THE PRACTICE OF SCHEDULE AND EXPERIENCE RATING FOR WORKMEN'S COMPENSATION RISKS

BY LEON S. SENIOR,

Manager and Secretary, Compensation Inspection Rating Board of New York.

In another article appearing elsewhere in this publication the reader has already been made familiar with the process involved in the determination of manual or basic rates for classifications or industrial groups to be covered by workmen's compensation insurance. It is well recognized, however, that the elaborate process which has resulted in providing basic rates for classes of risks is only the first step towards the ultimate object of ascertaining the correct rate for the individual risk.

The manual which has been established upon the basis of general and class experience contains average rates applicable to classes of risks but not appropriate to individual risks within the class. In the general process of rate-making the underwriters have adopted a number of classifications which cannot, with any degree of accuracy, describe every risk to be assigned to the classification. They were obliged to select pure premiums on a judgment basis in those cases where the class experience was insufficient to produce a reliable pure premium.

Practically every class for which a basic rate has been determined includes a number of risks that vary materially with respect to their physical and moral conditions. It is obvious that to charge the basic rate provided in the manual for each risk within a given classification does not promote the ends of justice. Equity demands that differentiation should be made between rates for employers who have modern plants and those for other employers in the same class whose workshops and equipment are of an inferior type. In order to justly discriminate in the rating of risks varying as to conditions with respect to safety, merit rating systems have been inaugurated with the object of providing an individual rate for each risk, such individual rate depending upon the physical and moral conditions in the plant. Two distinct systems are in use for that purpose, schedule rating and experience rating.

SCHEDULE RATING

"Schedule Rating" may be defined as a method of rating whereby it is intended to promote greater equity in the distribution of insurance cost by providing an individual rate for each risk based upon the physical character of the risk. The practice of rating each risk individually upon merit-establishing a rate higher than average for the inferior plant and a rate lower than average for the superior plant-is of important social value as an ecomomic force in accident prevention work, to which subject I intend to refer later.

For the purpose of enabling the individual rating of risks through measurement of risk hazard, the underwriters, with the aid of safety engineers, have prepared a rating system referred to in insurance parlance as a "schedule." This schedule makes a complete analysis of the average manufacturing plant and the normal items of hazard that contribute to industrial accidents. This analysis covers among other things the type of building construction, existing facilities for safety of employes against fire and panic hazard, the condition of floors, hoistways, stairs, elevated runways, platforms, boilers, pressure apparatus and steam engines. The schedule provides standard methods for safeguarding machinery and equipment, for the organization of safety committees and the improvement of sanitary and hygienic conditions. In the construction of the schedule the average plant has been taken as the basis and values in the form of rate or premium charges and credits established for the existence or absence of hazardous conditions. The rate values in the present schedule have been determined by interstate committees of underwriters and safety engineers upon the basis of a study of accidents sustained in European and American industries, with particular reference to the causes, severity and frequency of such accidents.

In the application of values, the underwriters have given recognition to three broad divisions of risk hazard: First: catastrophe hazard-All classifications are subject to the panic or catastrophe hazard, and all employes in any given risk are equally affected. The collapse of a building, the occurrence of a fire, the explosion of a boiler or the failure of a tank, are hazards which are not peculiar to any particular industry and not limited to any group of employes. The values for these hazards are, therefore, applied

in the form of flat charges and credits to the manual rate for all classifications, thereby distributing the cost equally among all industries. Second: Hazards peculiar to the industry and affecting all employes-Items relating to power transmission, working machines, proportion of machine operators, safety organization and hygienic conditions are regarded as hazards incidental to the industry, to be valued in proportion to the general rate for the classification. The values are, therefore, expressed in percentage form to the manual rate on the theory that the ultimate premium should be modified in a variable manner for each classification, in proportion to the loss expectancy indicated by the pure premium. Third: Hazards affecting a limited number of employes-Items relating to defective floors, stairways, unprotected elevated runways, unguarded flywheels, transmission gears, clutches, belts, shafting or set screws; absence of elevator safety devices and enclosures, unguarded grinding wheels, absence of safeguards for machinery and engines, present hazards which expose to risk only a part of the employes at a given plant at any given time. The values for these forms of hazard are expressed in flat amounts and applied not to the rate which affects the entire pay roll, but to the ultimate premium, estimated at manual rate on basis of average exposure. In the actual application of the schedule it is necessary to inspect each risk and prepare a report describing minutely each item subject to charge or credit.

