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WORKERS COMPENSATION - CURRENT ISSUES - (SESSION WCP-22) Robert Blanco- NCCI Kay Rahardjo- Liberty Mutual Dee Dee Mays, Moderator- NCCI Casualty Actuarial.

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Presentation on theme: "WORKERS COMPENSATION - CURRENT ISSUES - (SESSION WCP-22) Robert Blanco- NCCI Kay Rahardjo- Liberty Mutual Dee Dee Mays, Moderator- NCCI Casualty Actuarial."— Presentation transcript:

1 WORKERS COMPENSATION - CURRENT ISSUES - (SESSION WCP-22) Robert Blanco- NCCI Kay Rahardjo- Liberty Mutual Dee Dee Mays, Moderator- NCCI Casualty Actuarial Society 1999 Seminar on Ratemaking March 11-12, 1999

2 © 1999 National Council on Compensation Insurance, Inc. ® Line of Business Personal Auto Homeowners Workers Compensation Commercial Multiple Peril Other Liability Commercial Auto Fire & Allied Lines Total All Lines 1997 $113.6B $276.1B PREMIUM VOLUME BY LINE 1998p $118.0B $280.9B Change 3.9% % Source for lines other than Workers Compensation: Best's Aggregates & Averages, Property/Casualty, 1998 Edition and Best’s Review Preview, Property/Casualty, January 1999 © A. M. Best Company—used with permission p Preliminary

3 © 1999 National Council on Compensation Insurance, Inc. ® NET WRITTEN PREMIUM Private Carriers p Preliminary

4 © 1999 National Council on Compensation Insurance, Inc. ® REASONS FOR PREMIUM FLATTENING n High Deductibles n Rate Decreases n Self-Insurance n New State Funds n Alternative Coverages n On-Going Price Competition n Reinsurance Availability

5 © 1999 National Council on Compensation Insurance, Inc. ® p Preliminary Impact of Deductibles NET WRITTEN PREMIUM Private Carriers

6 © 1999 National Council on Compensation Insurance, Inc. ® LOSS RATIO p Preliminary

7 Workers Compensation Loss Ratios First DollarLDD Loss $ 75 $ 15 Expense $ 25 $ 23 Premium $100 $ 38 Loss Ratio 75% 40%

8 © 1999 National Council on Compensation Insurance, Inc. ® LOSS ADJUSTMENT EXPENSE RATIO TO PREMIUM p Preliminary

9 © 1999 National Council on Compensation Insurance, Inc. ® LOSS ADJUSTMENT EXPENSE RATIO TO LOSSES p Preliminary

10 © 1999 National Council on Compensation Insurance, Inc. ® UNDERWRITING EXPENSE RATIO p Preliminary

11 © 1999 National Council on Compensation Insurance, Inc. ® POLICYHOLDER DIVIDENDS RATIO p Preliminary

12 © 1999 National Council on Compensation Insurance, Inc. ® POLICYHOLDER DIVIDENDS RATIO California Private Carriers

13 © 1999 National Council on Compensation Insurance, Inc. ® COMBINED RATIOS BY LINE Line of Business Personal Auto Homeowners Workers Compensation Commercial Multiple Peril Other Liability Commercial Auto Fire & Allied Lines Total All Lines % % % % 1998p 100% % Avg. 100% % p Preliminary Source for lines other than Workers Compensation: Best's Aggregates & Averages, Property/Casualty, 1998 Edition and Best’s Review Preview, Property/Casualty, January 1999 © A. M. Best Company—used with permission

14 © 1999 National Council on Compensation Insurance, Inc. ® CALENDAR YEAR COMBINED RATIO p Preliminary

15 © 1999 National Council on Compensation Insurance, Inc. ® INVESTMENT GAIN AND OTHER INCOME RATIO * Adjusted to include realized capital gains to be consistent with 1992 and after. p Preliminary

16 © 1999 National Council on Compensation Insurance, Inc. ® PRETAX OPERATING GAIN/LOSS BY LINE p Preliminary Line of Business Personal Auto Homeowners Workers Compensation Commercial Multiple Peril Other Liability Commercial Auto Fire & Allied Lines Total All Lines % % % % 1998p 6% % Avg. 6% % Source for lines other than Workers Compensation: Best's Aggregates & Averages, Property/Casualty, 1998 Edition and Best’s Review Preview, Property/Casualty, January 1999 © A. M. Best Company—used with permission

17 © 1999 National Council on Compensation Insurance, Inc. ® PRETAX OPERATING GAIN/LOSS RATIO p Preliminary * Adjusted to reflect realized capital gains to be consistent with 1992 and after.

