Combined Ratio Difference – Different Numbers Show Improvement
The Combined Ratios of the Rating Bureaus and the carrier-reported numbers have always been a subject of debate.
Over the years, I have attended many NCCI (National), and WCIRB (California) in-person and online rating bureau conferences to keep current on the changes that occur each year. This website is full of articles on those conferences. See this article on Combined Ratios.
Whenever I mention the NCCI Combined Ratio’s great and still improving numbers, my friends and clients at the insurance carriers and agencies always mention that there are two sets of numbers. The carrier reported numbers have improved a little. The rating bureau numbers seem to show significant improvement.
One of the important concepts pointed out in my last article was that both sets of numbers are improving regardless of the final tallies. If you watch the video on the last article, one will see that the Combined Ratio difference debate ended up being the #1 question posed to NCCI. I recommend watching the snippet video produced by NCCI. It is worth the seven minutes.
Let us start with the definitions of each and see why such a difference exists between the numbers. I will include the chart from the last article as a reference. WCIRB’s Combined Ratio chart for the 4th quarter of 2022 is at the end of this article. The WCIRB reported only one set of statistics, not two.
Combined Ratio Formula
The combined ratio formula is CR = (Losses + Expenses) / Earned Premium.
The Calendar Year CR is what NCCI measures and reports. As one can see in the above chart, 2021 had a CR of 91%, and 86% in 2022. The carrier reported CR numbers for 2021 were 100% and 97% for 2022.
Why do these numbers vary?
Calendar Year vs. Accident Year
One only has to think of the number 18 months. Once a policy begins (inception) the carriers report the final numbers for that policy year 18 months later. This time gives the employer’s set of claims an extra six months after the policy expires for claims development. This delay in reporting the Total Incurred figures.
This delay is exactly why the numbers vary. The Combined Ratio difference between the calendar year and the accident year still shows an improvement regardless of the set of numbers.