Assigned Risk: Surcharge

Explanation of the Indiana assigned risk surcharge of 25%.

The assigned risk surcharge is part of the annual advisory rate and assigned risk rate filing effective every January 1st.
The assigned risk surcharge was implemented in 1990. A 25% surcharge applied to the entire premium before expense constant, when the total modified premium was in excess of $2,000. Premium generated from the assigned risk surcharge is part of standard premium.
The premium threshold was increased to $2,500.
Effective January 1, 2011, the assigned risk surcharge is adjusted so that the 25% surcharge is applied to only that portion of premium greater than $2,500.

The wording is in the 1/1/2011 assigned risk rate pages. It’s on page 34 of the PDF file (click on the link below). The text is highlighted in yellow at the bottom of the page. Here’s the link on our website:


"A 25% residual market surcharge is applicable to the premium in excess of $2,500 of the standard premium, subject to audit."

As an example, an employer with $3,000 in premium currently pays a surcharge of $750 ($3,000 x 0.25), Under the revised surcharge, the same employer would only pay $125 ($500 x 0.25). So, for this example, an employer of this size would realize an 83% reduction in the surcharge.



This adjustment achieves a reduction in the surcharge, especially for smaller employers in the assigned risk market. It keeps the current figures (surcharge of 25%, and threshold of $2,500 ) so it should be easy for employers and agents to understand, and simple for carriers to implement.

Actuarial Reviews
Annually as part of our January 1 rate filing reviews, our Actuarial Committee, in conjunction with our actuarial vendor, the NCCI, reviews the 25% assigned risk surcharge. The conclusion consistently has been that the current differential is adequate and should not be changed.

Over a long period of time, the employers in the assigned risk market generate proportionately more losses than the regular market. So, to keep the assigned risk market at a "break even" condition (collect enough premium to pay losses and expenses), the 25% surcharge was implemented in Indiana in 1990.

In Indiana, only assigned risk policies in excess of $2,500 receive the 25% surcharge (i.e., the surcharge is applied to the entire standard premium for policies that exceed $2,500). Therefore, the average surcharge typically is 16% to 17% (i.e., 0% surcharge on policies less than or equal to $2,500, and 25% surcharge on those above $2,500).

The actuarial reviews compare the loss ratios for the voluntary market to the loss ratios for the assigned risk market. A five-year experience period is reviewed and the losses and premiums are actuarially adjusted to reflect current benefit and voluntary market premium levels and the claims costs are developed to estimated ultimate level.

The analysis indicates the extent to which current voluntary market premium levels would be adequate to fund the expected losses for the assigned risk market. An assigned risk premium level which is approximately 20% higher than the voluntary market would be required to self fund the assigned risk market. This indication is then compared with the premium impact of currently approved assigned risk pricing programs as a basis for considering whether any changes in those programs are warranted.

Additional factors the actuaries consider:

• The possibility of double digit inflation
- The annual statewide (voluntary and assigned risk markets combined) rate filing process includes a comprehensive review of loss ratio trends which reflect wage growth, indemnity and medical inflation. This includes an examination of the actual history of Indiana loss ratio trends along with econometric forecasts of underlying cost drivers. The objective of trend analysis is to predict the likely changes in loss ratios from the experience period utilized in the rate filing to the period during which revised rates will be in effect.

- We have not performed a separate trend analysis based upon Indiana assigned risk experience for several reasons. First, the premium volume for the Indiana assigned risk market has been fairly modest over recent years. Policy year premiums that now are less than $50 million would not provide a credible basis for deriving Indiana Assigned Risk Differential/Surcharge trends into the future.
- The assigned risk differential analysis assumes that the trends selected based upon the statewide analysis will apply equally in the assigned risk market.

• The aging workforce
- Research has indicated that there are offsetting effects from the aging of the workforce. Older workers have slightly higher average costs than middle-aged workers but this is offset by the fact that older workers file fewer claims. As a result of these offsetting factors, the net effect would not have an impact.

• Although claim frequency is dropping, claim severity is rising
- NCCI’s analysis has confirmed these observations as part of its annual rate filing and trend procedures.

- The experience to date has been that the significant decline in frequency has substantially offset the rising severity. The actuaries review these patterns along with evidence of any changes in the relative trends to assure that overall trends are appropriate for future rating periods. 

• The changing mix of employers by hazard group
- Since premium rates are sensitive to the hazard level of employers, any changes in the mix of hazard groups will lead to higher or lower premiums entering the residual market.

- To the extent that a changing mix of employers by hazard group is believed to result in a different future premium distribution, the selection of the indicated differential could take this into account.

The 25% assigned risk surcharge has not changed since its inception in 1990. In 2015, 2016 and 2017 filings, the actuaries reviewed the indicated assigned risk differential in the context of the existing assigned risk pricing programs. In each of these analyses, it was suggested that the 25% assigned risk surcharge should be increased.  Given that the Indiana Commissioner of Insurance has spoken in opposition of any increase to the surcharge, and that the Indiana Reinsurance Pool is considered to be on strong footing, the ICRB Board made the decision not to seek an increase at this time.

This subject is clearly one where informed judgment must be applied rather than strictly following a mathematical formula. There are a number of concerns about the changing dynamics of the assigned risk market. To the extent that claim frequency or severity trends or the composition of the assigned risk market deteriorates, a higher surcharge may be warranted in the future.

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