RATING METHODOLOGY OF 

THE APH YIELD EXCLUSION

ACTUARIAL EXPERT REVIEW

UNITED STATES DEPARTMENT OF 

AGRICULTURE

THE RISK MANAGEMENT AGENCY

FEBRUARY 6, 2015

Call Order # AG-645S-B-14-0016

___________________________

Eric J. Hornick, FCAS, MAAA, FCA 
 

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CONTENTS 

1. Executive Summary .................................................................................................. 3

• Background ......................................................................................................... 3

• Findings............................................................................................................... 4

2. Research Report....................................................................................................... 5

• Description of Review Methodology..................................................................... 5

• Review of Submission ......................................................................................... 8

3. Discussion of Issues Surfaced in the Review of Items Listed in C.4 ........................ 15

4. Conclusion .............................................................................................................. 18

5. Acknowledgement................................................................................................... 19

6. Distribution and Use................................................................................................ 20

7. Considerations and Limitations ............................................................................... 21

8. Biographies of Participants in Expert Review .......................................................... 22
 

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1

Executive Summary 

The Risk Management Agency (RMA) of the United States Department of Agriculture (USDA) 

was established under the provisions of the Federal Agricultural Improvement and Reform Act of 

1996 to supervise the Federal Crop Insurance Corporation (FCIC) and oversee the programs 

authorized under the Federal Crop Insurance Act (7 U.S.C. 1505(e)) (the Act). The Act requires 

FCIC’s Board of Directors (the Board) to establish procedures under which any policy or plan of 

insurance, as well as any related material or modification of such a policy or plan of insurance, 

submitted to the Board be subject to independent review by persons experienced as actuaries 

and in underwriting. 

Oliver Wyman Actuarial Consulting, Inc. (Oliver Wyman) has been retained as an independent 

reviewer of Rating Methodology of the APH Yield Exclusion via a contract that was effective on 

January 12, 2015 (“the Submission”). This review is intended for the FCIC Board of Directors. 

The result of Oliver Wyman’s review is presented in this report to RMA.

Background

The Agricultural Act of 2014 (the “2014 Act”) mandated that RMA implement an adjustment into 

the calculation of the yield guarantees for applicable crop insurance programs. The adjustment 

is referred to as the Yield Exclusion Option (YE). The YE allows producers to eliminate low yields 

from the calculation of their APH, resulting in higher effective insurance coverage levels than had 

the YE not been in place. RMA implemented the YE for certain crops in in the 2015 crop year, 

and will expand the program to other crops in the 2016 crop year.1 RMA subsequently engaged 

Sumaria Systems, Inc. (Sumaria) to review and report2 on the procedures implemented by RMA 

to comply with the 2014 Act. Oliver Wyman has been contracted by RMA to review and opine on 

Sumaria’s Report. General information related to this Submission is presented in the following 

table:

APH Yield Exclusion Index: General Information

Consultant

Sumaria Systems, Inc.

Authors:

Thomas O. Knight, Mary Frances Miller, Keith H. Coble & Barry J. Barnett

Type of 

Submission

The Submission supports the implementation of Section 11009 of the 2014 Farm Bill, allowing producer 

the option to exclude any recorded or appraised yield for any crop year in which the county yield as at 

least 50% below the average yield of the prior ten crop years.

Effective 

Period To become effective for the 2015 or 2016 crop year, depending on Crop.

 

1

 USDA Informational Memorandum: PM-14-062, dated December 18, 2014

2

 Review of Adjustment in Actual Production History to Establish Insurable Yields” Determination of Actuarially Sound 

Premium Rates
 

4

Sumaria recommends that:

1. RMA follow the approach they have proposed and that we have described in computing effective coverage levels for 

policy units making use of Yield Exclusion in determining the yield guarantee. 

2. RMA adopt the proposed procedures for deriving effective coverage level differentials and premium rates for policy 

units making use of Yield Exclusion. 

3. RMA evaluate the feasibility of incorporating marginal premium rate caps such that the additional premium for any 

coverage interval cannot exceed the increase in liability. 

4. RMA re-evaluate the coverage level differentials and the behavioral component after two years of YE experience has 

been collected.

5. RMA adjust experience at the individual record level to the smaller of the 65% common coverage level or the effective

coverage level prior to compilation in StatPlan, thus preserving the actual indemnity experience in the base 

ratemaking process as much as possible. 

6. RMA continue its current methods for adjusting compiled data at the StatPlan level to the 65% common coverage 

level.

