p
`
`-_
`
`,_
`‘
`
`.-
`
`
`
`320
`
`NOTES on ex:-osusn AND PREMI‘:'J1\.-1; BASES
`
`from an increase in either the critical conditions or the number
`of injurablc objects, under conditions in which the other variable
`and the period of time remain constant, cannot be expressed as a
`linear function of the number of units of the variable. The period
`of time is the only one of the three variable elernentg into which
`the exposure has been divided somewhat arbitrarily, with which
`the hazard varies directly,
`the other two variables remaining
`constant.
`Even if the contribution of each of the variables were definitely
`known and if the hazard underlying the exposure could be ex.
`pressed as a [unction of them, such an expression would be too
`involved for practical purposes. In actual practice the time element,
`is elimiriated by considering the aggregate injuries in blocks for
`selected unit periods of time—-usually a year. This procedure
`brings together injuries of all degrees of severity and it becomes
`113035531? 1’-Q 31911‘-55 the i115“-‘Y aggregate in terms of a. common
`basis. The unit of measure used for this purpose is the economic
`unit, the dollar. The aggregate of injuries When expressed in the
`monetary standardbt dollars is known as the 105363.
`A new variable, or set of variables. inherent in the evaluation
`g standard used is introduced in the process of expressing the aggre-
`gate injuries in terms of dollars. This standard for evaluating
`injuries is the scale of remuneration adopted through a formal law
`as in compensation. or through custom and precedent as in the
`‘gov:-ts, or through community opinion as reflected in jury verdicts
`and private settlements. The efiect of this new variable, the-
`evaluation standard, is indicated by the difference in the losses
`obtained when the same or injuries to either human beings
`or inanimate objects are expressed in monetary units by the use of
`dilferent evaluation standards.
`
`_
`
`PREMIUM Bssns.
`
`Insurance is the institution devised to transfer the losses arising
`out of the hazard from the few upon whom they chance to fall to
`the many exposed by paying the losses from funds called premiums
`which have been specially collected for this purpose. These pre-
`mium iunds are acemnulated from charges called the rate collected
`per unit exposure. The exposure medium selected as the basis for
`the charge of the premium is known as the premium basis.
`
`
`
`Page 000010
`
`

`
`
`
`NOTES on nxrosonn AND rnnmom mass
`
`321
`
`Obviously, the premiums collected are to be proportional to the
`hazard which is measured by the losses. The medium selected for
`measuring the exposure is the most important factor in making the
`premium collections in accordance with the probable loss in-
`cidecnce. The medium most desirable as a. premium basis is the
`one possessing a combination of these two qualifications in the
`largest degree:
`1- Magfliifide of Medium should vary with hazard.
`_
`It is desirable to have for premium basis an exposure
`medium Whose magnitude varies approximately directly
`with the hazard when this is measured by the losses. By
`using a. medium which varies directly with the hazard, the
`total premium may be obtained by multiplying the eit-
`posure expressed in units of the premium basis by the rate.
`
`.2. Th3Medéum should be practical and preferably aireadyin use.
`For measuring the exposure it is desirable to have a
`medium whose magnitude is readily ascertained and which
`is already used by the assured for other than insurance
`purposes. The use of a. medium possessing these qualities
`promotes efliciency. as no additional records are necessary
`for measuring exposure, and enhances accuracy. as the
`various existing records may be used -as a check.
`
`'
`
`I 0' When one considers the many diverse factors which enter into a.
`hazard and the additional factors which enter into the evaluation
`of a lziszard in terms of losses, one might: expect that generally it
`would be impossible to find a medium whose magnitude varies
`directly with the losses. The factors underlying the losses. mftical
`cortditions. infufabie obfscts, and esaluaxion standard. are studied as
`a preliminary to sorting hazards into somewhat homogeneous
`groups. Divisions made according to the kind ‘of evaluation
`standard used, the type of injurable object covered, or the origin ,
`of critical conditions are known as lines of -insurance. Divisions
`-these-lines of
`with regard to the frequency and
`severity of _inji'n-ies or for convenience
`practical procedure are
`known as slasssjficatzbns. These designations hold only. in a very
`general way and have many exceptions.
`It is often diificult to
`distinguish between lines of insurance and classifications as used
`by difierent carriers or even-by a single carrier.
`.
`
`3.-
`
`Page 000011
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`

