classifications.
Classes are placed into hazard groups based on their excess ratios (which indicate their potential of having losses in excess of a given threshold) at different loss limits. Classes in Hazard Group A have the lowest potential for large claims, while those in Hazard Group G have the highest potential.
The Hazard Groups differentiate the degree of hazard for classifications from the least hazardous to the most hazardous. The seven new hazard groups are labeled A, B, C, D, E, F, and G, with A being the lowest hazard group with the least likelihood of serious claims, and G being the hazard group with the highest likelihood of serious claims.
Hazard Groups are different from Industry Groups which are used in the annual advisory rate filing.
Class Codes by Hazard Group List
Hazard Group assignments for classifications and severity relativities are periodically updated through item filings. With the filing effective January 1, 2007, the number of groups increased from 4 to 7. The most current list can be found in the Basic Manual, Appendix E. The attached file contains the current Table of Classifications by Hazard Group as of May 1, 2010.
Hazard Group Relativities
Question: Please explain the meaning of Indiana's Hazard Group Relativities
A State Hazard Group Relativity is the ratio of the average countrywide severity to that of the State's Hazard Group. Exhibit I of the Item Filing R-1329 describes the development of the Relativities.
Hazard Group Relativities are used as an adjustment factor to a given risk's Expected Losses to determine the applicable Loss Group. (More detail can be found in the passage in the filing captioned State and Hazard Group Relativities.) The Loss Group determines the Insurance Charge, which covers the costs due to the possibility of losses above the maximum. (See Appendix of the filing.)
Generally, risks with larger Expected Losses experience less variability in their loss ratios, so they are given lower Insurance Charges. However, the degree of hazard in a risk's class and the workers' compensation environment in the risk's state can also affect variability, making State Hazard Group Relativities necessary.
Finally, inflation can increase Expected Losses without decreasing variability, requiring a change in either the Expected Loss Ranges or in the Relativities. Increasing the State Hazard Group Relativity would reduce Insurance Charges and vice versa.