Findings

The general basis for RMA’s approach is patterned after adjustments implemented to 

accommodate the Trend Adjusted (TA) APH Option. Sumaria discusses this in their report and 

states that both programs increase the yield guarantee relative to what it would have been based 

on a simple average of historical yields. Sumaria also notes that the same fundamental principle 

that governed the adjustments for the TA option should govern adjustments for the YE option –

adjustments must be made to insure the loss experience underlying the premium rates and the 

coverage offered must be consistent. This is the basis for Sumaria’s recommendations 1 and 2 

above. Recommendations 3 and 4 address concerns regarding equity (3) and the potential 

impact of the YE option on insured behavior (4). Recommendations 5 and 6 address data 

collection.

Oliver Wyman agrees with Sumaria’s recommendations, with the following concerns:

1. The extrapolation procedure for effective coverage levels above 85% assumes that the 

marginal charge for each subsequent 5% should be the same. (Marginal charge from 90% to 

95% is the same as from 140% to 145%, etc.)

2. For larger extrapolations, even something as simple as rounding can produce significant 

differences in calculated values.

3. Producer results falling just above or just below the YE threshold can have a significant impact 

on the calculations. The removal of a value below the YE threshold has a fundamentally 

different effect than a replacement using the “60% plug”. 

4. The ability to purchase coverage beyond the top of the table can lead to moral hazard, morale 

hazard and adverse selection. Sumaria noted this concern and specifically mentioned the 

potential impact of insured behavior on YE experience. Oliver Wyman believes that this is 

potentially a material concern, and warrants examination sooner than the two year period 

recommended by Sumaria.

5. The limitation that Sumaria suggests on capping marginal premium at marginal liability is an 

improvement to RMA’s procedure(which is based on total, not marginal), but still is likely unfair 

to the policyholder because the policyholder is not going to have a total loss in every year, and 

therefore should be charged less than the liability in a specific layer.
 

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2

Research Report

Description of Review Methodology

Oliver Wyman’s review of the Submission is based on guidance provided in “The Statement of 

Principles Regarding Property and Casualty Insurance Ratemaking.” The Statement of Principles 

provides guidelines for actuaries; all ratemaking tasks undertaken by an actuary should be done 

in conformity with these statements:

Principle 1: A rate is an estimate of the expected value of future costs.

Ratemaking should provide for all costs so that the insurance system is financially sound.

Principle 2: A rate provides for all costs associated with the transfer of risk.

Ratemaking should provide for the costs of an individual risk transfer so that equity among insureds is 

maintained. When the experience of an individual risk does not provide a credible basis for estimating 

these costs, it is appropriate to consider the aggregate experience of similar risks. A rate established 

from such experience is an estimate of the costs of the risk transfer for each individual in the class.

Principle 3: A rate provides for the costs associated with an individual risk transfer.

Ratemaking produces cost estimates that are actuarially sound if the estimation is based on Principles 

1, 2, and 3. Such rates comply with four criteria commonly used by actuaries: reasonable, not 

excessive, not inadequate and not unfairly discriminatory.

Our review is based on guidance provided in Actuarial Standards of Practice (ASOP), specifically 

ASOP No. 12, Risk Classification (for All Practice Areas) adopted by the Actuarial Standards 

Board (ASB). The ASB promulgates ASOPs for use by actuaries when providing professional 

services in the United States. ASOPs are intended to provide actuaries with a framework for 

performing professional assignments and to offer guidance on relevant issues, recommended 

practices, documentation, and disclosure. Each ASOP articulates a process of analysis, 

documentation, and disclosure that, in the ASB’s judgment, constitutes appropriate practice within 

the scope and purpose of the ASOP.3

 

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Introduction to the Actuarial Standards of Practice. Actuarial Standards Board, 2004
 

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Specifically, ASOP No. 12 establishes the following relevant considerations related to the 

selection of risk characteristics and risk classes which were considered in our review4:

Relationship of Risk Characteristics and Expected Outcomes — The actuary should select 

risk characteristics that are related to expected outcomes. A relationship between a risk 

characteristic and an expected outcome, such as cost, is demonstrated if it can be shown that 

the variation in actual or reasonably anticipated experience correlates to the risk 

characteristic. In demonstrating a relationship, the actuary may use relevant information from 

any reliable source, including statistical or other mathematical analysis of available data. The 

actuary may also use clinical experience and expert opinion.

Rates within a risk classification system would be considered equitable if differences in rates 

reflect material differences in expected cost for risk characteristics.

