Earned But Not Reported Now A Factor With Premium Audits – Employers Be Wary
NCCI’s Barry Lipton, Senior Actuary published a post this morning that I read over three times to absorb the theory of the Earned But Not Reported (EBNR) hangover effect. You can check out the post here at this link. You should at least read the introduction and conclusions.
I had to take Barry’s great article and take it from a macro view to a micro view. How will this affect the individual policyholder? Agents need to take heed of this info for their insured clients.
No, I am not beating up on premium auditors and premium audits. I am beating up on the assumptions made after an employer receives a premium audit refund due to a downturn in their business.
Carriers are examining their figures due to the downturn. Employers should also review their figures.
Yes, having a premium refund now has helped and will help employers survive until the main-street economy picks up speed – it already has picked up in certain areas and industries.
Earned But Not Reported (EBNR) Definition
From the NCCI article – at the previous link
… our subject today is about a related issue—the accuracy and timeliness of the financial estimates carriers are required to make for the premium these audits generate.
This financial estimate, known as Earned but Not Reported premium (EBNR), is the premium counterpart to the better-known Incurred but Not Reported component of loss reserves (IBNR).
This is a macro level definition – hang in there with me – this is going to make sense.
Micro-level Definition of EBNR
Therefore, the written premium for that calendar period will look extra low since high-payroll estimates in the prior policy period are being corrected over and above the decline in actual insured policy payroll volume attributable to economic conditions—a double whammy, as two years of impacts are rolled into one. This affects both written and earned premium.
How Does Earned But Not Reported Affect An Employer?
NCCI did not make this conclusion, I am making it. Let us say that your business spikes once a full recovery takes place. Look at the second chart in the article. You can see the spike there.
The resulting audit for the subsequent policy year should be a concern. If at policy renewal, the recovery numbers – where you received the refund are used, then you are in for a sticker shock on the post-recovery policy period audit.
Many carriers, (I assisted a few) processed premium refunds earlier this year. My earlier “employer beware” warning results from this very situation.
The carrier has returned a large amount of premium to your company. Many states such as New Jersey and California ordered an immediate return of premium.
When your business returns and you return your employees to work or hire new ones, your payroll may be much larger than your policy anticipated. Agents take heed so that you avoid an angry insured when the post-recovery premium audit occurs in 2021 or later.
Earlier Articles On Economic Slowdowns
Many articles published in this blog over the years warned if you have a business contraction, your policy renewal should reflect the reduction in payroll and should not be delayed until at the yearly premium audit.
The article in the prior link is from 2008 and covers recession proofing your workers comp policies. The article you are reading now should be looked at as recovery-proofing.
Now, the opposite may be true for your company, you may have received an early premium refund or have received one at the audit. That is great news. Make sure that your next policy reflects any anticipated business improvements.
Some businesses may not recover until late 2021 or 2022. If you do not anticipate your business increasing until the second policy year, then remember to adjust the policy renewal figures in your recovery year.
Waiting Until Premium Audit To Offset EBNR
If you wish to conservatively estimate your business recovery, then avoid the Earned But Not Reported sticker shock at premium audit. Budget funds to pay the affected premium audit when your business fully recovers – good luck.
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