18 0.0% 10.0% 20.0% 30.0% Tobacco Drug Air Trans Auto Mfg (Big 3) Med Supplies Semicond Mfg Food Proc Restaurant Lge Banks Retail Food Whole Life Ins Truck/Lsng P/C Ins 30.1% 12.9% 12.3% 13.0% 13.7% 14.6% 15.8% 16.7% 17.0% 19.7% 23.0% 27.6% 26.3% 27.7% Source: Value-Line 1997 ROEs Various Industries

19 2% 4% 6% 8% 10% 12% 14% 16% 1997 Reported ROE 14.2% Based on 22 Property-Casualty Stock Companies 0% Normalized ROE 10.6% Catastrophe Impact 1.9% Prior Year Releases in % Source: Fox-Pitt, Kelton

20 Contribution to 1997 ROE Reserve Releases Based on 22 Property-Casualty Stock Companies *ROE points, Releases 2.4% $3,321 *ROE points, pre-93 Releases-0.7% $ -859 *Total 1.7% $2,462 Source: Fox-Pitt, Kelton

21 Number of “Severe” Florida Hurricanes* *Number of hurricanes with Simpson-Saffir category of 4 (winds between 131 mph and 155 mph) or 5 (winds above 155 mph)

22 Largest Earthquakes in the U.S. Source: E.W. Blanch, General Reinsurance

23 Great Natural Catastrophes** *All figures in U.S. $ billion price level). **Defined as catastrophes in which the ability of the region to help itself is distinctly overtaxed, making interregional or international assistance necessary.

24 © 1999 National Council on Compensation Insurance, Inc. ® DECREASING THE COMBINED RATIO: + Rate increases + Reform + Self-funding residual markets + Flattening of loss trends + Reserve releases INCREASING THE COMBINED RATIO: + Rate reductions + Price competition + Roll-off of offsetting reserve take-downs REASONS FOR CHANGING RESULTS

25 © 1999 National Council on Compensation Insurance, Inc. ® Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization. AVERAGE RATE/LOSS COST LEVEL CHANGES

26 © 1999 National Council on Compensation Insurance, Inc. ® RATING LAWS FOR WORKERS COMPENSATION Loss Costs Status as of 2/1/99 Rates Changing Monopolistics

27 © 1999 National Council on Compensation Insurance, Inc. ® DETERMINATION OF FINAL PREMIUM CHARGED BUREAU Advisory Loss Costs Assigned Risk Rates Experience Rating Values Experience Mods Rating Plans and Classifications INSURANCE COMPANY Final Rate Determination: –Expense Multiplier –Loss Cost Deviations Individual Risk Modifications: –Schedule Rating –Retrospective Rating

28 © 1999 National Council on Compensation Insurance, Inc. ® IMPACT OF PRICE FACTORS: Schedule Rating, Premium Discount, Retro Rating, and Premium Credits for Small Deductible Policies * 1997 is Calendar Year. Does not reflect company rate departures or dividends. Based on the 37 states where NCCI provides ratemaking services.

29 Workers Compensation Pricing Components of Price Loss Cost = f (inflation, interest rate, med technology, economy, etc.) + Risk Charge + Expenses + Tax Premium

30 Workers Compensation Pricing Inflation Suppose we have a customer whom we know will have one $360,000 claim this year. They purchase a $250,000 large dollar deductible policy. This year’s price (assume no expenses) will be $110,000. How much must we charge for next year’s policy if we know WC claims are growing 3% per year?

31 Workers Compensation Pricing Inflation Should we charge 3% more? No. We have to charge 10% more because ($360,000 x 1.03) - $250,000 = $120,800 and $120,800/$110,000 = 1.10

32 Workers Compensation Pricing Interest Rate Undiscounted Loss Cost = $1,000,000 Excess of $250,000 Discounted Loss 10% = $280,842 9% = $306,459 8% = $336,329 7% = $371,539 6% = $413,551 5% = $464,363 => A 1% decrease in interest rate impacts the discounted loss cost by ~ 9-12%.