The actuary should consider the interdependence of risk characteristics. To the extent the 

actuary expects the interdependence to have a material impact on the operation of the risk 

classification system, the actuary should make appropriate adjustments.

In addition to the items noted above, we also considered our general knowledge of modeling

techniques and best practices.

Particular to this review is a consideration of three common insurance terms: “moral hazard”,

“morale hazard”, and ‘adverse selection”.

The Glossary of Insurance and Risk Management Terms as published by International Risk 

Management Institute (IRMI) defines these terms as follows:

Moral Hazard

A term used to describe a subjective hazard that tends to increase the probable frequency or 

severity of loss due to an insured peril. Moral hazard is measured by the character of the 

insured and the circumstances surrounding the subject of the insurance, especially the extent 

of potential loss or gain to the insured in case of loss. ... Moral hazards are considered when 

underwriting insurance, particularly fire insurance, and are addressed by certain policy 

exclusions. For example, underwriters are hesitant to insure vacant and unoccupied buildings 

because of the possibility that an insured will be tempted to intentionally start a fire to obtain 

an insurance recovery.

 

4 ASOP 12, Section 3, certain non-relevant portions were omitted
 

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Morale Hazard

A term used to describe a subjective hazard that tends to increase the probable frequency or 

severity of loss due to an insured peril. Morale hazard, as contrasted with moral hazard, does 

not imply a propensity to cause a loss but implies a certain indifference to loss simply because 

of the existence of insurance. For example, an insured's attitude may be indifferent if a loss 

occurs because they have insurance.

Adverse Selection (anti-selection)

An imbalance in an exposure group created when persons who perceive a high probability of 

loss for themselves seek to buy insurance to a much greater degree than those who perceive 

a low probability of loss.

We refer to these items in the following sections.
 

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Review of Submission

Introduction

Sumaria has submitted a report to RMA containing their review of the changes that are being 

implemented as a result of the 2014 Act.

Sumaria’s recommendations are as follows:

Recommendation 1 

We recommend that the RMA follow the approach they have proposed and that we have described 

in computing effective coverage levels for policy units making use of Yield Exclusion in determining 

the yield guarantee. 

Recommendation 2 

We recommend that the RMA adopt the proposed procedures for deriving effective coverage level 

differentials and premium rates for policy units making use of Yield Exclusion. 

Recommendation 3 

We recommend that the RMA evaluate the feasibility of incorporating marginal premium rate caps 

such that the additional premium for any coverage interval cannot exceed the increase in liability. 

Recommendation 4 

We recommend that the RMA re-evaluate the coverage level differentials and the behavioral 

component after two years of YE experience has been collected. This will be the beginning of 

capturing the data needed to refine current actuarial procedures.

Recommendation 5 

We recommend that the RMA adjust experience at the individual record level to the smaller of the 

65% common coverage level or the effective coverage level prior to compilation in StatPlan, thus 

preserving the actual indemnity experience in the base ratemaking process as much as possible. 

Recommendation 6 

We recommend that the RMA continue its current methods for adjusting compiled data at the 

StatPlan level to the 65% common coverage level.
 

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Discussion

The APH (Annual Production History) program has been in place for many years, and under this 

program producers currently have an option to replace their own production history with a 

minimum value that is established as 60% of the County T-Yield (“60% plug”).

The use of the 60% plug minimizes the effect of a particularly bad year in a producer’s history,

and makes the producer eligible for more coverage than they would be had the “60% plug” not 

been available.

It is our understanding that producers generally take advantage of the 60% plug if available.

A portion of a Table included in Sumaria’s report demonstrates the effect:

County 60% of Producer APH with

Year T-Yield APH APH 60% Plugs

2005 96 58 110 110

2006 104 62 100 100

2007 104 62 88 88

2008 104 62 118 118

2009 106 64 111 111

2010 106 64 110 110

2011 119 71 55 71

2012 119 71 20 71

2013 119 71 57 71

2014 119 71 153 153

Approved Yield 92 100

Note that in 2011-2013, the Producer’s APH was less than 60% of the County T-Yield. The 

application of the “60% plug” allowed the Producer to substitute 71 bushels (shown as 60% of 

APH) for the actual production of 55, 20 and 57 bushels, respectively. As a result, the 10-year 

average increased from 92 bushels to 100 bushels, allowing the producing to purchase almost 

9% of additional coverage, in consideration for additional premium.

