1. © 2004 Towers Perrin Joanne M. Ottone, FCAS, MAAA California Workers’ Compensation Impact of Recent Legislation CAS 2004 ANNUAL MEETING November 14-17, 2004 Montreal, Quebec

2. © 2004 Towers Perrin 2 AB 749 Statutory Benefit Changes Well-established methodologies for these types of changes Use wage distribution to quantify impact of changing minimum and maximum wages on average benefit payment Minimum wage Maximum wage

3. © 2004 Towers Perrin 3 AB 749 Statutory Benefit Changes (continued) Use distribution of PD ratings to estimate impact of changing number of weeks per PD %

4. © 2004 Towers Perrin 4 AB 749 Statutory Benefit Changes (continued)

5. © 2004 Towers Perrin 5 AB 749 Statutory Benefit Changes – Cost Estimates Effective Date Impact on Indemnity – Excluding Utilization Impact Impact on Indemnity – Including Utilization Impact Impact on Total Losses 1/1/20039.1%11.3%4.4% 1/1/20049.3%11.7%5.6% 1/1/20054.8%6.0%2.8% 1/1/20064.7%5.8%2.7% Increased claim frequency associated with increases in benefits is documented in several studies

6. © 2004 Towers Perrin 6 AB 227 Vocational Rehabilitation Repeal Vocational rehabilitation makes up about 15% of indemnity benefits Education vouchers estimated to cost 14% of current voc rehab costs Total savings of 13% of indemnity costs – or 5% of total losses BeforeAfter Source: WCIRB Indemnity Benefits

7. © 2004 Towers Perrin 7 SB 899 TD Duration Cap TD benefits limited to 104 weeks within a period of 2 years from the date of the first TD payment – with exceptions for certain types of injuries Date of Injury Date of First TD Date of First TD Payment 104 Week Limit X

8. © 2004 Towers Perrin 8 SB 899 TD Duration Cap Temporary disability benefits make up about 15% of total losses Approximately 15% of all TD benefits are estimated to be eliminated by the 104 week cap – for savings on total losses of 2.2% WCIRB also assumes there will be reduced frequency of claims due to imposition of cap – total estimated savings of 2.5%

9. © 2004 Towers Perrin 9 SB 899 PD Apportionment Estimates of changes due to apportionment of permanent disability awards to prior industrial injuries as well as non-occupational causes are far more subjective WCIRB estimates that PD awards will be reduced by 10%, PD makes up 22% of total loss dollar 2.2% of total loss dollar eliminated WCIRB also assumes that there will be reduced frequency of claims due to reduction in PD benefits from apportionment Total estimated savings of 3.1% of total

10. © 2004 Towers Perrin 10 SB 899 Change in PPD Weeks WCIRB estimates savings of 7.6% of PD benefits, or 1.7% of total losses With additional savings from reduced frequency: 2.5% of total losses Change in number of weeks does not go into effect until new PD schedule has been adopted. Distribution of ratings likely to change under new PD schedule.

11. © 2004 Towers Perrin 11 SB 899 Two-Tiered PPD Benefits Two-tier benefit based on offer of return-to-work WCIRB estimates two-tier benefit will reduce permanent disability costs by 2.3% 0.5% of total loss dollar eliminated by two-tier benefit WCIRB also assumes that there will be reduced frequency of claims due to reduction in PD benefits Total estimated savings of 0.8% of total Assumes distribution of PD ratings will not change Two-tier benefit does not go into effect until after new schedule is promulgated.

12. © 2004 Towers Perrin 12 SB 899 New PD Schedule New schedule to be promulgated by Administrative Director Nature of injury shall incorporate AMA guidelines 5 th edition Diminished future earning capacity shall be numeric formula —based on data and findings from RAND study Schedule hasn’t been promulgated yet, so impact is unknown

13. © 2004 Towers Perrin 13 SB 899 – Summary of Indemnity Impacts ProvisionImpact on Total Losses Cap on TD Duration-2.5% PD Changes Effective Now: Apportionment -3.1% Total Excluding PD Changes Effective Later -5.6% PD Changes Effective Later: Schedule Change in Number of Weeks Two-Tier Unknown -2.5%* -0.8%* Total Including PD Changes Effective Later~9% Source: WCIRB

14. © 2004 Towers Perrin 14 Reform Implications on Loss Reserves - Indemnity New PD schedule applicable to claims where there has been no comprehensive medical-legal report or no report by a treating physician indicating the existence of permanent disability Apportionment provisions apply regardless of date of injury – but “shall not constitute good cause to reopen or rescind, alter, or amend any existing order, decision, or award of the Workers’ Compensation Appeals Board” When is an order an “order”? Legal decision already made which gives broad definition to term May limit applicability of provisions to existing claims

15. © 2004 Towers Perrin 15 Impact of Apportionment on Unpaid Indemnity WCIRB estimates savings on unpaid indemnity by assuming that all unpaid permanent disability benefits will be reduced by 10% Accident YearImpact on Ultimate Indemnity Impact on Unpaid Indemnity 1999-0.3%-1.4% 2000-0.7%-2.2% 2001-1.7%-3.7% 2002-2.8%-4.2% 2003-4.0%-4.5%

16. © 2004 Towers Perrin 16 Reform Implications on Loss Reserves - Medical Fee schedules apply based on date of service Repeal of presumption of correctness of treating physician applicable to pre-2003 injuries Medical treatment utilization guidelines and medical networks applicable regardless of date of injury California Applicants Attorneys Association recently filed a lawsuit to block regulations which allow carriers to direct current claimants to network doctors CAAA does not appear to have opposition to application of guidelines to existing claims

17. © 2004 Towers Perrin 17 Impact of Fee Schedule Changes Component Percentage of Medical Costs Impact of Fee Schedule Impact on Unpaid Medical Inpatient Hospital 11.0%+8%+0.9% Outpatient Surgery Centers 16.5%-41%-6.8% Pharmacy7.2%-37%-2.7% Official Medical Fee Schedule 50.2%-5% CYs 2004&2005 -0.6% [-2.5% of % Expected Paid in 2004 (14%) and 2005 (10%)] Source: WCIRB

18. © 2004 Towers Perrin 18 Impact of Treating Physician Presumption Repeal Impact on reserves should be for pre-2003 injuries only Quantification of impact based on modifying assumptions in rate level calculations Savings estimates range from 1.4% to 6.7% of unpaid medical, depending on accident year Source: WCIRB

19. © 2004 Towers Perrin 19 Impact of Medical Utilization Guidelines/Networks Quantification of impact also based on modifying assumptions in rate level calculations Savings estimates for guidelines/networks range from 1.4% to 15.6%, depending on accident year Total savings estimates from PTP and guidelines/networks range from 2.8% to 15.6%, depending on accident year Source: WCIRB

20. © 2004 Towers Perrin 20 Summary of Impact of Reforms on Unpaid Medical ComponentSavings Estimate Fee Schedules-9.2% Primary Treating Physician-3.1% Medical Utilization Guidelines/Networks -7.1% Total-18.3% Assumes industry distribution of unpaid medical by accident year

21. © 2004 Towers Perrin 21 Impact of Reforms on Loss Reserves – Other Considerations Impact on development patterns Impact on trends Double-counting