`
`Notes oN ext-osuns AND PREMIUM BASES
`
`322
`
`In this discussion of premium bases it is proposed to review
`th
`different media. that might be used for measurin
`For convenience in outlining the procedure the gain:a:l:P:§}:1'c:
`will be divided into human beings and all other object_g_ At this
`time it is intended to consider only premium bases for insurance
`covering injuries -to human beings. The coverages will be treated
`under four divisions which embrace the more important types_ It
`is not intended to make this an exhaustive analysis including the
`special cases that may snise.
`
`I. ' Coverage for injuries ‘to designated peg:-3Dns_
`II. Coverage to ‘employers for
`injuries to their
`employees.
`III. Coverage for liability for injuries to the general public,
`IV. Coverage for liability for professional acts.
`'
`
`.
`
`I. Covemics FOR INJURIES T0 Dissicurvrnn Piagm,
`.1, L-ifo_.Insu1*a.nce.
`_
`_l
`2. Accident and Health Insurance.
`
`i
`
`;In.lifo. accident, and health insurance. coverage is given ta in, .:
`dividuals for specified injuries evaluated at specified am-suns. E4‘
`These lines differ from the others of the four general divisions-2 -'
`that injuries are appraised at specified values which are is
`scribed in the contract. Within certain limits these "sp"""
`valugs may be selected by the assured when making the con
`,
`.
`
`_
`
`,
`
`r _
`
`__
`
`A
`
`_
`
`,
`
`_
`
`.:-_.
`'
`
`*- _
`-
`1. Line Insummcn.
`In life insurance the critical conditions are those-,
`tions external to the assured and also those bodily
`ditions within the assured which tend to place his '1ife'in
`jeopardy. The injurable object is. the assured
`and
`the injury is the loss of his life. The measure of the injury
`in dollars by the evaluation standard is the amount named
`in the policy.-ti)-he paid‘in case of death. The underlying
`assumption is‘ that classifications, when fired with
`respect to age, occupation. sub-standard conditions. etc.,
`are cflfllposed of individuals of equal essential The
`losses differ only becau._s_e_ different amounts are written in
`_. the policies to. be paid for_ the same injury, is. loss of‘
`The amount of‘inst1rance‘_spe_ej_figd in. the policy is ob-
`viously the exposure iI1ed.ium_which'va.1‘ies directly with
`
`Page 000012
`
`

`
`NOTES on nxrosnsn AND PREMIUM BASES
`
`323
`
`the losses for the veryreason that the losses are made a.
`definite function of the amount insured by the specific
`provision in the policy. A medium consisting of the
`amount f insurance is quite practical and forms such an
`idealjpremium basis that little thought is given to any
`other. In group life insurance the situation is not changed
`although through the use of weighted averages it becomes
`less obvious.
`'
`'
`
`2. Ac-cmnnr AND HEALTH Insunmvcn.
`
`'Asin life insurance, the critical conditions of accident
`and health insurance are those conditions external to the
`arid those internal which may produce injuries
`through accidents or ill health. The evaluation standard
`is more involved than in life insurance. The accident
`insurance contract ‘generally specifies a
`loss
`lcnown as the principal stun, certain lesser losses which
`have a. definite relativity to this'rnaxirnu.m'. and fixed
`weekly benefits.
`In health insurance the losses are evalu-
`ated through the weekly benefits written into the contract.
`The classifications. through sulhcient subdivisions accord-
`ing to age. occupation, and other conditions that may
`aifect the hazard, are assumed to be composed of indi-
`viduals of equal essential hazard. Equivalent
`injuries
`sustained difler when evaluated as losses only through the
`variation in the principal sum and the weekly benefits
`because, by the terms of the policy, they are definitely
`related to these items. The principal sum and weekly
`benefits form ideal premium bases as they are quite prac-
`tical and vary directly with the losses.
`
`.9
`
`II, Covnnsos TO EMPLOYERS son INDUsrRmL_ INJo1ues_ TO
`THEIR EMPLOYEES.
`
`1. Workmen's Compensation Insurance.
`2. Employers’ Liability Insurance.
`3. Work-men's Collective Insurance.
`
`O_f the va1_!ia'oles'un'derlyin«g the hazard of this group of coverages
`the critical cmfiiiiom and 'the'¢'1i7'nrabi9 htmtcm beings are substan-
`deny the same. The inherent injuries are the same under each of
`
`/7
`
`Page 000013
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`