The Yield Exclusion that is being implemented takes this process one step further, and allows 

producers to completely exclude the yields from certain years from the APH calculation.
 

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Sumaria’s report includes the following Table:

APH with

County 60% of Producer APH with Excluded

Year T-Yield APH APH 60% Plugs Yields

2005 96 58 110 110 110

2006 104 62 100 100 100

2007 104 62 88 88 88

2008 104 62 118 118 118

2009 106 64 111 111 111

2010 106 64 110 110 110

2011 119 71 55 71 Excluded

2012 119 71 20 71 Excluded

2013 119 71 57 71 71

2014 119 71 153 153 153

Approved Yield 92 100 108

In that Table, the 2011 and 2012 years are no longer being “plugged” with a 60% value, rather 

they are being excluded entirely. In the example shown above, this raises the Approved Yield 

from 100 to 108, resulting in a further increase of 8%.

Note that the 2013 year was not eligible for exclusion. However, this cannot be seen simply by 

examining the Table. Rather, the 2013 year was not eligible for exclusion because the Producer’s 

APH in that year was greater than 50% of the 10-Year Moving Average used to determine 

eligibility; only years at least 50% below are deemed eligible.

As a result of a discussion with RMA, Oliver Wyman created the following Table that showed a 

sample set of data in which the 2011 and 2012 years would be eligible for exclusion and the 2013 

year would not.
 

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10-Yr 50% of Eligible

Moving Moving Producer for

Year Average Average APH Exclusion

2005 96 48.0 110.0 No

2006 104 52.0 100.0 No

2007 103 51.5 88.0 No

2008 105 52.5 118.0 No

2009 106 53.0 111.0 No

2010 108 54.0 110.0 No

2011 119 59.5 55.0 Yes

2012 115 57.5 20.0 Yes

2013 110 55.0 57.0 No

2014 108 54.0 153.0 No

The 10 Year Moving Average is designed to be consistent with the County T-Yield shown in the 

prior Table; note that unlike the County T-Yield, the 10-year Moving Average changes annually. 

In 2011 and 2012, the Producer APH is below 50% of the Moving Average, making those years 

eligible for exclusion. However, in 2013 the Producer APH of 57.0 is higher than 50% of the

Moving Average (55.0) and this year is thus not eligible for Exclusion. Had the Producer APH 

been 55.0 or lower, this year would also have been eligible for Exclusion.

It is our view that there is no significant issue with the calculation for the points for which it is 

interpolated; however, there are issues with the calculation for points beyond the 85% level (which 

is the maximum level published in the actuarial documents).

If the coverage level after APH (Effective Coverage Level) is under 85%, the same coverage could 

be obtained without the Yield Exclusion, and the program correctly charges the same Premium 

per Acre under either example.

For example, if the APH prior to Yield Exclusion is 100, then at the 77% coverage level, 

the guarantee would be 77. If the APH after Yield Exclusion rose to 110, a producer could 

purchase coverage at the 70% level, and the resulting guarantee would still be 77. There 

is no difference in the coverage purchase and no difference in the resulting Premium per 

Acre. 

However, issues occur when the Effective Coverage Level rises above 85% and these issues 

become magnified as the Effective Coverage Level increases.

For example, if the APH prior to Yield Exclusion is 100, then at the 85% coverage level, 

the guarantee would be 85. If the APH after Yield Exclusion rose to 140, a producer could 

still purchase coverage at the 85% level, but the resulting guarantee would increase to

119. As a result, the Effective Coverage Level would be 119%. 
 

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This situation is demonstrated in the following data:

10-Yr 50% of Eligible

Moving Moving Producer for

Year Average Average APH Exclusion

2005 96 48.0 120.0 No

2006 104 52.0 30.0 Yes

2007 103 51.5 30.0 Yes

2008 105 52.5 50.0 Yes

2009 106 53.0 50.0 Yes

2010 108 54.0 160.0 No

2011 119 59.5 130.0 No

2012 115 57.5 125.0 No

2013 110 55.0 155.0 No

2014 108 54.0 150.0 No

This producer had six very good years, averaging 140 bushels per year, and four poor years, 

averaging 40 bushels per year. The APH prior to exclusion is 100 [(140 x 6 + 40 x 4)/10], but it 

rises to 140 after Yield Exclusion.

The resulting charge as shown in Sumaria’s Report would be extrapolated based on the last two 

levels published by RMA (80% and 85%). If for example, the 80% differential was 1.40 and the 

85% differential was 1.50, each additional 1% would incur an additional differential of 0.02, so the 

differential for 119% would be 2.18.

