Calculating the Benefit Multiplier Adjuster (BM.A)
The algorithm has 3 methods to calculate the BM.A:
The Shortfall method. The model compares the current total benefit payouts made to the projected total of benefit payouts. This difference is the Shortfall. If the current total exceeds the projected total, it calculates the BM.A as: (Benefits Reserve + 70% of Fund Reserve – Shortfall) / (Benefits Reserve + 70% of Fund Reserve)
Shortfall | = | Current total benefit payouts | - | Projected total benefit payouts |
The Loss Ratio (LR) method. The model compares the fund’s current loss ratio, defined as total costs over total revenue, and compares it to its pre-set loss ratio target. If the current LR exceeds the target LR, the BM.A is calculated as: 1 – (LR actual – LR target)
BM.A | = | 1 | - | Current LR | - | Target LR |
The Cash Flow method. The Cash Flow method looks at current reserve levels, projected reserve levels, as well as recent and expected cash flows of the fund, when determining the amount of reserves available for claims payments. This is calculated as: (Actual Benefits Reserve + 70% of Fund Reserve + expected 12-month cash flow in through contributions) / (Expected Benefits Reserve if no claims were made + 70% of Fund Reserve + projected 12-month cash out flow through payouts).
Methods 1 and 3 take into account 70% of the Fund Reserve to spread out the impact of payouts. While the BM.A is used to protect the fund, changes to the BM.A should remain as small as possible to create transparency and fairness to the members. The fund can use any of these methods, or a combination, based on the model’s circumstances, whereby the model may change which method it uses based on the fund’s size, level of growth, and other characteristics.
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