33 Workers Compensation Pricing Interest Rate Undiscounted Loss Cost = $1,000,000 Discounted Loss 10% = $131,983 9% = $152,914 8% = $179,104 7% = $212,083 6% = $254,083 5% = $308,205 => A 1% decrease in interest rate impacts the discounted loss cost by ~ 16-21%. Excess of $1,000,000

34 Workers Compensation Pricing How big can a WC claim become? Consider a 25-year old making $450 per week whose injury results in quadriplegia requiring 24-hour attendant care. $ amounts are in millions.

35 Workers Compensation Pricing Risk Charge *Surplus can be allocated to lines of business, policy types, accounts *Shareholders expect a return on the surplus *Surplus serves as a cushion to absorb risk *Surplus on a single year policy is a multi-year commitment

36 © 1999 National Council on Compensation Insurance, Inc. ® n Impact of Benefit Reforms n Managed Care Initiatives n Enhanced Safety Measures n Antifraud Measures n Employer Loss Control Initiatives n Economic Impacts LOSS TRENDS REASONS FOR REDUCTION IN FREQUENCY/SEVERITY

37 © 1999 National Council on Compensation Insurance, Inc. ® AVERAGE INDEMNITY COST PER LOST TIME CLAIM Based on data through 12/31/1997, developed to ultimate. States included: AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, MD, MI, MS, MO, MT, NE, NH, NM, NC, OK, OR, RI, SC, SD, TN, UT, VT, VA, and WI. Excludes the effects of deductible policies Annual Growth = 8% Annual Growth = 0%

38 © 1999 National Council on Compensation Insurance, Inc. ® AVERAGE MEDICAL COST PER LOST TIME CLAIM Based on data through 12/31/1997, developed to ultimate. States included: AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, MD, MI, MS, MO, MT, NE, NH, NM, NC, OK, OR, RI, SC, SD, TN, UT, VT, VA, and WI. Excludes the effects of deductible policies Annual Growth = 11% Annual Growth = 3%

39 © 1999 National Council on Compensation Insurance, Inc. ® ANNUAL CHANGE IN MEDICAL CPI

40 © 1999 National Council on Compensation Insurance, Inc. ® ANNUAL CHANGE IN LOST TIME CLAIM FREQUENCY PER WORKER Based on data through 12/31/1997, developed to ultimate. States included: AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, MD, MI, MS, MO, MT, NE, NH, NM, NC, OK, OR, RI, SC, SD, TN, UT, VT, VA, and WI. Excludes the effects of deductible policies.

41 © 1999 National Council on Compensation Insurance, Inc. ® ANNUAL CHANGE IN LOST TIME CLAIM COSTS PER WORKER Based on data through 12/31/1997, developed to ultimate. States included: AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, MD, MI, MS, MO, MT, NE, NH, NM, NC, OK, OR, RI, SC, SD, TN, UT, VT, VA, and WI. Excludes the effects of deductible policies Annual Growth = 12% Annual Growth = - 2%

42 © 1999 National Council on Compensation Insurance, Inc. ® * Excludes Maine Residual Market Pool ** Projected to ultimate RESIDUAL MARKET PREMIUMS as of 9/30/1998

43 © 1999 National Council on Compensation Insurance, Inc. ® Residual Market Pools Eliminated: n Florida n Hawaii n Kentucky n Louisiana n Maine n Rhode Island n Texas Accounted For Over $1 Billion in Residual Market Underwriting Losses in 1990 RESIDUAL MARKET RELIEF

44 © 1999 National Council on Compensation Insurance, Inc. ® NEW STATE FUNDS INSURER OF LAST RESORT MARKET SHARES Florida--541na Hawaii Kentucky Louisiana Maine Rhode Island Texas

45 © 1999 National Council on Compensation Insurance, Inc. ® RESIDUAL MARKET SHARES p Preliminary Average based on states with pools

46 © 1999 National Council on Compensation Insurance, Inc. ® * Excludes Maine Residual Market Pool RESIDUAL MARKET COMBINED RATIOS as of 9/30/1998