The only limitation on the differential is one of marginal utility. Since a Producer can incur no 

greater than a 100% loss (they can have multiple partial losses in a policy period, but the total 

cannot exceed 100% during a policy period), RMA has proposed that a cap be imposed such that 

total premium not exceed total liability. Sumaria goes one step farther, recommending that the 

marginal premium in any 5% coverage range (i.e. 85% to 90%, 110% to 115%) not exceed the 

marginal liability in that level. This would eliminate the possibility of a Producer purchasing 

additional insurance to a level at which they would have no opportunity to recover more than they 

paid for the insurance.

It should be noted that the threshold nature of this calculation can produce significantly different 

results depending on whether the Producer APH is just above, or just below, 50% of the Moving 

Average.

For example, if the 2008 and 2009 years had producer APH’s of 56 and 56, instead of 50 and 50, 

those years would not be eligible for exclusion and the APH after Yield Exclusion would be 119, 

not 140.
 

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While we agree with Sumaria that a marginal limitation is a better limitation than a limitation in 

total, we have concerns for the possibility of Moral Hazard and Morale Hazard existing given the 

potential for a producer to insure more than they would expect on average to produce.

Moral Hazard refers to the possibility of an insured realizing a gain due to the presence of 

insurance. This hazard is more likely to be present when higher amounts of insurance are 

purchased and is the reason that insurers generally prefer to share a loss with policyholders either 

through the use of deductibles or co-insurance.

Morale hazards focus on policyholders being careless because of the presence of insurance. 

Allowing coverage amounts significantly above the long-term average production could lead to 

these hazards as well.

Additionally, the larger the extrapolation, the larger potential for data to emerge that is not 

consistent with the extrapolation.

Interpolation generally works well because the potential for error is bounded by other established 

results. (In Sumaria’s example, if the differential is 1.40 at 80% and 1.50 at 85%, one can clearly 

see that a 1.45 differential should be at approximately 82.5%. Even if it is not a straight-line 

interpolation, the result will only be slightly higher or lower than the straight-line calculation.)

However, the extrapolation of a differential for 119%, based on behavior between 80% and 85% 

is based on the questionable assumption that the measured functional relationship between 80% 

and 85% will extend to 119%. The uncertainty of this assumption is compounded by the fact that 

small differences, even those due to rounding, may have a large impact on the extrapolated value. 

For example, if the actual differentials were 1.395 and 1.505 (yet were shown as 1.40 and 1.50) 

the differential at 119% would be calculated as 2.253. This is 3% higher than the 2.19 that was 

previously calculated.

Given that differences do exist in charges of Premium per Acre between 50% and 85%, it is not 

reasonable to assume that such differences do not exist between 85% and 119%. As such, a 

pure extrapolation may produce charges that are either too high or too low than the actuarially 

indicated premiums.

The potential for charges that are too low as compared to the actuarially indicated premium could 

be further complicated by adverse selection, as producers with a greater propensity to loss 

purchase more and more insurance.

Based on this review, while we agree with Sumaria’s first two recommendations, we recognize 

that there does not appear to be any data to support the extrapolation beyond the 85% coverage 

level, particularly to the levels that are possible in a situation where producers experience either 

very good years or very poor years. In this “feast or famine” situation, the insurance will be 

guaranteeing producers significantly more in indemnity than they would expect to produce in an 
 

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average year. However, we also understand that this is the only option available to RMA at this 

point in time.

Sumaria’s third recommendation goes further than RMA has gone to this point, but in our opinion, 

limiting marginal premium to marginal liability (which essentially assumes a 100% loss ratio in a 

product that cannot have a loss ratio in excess of this amount) does not go far enough. The 

program should be reviewed further to determine appropriate pricing for these higher levels and 

to determine whether a maximum Effective Coverage Level (lower than 200%, which is the current 

mathematically implied maximum) should be implemented.

 

We agree with Sumaria’s fourth recommendation that these differentials should be evaluated 

within the next two years. This will help address some of the issues described in this report.
 

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3

Discussion of Issues Surfaced in the Review of Items 

Listed in C.4

The following discussion addresses each of the items listed in Section C.4 of the Expert Review 

of the Rating Methodology of the APH Yield Exclusion for the FCIC Board of Directors. We present 

detailed discussion regarding matters that are within the scope of our knowledge as actuarial 

expert reviewers. When an item lies outside the scope of our knowledge, we indicate so in its 

corresponding discussion. The issues are reproduced in the order listed in C.4:

1. Actuarial soundness

A. Is adequate, credible and reliable rate-making data available? Is it likely that the 

data will continue to be available?

