Assigned Risk Adjustment Program (ARAP) is a filed rating plan designed to help keep the residual market self-funded and provide employers with an incentive for loss prevention. ARAP is used in 18 jurisdictions (see below). It surcharges insureds with losses greater than expected under the Experience Rating Plan. The ARAP factor and the experience modification are calculated and printed on the experience modification worksheet. The Simplified ARAP (SARAP) is similar to and a refinement of ARAP.
Both programs are applied after experience rating. They are intended to make the assigned risk market more self-supporting or "self-funded." Just like experience rating, these programs also encourage safety by directly hitting the pocketbook of the employer by modifying the premium. The biggest difference between the Experience Rating Plan and ARAP or SARAP is in the formula. Experience rating is more focused on loss frequency whereas ARAP and SARAP are more focused on loss severity.
The states with ARAP or SARAP are: Alabama, Connecticut, District of Columbia, Idaho, Illinois, Iowa, Kansas, Massachusetts*, Nevada, New Hampshire, New Mexico, North Carolina, Oregon, South Carolina, South Dakota, Vermont, Virginia, and West Virginia. Not applicable in Indiana.
*The Massachusetts All Risk Adjustment Plan applies to both Assigned Risk and Voluntary Market policies.
ARAP and Experience Rating
The Assigned Risk Adjustment Program (ARAP) was developed to surcharge insureds with a record of losses greater than expected under the Experience Rating Plan (ERP). ARAP is not a replacement for experience rating, but rather, works in conjunction with experience rating. ARAP uses the same three years of data used to calculate the experience modification but relies more heavily on the total loss experience of the insured. Since the experience modification is based more on frequency than severity, the effect of large losses is greatly diminished. To make the residual market more self supporting, ARAP assigns more weight to total losses, whereas the Experience Rating Plan relies more on primary losses.
In the calculation of ARAP surcharges, the insured's actual losses are compared to the "modified" expected losses, which have been adjusted to reflect the experience modification. In other words, the resulting surcharge reflects the insured's experience modification and the insured is not doubly penalized for the same losses.
The benefit of ARAP is that it only affects those in the residual market with poor loss experience. Those accounts generating the losses are paying more of their share. ARAP is a targeted pricing program and allows one more way to fairly distribute residual market losses, both within the residual market and between the voluntary and residual markets. It also contributes significantly to the goal of maintaining a self funded residual market.
Servicing carrier standards include steps to promote loss control. In addition, NCCI's website offers a free loss control program designed for small and medium size employers. Ultimately, if all of the pricing incentives (surcharge, ARAP, LSRP) do not work and an employer knowingly refuses to meet loss control requirements, it can be refused assigned risk coverage in accordance with Section II of the Indiana Assigned Risk Plan.
Refer to the NCCI website Customer Service division for more detailed or actuarial explanations of ARAP or SARAP.