`
`|
`'
`
`
`
`324
`
`Home on‘ axrosusa AND rnnmronr mans
`
`these
`in the.
`=1.
`
`The diiference "in the losses, which is due to a change
`standard used. arises out of these -_=,.;.ums;-
`In Compensation a wider range of inju,-$.35 is cwemd than
`in Employers’ Liability.
`It does not necessarily follow.
`however, that the losses are larger under Compensation
`In _Work-men's Collective the extent of the liability as-
`is stated in the-contract.
`2. The severity of an injury is expressed in monetary units
`by using different evaluation standards. In Compensation
`the standard is prescribed in the law.
`In Employers’
`Liability it consists in direct settlement mutually accept.-
`able or in a jury verdict under cou;-1-, prwfidm‘
`In
`Worlm;-.en's Collective the standard is specified in the
`contract.
`
`'
`in‘
`Several premium bases have been considered and
`' different degrees for these
`of insurance. As possr‘b1e~m;fi;_'a,
`" '
`foruse inmeesuring exposure. thesemaybeconsidered:
`*
`1. Payroll.
`
`2:
`
`
`Payroll.
`
`.
`
`_
`weekly wages. The indemnity losses vary as the p __
`-
`the time and the weekly wages which product is-=rep_re'aVen
`by the payroll. Payroll as a medium does not respo::gc1£uJ1y'to
`variation in losses to the extent that the losses are legally
`restricted by the
`"weekly payments and by the
`
`the earlier Compensation laws these
`exposures. Under
`maximmn l.i:mit.s were rather low and had an appreciable
`effect on the losses. Since then the limits have been ra.ir,:1
`:\
`
`.
`
`4
`
` --
`
`Page 000014
`
`

`
`‘
`
`H
`
`
`
`NOTES ON sxrosnsr. AND PREMIUM asses
`
`325
`
`materially by amendments to the law and their effect on the
`losses has been very much reduced.
`Medical losses vary jointly with the accident frequency and
`severity, and therefore with the time exposure, and with the
`scale of medical fees. The wages and the medical fee scale
`5=‘l1PD|JSed1y respond to the same general price level and vary
`with each other. Medical losses thus vary jointly with the
`time exposure and the wages or as a product of the time and the
`wages which product is the payroll. The payroll does not
`reflect either the time or amount limitations on ‘the medical
`benefits.
`The trend in Compensation‘ has been toward raising the
`limits on the time period and the maximum amount of
`medical benefits. The present Acts come near to providing
`unlimited medical benefits thus tending to make the medical
`losses vary with the payroll.
`The-._ exposure in Compensation measured in payroll may be
`said to vary reasonably with the losses. From the practical
`viewpoint the payrolls form a desirable medium for measuring
`exposures. The need of payroll records for internal business at!-
`ministration and for reports for external agencies emphasizes
`. their importance thus serving as an incentive to accuracy.
`There is a correlation between payroll and losses in Em-
`ployers‘ Liability although this is not so definite as in Com-
`pensation. The loss of wages resulting from an accident is a.
`major factor in evaluating injuries whether by direct settle-
`ment or through court procedure. Workmen's Collective, in
`responsiveness of payroll to losses, stands somewhere between
`Compensation
`Employers‘ Liability, the exact position
`depending on the limitations on payments written into the
`Wm-'k:men’s Collective contract. For both Employers’ Lia-
`bility and Worlm-1en’s Collective, payrolls form practical
`media for measuring exposures.
`
`2. Restricted Payroll. This term is used to denote ordinary
`pay-rolls after they have been modified by limiting the maxi-
`mum weekly wage for any employee to an amount which
`when multiplied by the weekly percentage compensation rate
`will equal the rnaxinium weekly payment provided in_ the
`law. Under the early, simple Compensation acts the restricted
`
`:
`
`|’
`
`Page 000015
`
`