For Effective Coverage Levels of 85% or less, the same data that is currently used can be 

used going forward.

However, for higher coverage amounts it is necessary to extrapolate the amount of 

coverage as well as the premium. This extrapolation assumes that the coverage rate 

beyond 85% will be exactly equal to the coverage rate between 80% and 85%, which are 

the last two published amounts. 

As the amount of coverage increases further, it becomes more likely that this amount will 

not be the appropriate coverage level and premium. This is particularly an issue as the 

coverage amount grows above 100% of the expected output.

Is the data vulnerable to tampering if the proposed rate methodology is approved?

We would not expect this to be the case; however this is beyond our area of expertise.

B. Are the explicit and implicit assumptions used in the rating process reasonable? 

The biggest assumptions are:

 If the product of (bushels x coverage percentage) produces the same amount of 

coverage with or without the Yield Exclusion, the coverage and premium should 

be the same. This assumption is reasonable, and should avoid the potential for 

sophisticated insureds selecting a lower price for the same coverage.

 If the effective coverage is below 85%, straight line interpolation is used between 

the nearest 5% bands. This assumption is currently in place and is also 

reasonable.
 

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 If the effective coverage is above 85%, straight line extrapolation is used with the 

rate of change between 80% and 85% being applied to produce the desired 

coverage. This assumption is not reasonable for two reasons. 

The Submission has not demonstrated that this rate of change should be the same, 

rather it just states: 

A similar approach is taken in deriving Effective Coverage Level Differentials 

for effective coverage levels above the maximum coverage level available, 

except that linear extrapolation rather than interpolation is used. The 

extrapolation is based on the rate of change of coverage level differentials 

between the next to highest and highest available nominal coverage levels.

Additionally, no consideration for the possibility of moral hazard, morale hazard 

and adverse selection affecting the results at higher coverage is provided.

Absent of this information, we are unable to conclude that the marginal coverage 

between 100% and 105% should be the same as from 80% to 85% or 145% to 

150%.

C. Are the technical analyses (e.g., stochastic and other simulations) correct and 

recognized as appropriate? Do they provide credible, relevant results?

No simulations or technical analysis is included.

D. Is the data used for the analyses appropriate, reliable, and the best available?

As noted above, the data used for interpolation between existing 5% bands is already 

published in actuarial documents and we have no reason to believe that this is not 

reasonable.

However, for the extrapolation beyond 85%, no data has been provided to indicate that 

this extrapolation is reasonable.

F. Are the proposed premium rates likely to cover anticipated losses and a 

reasonable reserve?5

For effective coverage at or below 85%, the coverage is exactly the same that could have 

been obtained using different coverage percentages and estimates of bushels. As long 

as the existing programs have been established in such a way to cover anticipated losses 

and a reasonable reserve, the APH Yield Exclusion should also do so.

Above 85%, it is unclear from the documentation whether the premium rates would cover 

anticipated losses and a reasonable reserve. The Sumaria report assumes that straightline extrapolation beyond the last published factor will produce reasonable results; nothing 

scientific supports this conclusion and due to factors such as moral hazard, morale hazard 

and adverse selection we are not convinced that this conclusion can be supported. 

 

5 The SOW provided by RMA did not contain a letter “E”.
 

17

Further research needs to be done to ensure that the rates are indeed adequate, and also 

meet the actuarial standard of being not excessive and not unfairly discriminatory. 

G. Is the actuarial methodology appropriate for the insured risks?

The interpolation/extrapolation described earlier are reasonable, notwithstanding the 

concerns expressed earlier in this report.

The expert reviewers’ written report may also include additional information at the 

discretion of the expert reviewer.

No additional comments beyond what appears in the narrative in the previous section.
 

18

4

Conclusion

Based on our review, we believe that there are several aspects of the Submission, primarily 

relating to the extrapolation methodology beyond 85% that should be reconsidered and/or refined. 
 

19

5

Acknowledgement

I, Eric J. Hornick, am a Principal with Oliver Wyman Actuarial Consulting Inc. I am a member of the 

American Academy of Actuaries and a Fellow of the Casualty Actuarial Society. I meet the 

Qualification Standards of the American Academy of Actuaries to render the actuarial opinion 

contained herein.