47 © 1999 National Council on Compensation Insurance, Inc. ® * Excluding Maine ** Excluding Maine and New Mexico # Excluding New Mexico RESIDUAL MARKET UNDERWRITING GAIN/LOSS as of 9/30/1998

48 © 1999 National Council on Compensation Insurance, Inc. ® COMBINED RATIO Calendar Year Countrywide - Private Carrier p Preliminary Includes dividends to policyholders

49 © 1999 National Council on Compensation Insurance, Inc. ® COMBINED RATIO Calendar Year vs. Ultimate Accident Year Countrywide - Private Carrier p Preliminary Includes dividends to policyholders Accident year is developed to ultimate

50 © 1999 National Council on Compensation Insurance, Inc. ® ACCIDENT YEAR LOSS RATIOS INCLUDING LOSS ADJUSTMENT EXPENSE Reserve releases

51 © 1999 National Council on Compensation Insurance, Inc. ® CHANGING DEVELOPMENT PATTERNS 1st to 2nd Development Accident Year Development. First is at 12 months. Source: NCCI's Loss Development Exhibits

52 © 1999 National Council on Compensation Insurance, Inc. ® IMPACT OF LOSS DEVELOPMENT CHANGES ON ULTIMATE PROJECTIONS Development Method: Incurred Including IBNR Accident Year Development. First is at 12 months. Source: NCCI's Loss Development Exhibits

53 © 1999 National Council on Compensation Insurance, Inc. ® IMPACT OF LOSS DEVELOPMENT CHANGES ON ULTIMATE PROJECTIONS Development Method: Case Incurred Accident Year Development. First is at 12 months. Source: NCCI's Loss Development Exhibits

54 © 1999 National Council on Compensation Insurance, Inc. ® IMPACT OF LOSS DEVELOPMENT CHANGES ON ULTIMATE PROJECTIONS Development Method: Paid Accident Year Development. First is at 12 months. Source: NCCI's Loss Development Exhibits

55 © 1999 National Council on Compensation Insurance, Inc. ® WORKERS COMPENSATION PAID TO INCURRED RATIOS TOTAL LOSSES Accident Year1st2nd Accident Year Development. First is at 12 months. Source: NCCI's Loss Development Exhibits

56 © 1999 National Council on Compensation Insurance, Inc. ® WORKERS COMPENSATION PAID TO CASE-INCURRED RATIOS TOTAL LOSSES Accident Year1st2nd Accident Year Development. First is at 12 months. Source: NCCI's Loss Development Exhibits

57 © 1999 National Council on Compensation Insurance, Inc. ® WORKPLACE SUBSTANCE ABUSE + Current hot topic in state legislatures + Compensability standards for claims involving substance abuse + Common "incentive" device - DFW programs: –currently in 9 states –premium credit –employer participation –insurer participation

58 © 1999 National Council on Compensation Insurance, Inc. ® LEGISLATIVE UPDATE - PROPOSALS AK,AZ,CO,GA,OR,TNBenefit increases DCPPD benefit reductions, med fee schedule change, SIF elimination FLORIDAWC rate deregulation discussion HAWAIIMed fee schedules changes ILLINOISHours worked and SF creation INDIANAHours worked KANSAS“Right to sue” bills SOUTH DAKOTASIF elimination VIRGINIADeregulation

59 © 1999 National Council on Compensation Insurance, Inc. ® SECOND INJURY FUND ELIMINATION Kansas7/1/94 Utah7/1/94 Connecticut7/1/95 Nebraska12/1/97 Florida1/1/98 Rhode Island7/3/98

60 © 1999 National Council on Compensation Insurance, Inc. ® MULTIPLE STAT AGENTS AND ADVISORY ORGANIZATIONS + Concept being discussed in a growing number of states + Important issues to consider: –uniformity in class and statistical plans –uniformity in experience rating process –data integrity / fragmentation –cost efficiencies –equity –rate filing process

61 © 1999 National Council on Compensation Insurance, Inc. ® ISSUES n Divergence of calendar year and accident year results n Adequacy of reserves – Loss development changes – Large deductible policies n Potential loss trend changes n Impact of reinsurance n Potential for reform rollback n Managed Care backlash n Test of Residual Market changes n Potential changes in the economy n Future investment gains


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