`
`-.-_.-_.._;.-.~..‘,
`
`326
`
`NOTES ON EXPOSURE AND PREMIUM BASES
`
`payroll exposure would have varied directly with the indem-
`nity losses aside‘ from the limit as to total amount of the case.
`At no time would it, have accounted for a time limitation on
`the total amount, for either time or amount lirniwtations on
`medical, or for the additional hazard involvedv in overtime
`work.
`.AAfur.the1‘ obstacle arose when Compensation laws
`introduced different weekly -limits dependent on.'the nature
`of injury or the dependency status. Such restricted payrolls
`would impose additional records on the assured. would involve
`more detail in auditing, and as they are not used for other
`purposes would not provide an external check.
`is
`In Employers’ Liability Insurance restricted payroll
`meaningless as there is no fixed wage that has a definite
`relation to the award.
`In Workmen's Collective Insurance
`the relationship would depend upon the agreement in the
`contract; probably it would be very much as in Compensation.
`
`3. Man-Year. To measure Compensation exposure in
`man-year units—the exposure of one man for one year-
`would not reflect any variation in wages and for that reason
`would not be expected to vary as constantly with the losses
`as payroll exposure. In some occupations, o.g. aviation, where
`wages are so high that-in almost every case the maximum
`weekly payments are made, a man-year exposure medium is
`more responsive to the indemnity losses than payroll. To
`account for difierences in hazard due to a variation in the‘
`number of working days per week or the number of working
`hours per day, it is necessary to define the man-year unit in
`terms of man-days or man-hours. This would introduce no
`special difficulty aside from making the records somewhat
`more involved.
`In E::nploye:rs' Liability there is presumably
`less correlation between wages and amount of award than in
`Compensation. For this reason the man-year medium as a
`basis of premium would be less objectionable here.
`It could
`not be expected to vary as constantly with the 106589 as 133-?-
`roll however. Man-year exposure would probably serve
`reasonably well in Workn1en’s Collective insurance. for the
`weekly payments usually do not vary much and the fixed
`amounts paid for permanent injuriesdo -not <1°P3151'?1 911 the
`wages received by the injured.
`
`
`
`.__._-'-_-___
`
`Page 000016
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`

`
`Norres on EXPOSURE AND PREMIUM BASES
`
`327
`
`This exposure medium is the one best adapted for measuring
`accident frequency or weighted accident severity. Exposure
`on a‘man—year basis would be more difficult and costly to
`obtain as special records would have to be maintained for this
`purpose. These would not have the general importance of
`payroll, would probably be less accurate, and would not be
`subject to check from external sources.
`
`4. Value of Product. The value of product or sales re-
`ceipts is another medium that has been considered for measur-
`ing exposures.
`It would be dilficult to ascertain to what
`extent the exposure on this basis would vary with the losses.
`A new system of classification would be required if this medium
`were used as it would be necessary to recognize the relative
`degree in which machines enter not on account of the hazard
`difference between machine and non-machine operations but
`on account of the additional exposure as measured through
`this rne-dium, due to the greater production of machines.
`In
`these new classifications it would also be necessary to note
`the degree in which the raw and partially treated materials
`enter into the process.
`In insurance for contractors it would
`be necessary to distinguish between contracts covering all
`material and cost~plus contracts. The new classifications
`would have to be on an industrial basis so as to include those
`
`‘
`
`¢ employees not engaged in producing a salable product. Some
`of the present classifications, e.g. public employees, would
`require some other procedure.
`In Employers’ Liability and
`Worbnen's Collective the same difficulties arise that appear
`in Compensation. This exposure medium wherever it could
`be used at all would generally be readily available and subject
`to check. Measuring exposure on this basis would not require
`undue effort.
`
`There are certain factors whose existence is now more or less
`recognized as allecting the losses which are not reflected in any of
`the media for measuring exposure. The increase in the accident
`frequency during industrial prosperity and an increase toward
`malingering during depressions are factors of this nature.
`
`Page 000017