_______________________________

Eric J. Hornick, FCAS, MAAA, FCA
 

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6

Distribution and Use

 Usage and Responsibility of Client – This report was prepared for the sole use of RMA for the 

purpose of evaluating the proposed APH Yield Exclusion. All decisions in connection with the 

implementation or use of advice or recommendations contained in this report are the sole 

responsibility of RMA.

 Circulation or Publication – This report is not intended for general circulation or publication, 

nor is it to be used, quoted or distributed to others for any purpose other than those that may 

be set forth herein or in the written agreement pursuant to which this report has been issued 

without the prior written consent of Oliver Wyman. 

 Third Party Reliance and Due Diligence – Oliver Wyman’s consent to any distribution of this 

report (whether herein or in the written agreement pursuant to which this report has been 

issued) to parties other than RMA does not constitute advice by Oliver Wyman to any such 

third parties and shall be solely for informational purposes and not for purposes of reliance by 

any such third parties. Oliver Wyman assumes no liability related to third party use of this 

report or any actions taken or decisions made as a consequence of the results, advice or 

recommendations set forth herein. This report should not replace the due diligence on behalf 

of any such third party.

 Public Dissemination – Neither all nor any part of the contents of this report, any opinions 

expressed herein, shall be disseminated to the public through advertising media, public 

relations, news media, sales media, mail, direct transmittal, or any other public means of 

communications, without the prior written consent of Oliver Wyman. 
 

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7

Considerations and Limitations

 Data Verification – For our analysis, we relied on data and information provided in the 

Submission and the supporting spreadsheet without independent audit. Though we have 

reviewed the data for reasonableness and consistency, we have not audited or otherwise 

verified this data. It should also be noted that our review of data may not always reveal 

imperfections. We have assumed that the data provided is both accurate and complete. The 

results of our analysis are dependent on this assumption. If this data or information is 

inaccurate or incomplete, our findings and conclusions may need to be revised.

 Unanticipated Changes – Our analysis makes no provision for extraordinary future changes 

in the legal, social, economic, or regulatory environment that might affect the proposed APH 

Yield Exclusion. 

 Other Issues – Readers of this report should not infer Oliver Wyman’s acceptance of any 

methodologies and/or judgments that were not discussed in the report. 
 

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8

Biographies of Participants in Expert Review
 

23

Eric J. Hornick, FCAS, MAAA, FCA

Eric Hornick is a Principal in the Melville, NY office of Oliver Wyman 

Actuarial Consulting, Inc. He specializes in all lines of property/casualty 

insurance, including professional liability and workers’ compensation. 

His primary responsibilities are to provide actuarial consulting services 

to a variety of insurance, reinsurance and self-insured organizations. 

He serves as lead consultant and provides risk financing guidance on 

actuarial assignments.

Eric Hornick has provided actuarial services for 27 years. Prior to 

joining Oliver Wyman, Eric was a Senior Vice President at our sister 

company, Guy Carpenter, where he provided actuarial expertise in 

support of Carpenter’s brokerage operations. He joined Guy 

Carpenter after spending six years at Centre Solutions and ten years 

at Insurance Services Office, Inc.

Eric Hornick is a Fellow of the Casualty Actuarial Society, a Member of 

the American Academy of Actuaries and a Fellow of the Conference of 

Consulting Actuaries. 

Professional Experience

 Experienced with nearly every line of insurance

 Reviewed Washington State Workers’ Compensation 

retrospective rating program

 Regulatory actuarial consultant for the State of Vermont

 Professional liability and Workers compensation reserving and 

forecasting – actuarial reviews of liabilities and loss forecasts for 

various organizations. 

 Constructed Excel-based Workers’ Compensation models

 Lead consultant on a variety of self-insured programs and captive 

insurance companies

 Reinsurance expertise from seven years of experience with 

Centre Solutions and Guy Carpenter

 Qualified to provide opinions for statutory annual statements. 