Under competitive systems of insurance, where the state is charged with rate supervision, it was found necessary to establish state supervised rating organizations for the purpose of making inspections under a uniform schedule, its application to be free from discrimination and competitive influences. Rating organizations of this character have been established in the states of New York, Massachusetts, Pennsylvania and California. Under this system every insurance carrier is required to become a member of the rating organization and to submit to such organization each risk subject to schedule rating. The inspection report on each risk is valued in accordance with the provisions of the schedule and the resulting rate becomes applicable to the risk for a given period. The assured has the privilege of securing a copy of the inspection report and may, with the advice of the insurance carrier or through his own engineers, make such improvements in the plant as the inspection

may indicate and thereafter apply for a reinspection which will result in a lower rate. It is clear that the opportunity to secure reduced rates for improvements made upon expert advice has an important influence in stimulating the work of accident prevention, in reducing the accident rate and thereby lowering the cost of in

surance.

The first rating schedule has been criticised mainly on the ground that it resulted in a general decrease of premiums. It has been argued that with a manual of rates based upon average experience and a schedule providing values on the basis of the average risk, the application of the system should result neither in an increase nor in a decrease in the total volume of premiums. It must be borne in mind, however, that the constant improvements which are being made by employers will necessarily result in reduced rates and, therefore, cause a depression in premiums which in theory is justified by reason of the belief that the improved conditions produce a lower accident rate.

The first schedule, known as the Universal Analytic Schedule, applied in the state of New York, produced a net decrease in premium rates as compared with manual rates, approximating 10 per cent in the first two years of its operation and approximating 20 per cent in the last year of its operation. This very substantial decrease was undoubtedly due to the fact that the authors of the schedule had provided credit values for average conditions where no credit should have been allowed and had failed to provide charge values for inferior conditions where such charge values were ne

cessary.

The present Industrial Compensation Rating Schedule, which is now in operation in practically all compensation states, has been so framed as to more closely appraise risks upon the average basis and will undoubtedly produce more balanced results. It is urged frequently, and probably with good reason, that the best sort of a schedule is one that provides values based upon the inferior plant. This kind of a schedule would provide all credits and no charges; its application, however, would not be practical in connection with a system of basic rates established upon the general or average class experience.

The authors of the next rate manual will have to give serious consideration to the premium depression due to schedule rating and

make proper provision in the basic rates to offset this depression by means of a proper differential.

As has been mentioned already, one of the important results of schedule rating has been the stimulation of accident prevention work among manufacturers, who in the first instance have to pay the cost. While the insurance companies have been engaged for a long time under Employers' Liability laws in accident prevention work and have achieved considerable success in urging employers to correct unsafe conditions, it is believed that the most satisfactory work in that direction has been accomplished with the introduction of workmen's compensation laws and systems of schedule rating. Schedule rating offers a direct economic incentive to the employer to equip his plant in accordance with the provided standards, to introduce proper safeguards, to remove dangerous conditions that may lead to panic or catastrophe, to inaugurate systems of safety organization, and to educate the men as to the importance of care and safety through shop committees, bulletin boards and general meetings. The introduction of schedule rating has increased interest in the study of safety standards and has accelerated the movement for uniformity between insurance companies and state authorities. There is still existing a wide conflict between the laws of the various states and the requirements of insurance companies and rating organizations and it will undoubtedly take many years before all inconsistencies are entirely removed, if ever. But there is already in evidence a spirit of helpful coöperation, with a view to removing much of the inevitable confusion due to our territorial and political divisions. Both in Pennsylvania and in New York important steps have been taken to harmonize interpretations and requirements so as to remove as much of the conflict as is practicable and to place the legal requirements upon the same basis as the requirements of the insurance carriers.

A few words should be said about the future possibilities of schedule rating. Considerable attention is now being devoted by thoughtful students to the scientific development of rate-making for workmen's compensation insurance. Much of the philosophic discussion which has recently been published relates to the subject of schedule rating and the future progress of the practice.

The students' attention is particularly directed to recent papers presented before the Casualty Actuarial and Statistical Society of