Recent Speaking Engagements 

 Issues in Reinsurance: Risk Transfer, Attestation and

Documentation – 2006

 New York Workers’ Compensation Reform – 2007

 Actuarial Issues and Insights – 2007

 State of Washington – Retrospective Rating – 2009 (internal)

 Basic Goals for the Portfolio of Reinsurance Ceded – 2011

 New York State Workers’ Compensation – 2014

 New York Workers’ Compensation – 2014

Professional Activities

 Past President, Casualty Actuaries of Greater New York

 Past Chairperson, CAS Regional Affiliates Committee

 Chairperson, CAS Committee on Sponsorships and Advertising

 Member, Professional Education Policy Committee

 Member, CAS Examination Committee

 Member, National Council of Self Insurers

Publications

 Examining Costs and Trends of Workers’ Compensation Claims 

in New York State (2013), Co-Author

 Examining Costs and Trends of Workers’ Compensation Claims 

in the State of Connecticut (2012), Co-Author

Eric Hornick

Principal

48 South Service Road

Suite 310

Melville, NY 11747

Tel 631 577 0537

Fax 212 948 1499

Cell 516 946 4794

www.oliverwyman.com/actuaries

Professional History

 Principal, Oliver Wyman (2005-

present) 

 Senior Vice President, Guy 

Carpenter (2004-2005)

 Vice President, Centre 

Solutions (1998-2004)

 Various positions of increasing 

responsibility, Insurance 

Services Office, Inc. (1988-

1998)

Professional Memberships

 Fellow of the Casualty 

Actuarial Society (2003)

 Associate of the Casualty 

Actuarial Society (1996)

 Member, American Academy 

of Actuaries (1996)

 Fellow, Conference of Consulting 

Actuaries (2005)

Education

 Union College, Bachelor of 

Science, Psychology, 1986
 

24

Scott J. Lefkowitz, FCAS, MAAA, FCA

 Scott J. Lefkowitz is a Partner of Oliver Wyman Actuarial Consulting, 

Inc. and Leader of the Melville, New York office. He specializes in all 

lines of property/casualty insurance and is regarded as an expert in the 

area of workers’ compensation. He is currently the managing 

consultant for a variety of clients, including state regulatory authorities, 

regulators, public entities, insurance companies and industrial firms. 

Scott is a Fellow of the Casualty Actuarial Society, a member of the 

American Academy of Actuaries, and a Fellow of the Conference of 

Consulting Actuaries. 

Professional Experience

Scott has 27 years of actuarial experience in the insurance and risk 

management industry. Prior to joining Oliver Wyman, Scott was an 

Actuarial Manager at the National Council on Compensation 

Insurance. His responsibilities included many aspects of Workers’ 

Compensation ratemaking and reserving, as well as research activities 

dealing with the overall Workers’ Compensation system. Scott was 

also responsible for estimating the cost impact of legislative activity and 

reform, assisting in the preparation of expert witness testimony for 

several state rate filings, and the peer review of state rate filings. Scott 

began his actuarial career at Milliman and Robertson where his 

responsibilities included preparation of rate and reserve analyses for a 

number of insurance coverages.

Since joining Oliver Wyman in 1993, Scott has provided a broad range 

of actuarial consulting services to property and casualty insurance 

companies, investors, brokerage firms, government entities, selfinsured corporations, self-insured groups, and state insurance 

departments. The services provided include:

- Reserve analyses - Risk program analyses

- Financial viability analysis - Captive feasibility studies

- Profitability studies - Litigation support

- Risk funding studies - Expert witness testimony 

- Rate analysis and program design

Professional Activities

Scott has served on a number of committees of the Casualty Actuarial 

Society, including the Examination Committee, the Committee on the 

Theory of Risk and the Syllabus Committee.

Publications

 Examining Costs and Trends of Workers’ Compensation Claims 

in New York State (2012), Co-Author

 New York State Self-Insured Employers & Workers’ 

Compensation Board Assessments (2012), Co-Author

 Examining Costs and Trends of Workers’ Compensation Claims 

in the State of Connecticut (2012), Co-Author

 Examining Costs and Trends of Workers’ Compensation Claims 

in the State of Massachusetts (2012), Co-Author

Scott J. Lefkowitz

Partner

48 South Service Road

Suite 310

Melville, NY 11747

Tel 631 577 0548

Fax 212 948 1548

Cell 516 532 2211

www.oliverwyman.com/actuaries

Professional History

 Oliver Wyman (1993-present)

 National Council on 

Compensation Insurance (1989-

1993)

 Milliman and Robertson (1987-

1989)

Professional Memberships

 Fellow of the Casualty Actuarial 

Society (1998)

 American Academy of Actuaries 

(1993)

 Fellow of the Conference of 

Consulting Actuaries (2001)

Education

 University of Massachusetts, 

Master of Science Degree in 

Electrical Engineering (1981)

 State University of New York, 

Bachelor of Science Degree in 

Physics (1978)
 

25

Oliver Wyman

48 South Service Road, Suite 310

Melville, NY 11747-2335

1 631 577 0500