1  2004 National Council on Compensation Insurance, Inc. Maryland Workers Compensation Costs: A Statistical Review September 20, 2004 Presented by:

2  2004 National Council on Compensation Insurance, Inc. Maryland Workers Compensation Costs: Agenda  About NCCI  State of the Industry  Maryland Workers Compensation System Overview  A Closer Look at Claim Frequency in Maryland  A Closer Look at Claim Severity in Maryland  Impact of “Harris vs. Bd of Ed of Howard County” case  NCCI Research

3  2004 National Council on Compensation Insurance, Inc. About NCCI

4  2004 National Council on Compensation Insurance, Inc. NCCI: Who We Are National Council on Compensation Insurance (NCCI) manages the nation’s largest database of workers compensation insurance information. NCCI – – analyzes industry trends. – prepares workers compensation insurance loss cost/rate recommendations. – assists in pricing proposed legislation. – provides a variety of data products to maintain a healthy workers compensation system and reduce the frequency of employee injuries.

5  2004 National Council on Compensation Insurance, Inc. NCCI’s Mission To foster a healthy workers compensation system by providing high quality information and analytical services that result in:  Adequate loss costs/rates  Objective reform evaluation  Self-funded residual markets  Tangible value for stakeholders

6  2004 National Council on Compensation Insurance, Inc. NCCI Products & Services

7  2004 National Council on Compensation Insurance, Inc. State of the Industry

8  2004 National Council on Compensation Insurance, Inc. State of the Industry—An Overview Positives: Results are improving Frequency continues to decline Negatives: Medical severity continues rapid growth

9  2004 National Council on Compensation Insurance, Inc. $ Billions $ Trillions Workers Compensation Premium Volume: A Continued Period of Growth Workers Compensation Net Written Premium—Private Carriers $ Billions$ Trillions p Preliminary Source: 1990–2002, A.M. Best Aggregates & Averages; 2003p, NCCI and Economy.com

10  2004 National Council on Compensation Insurance, Inc. $ Billions $ Trillions Adjusted Workers Compensation Premium Volume Workers Compensation Direct Written Premium—Private Carriers 1. Direct of Reinsurance 2. Grossed-Up for Large Deductible Credits 3. Adjusted to 1990 Rate/Loss Cost Level 4. Grossed-Up for Carrier Departure p Preliminary. Source: NCCI.

11  2004 National Council on Compensation Insurance, Inc. Workers Compensation Net Written Premium Private Carriers and State Funds Private Carriers ($B) State Funds ($B) p Preliminary Source:1996–2002 Private Carriers, A.M. Best Aggregates & Averages; 2003p, NCCI 1996–2003p State Funds—AZ, CA, CO, HI, ID, KY, LA, ME, MN, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

12  2004 National Council on Compensation Insurance, Inc. Accident Year 2003 Combined Ratio Continues to Improve Workers Compensation Calendar Year and Ultimate Accident Year Private Carriers p Preliminary. Accident Year data is evaluated as of 12/31/03 and developed to ultimate. Source: Calendar Years , A.M. Best Aggregates & Averages; Calendar Year 2003p and Accident Years p, NCCI. Includes dividends to policyholders.

13  2004 National Council on Compensation Insurance, Inc. Workers Compensation Net Combined Ratios Calendar Year—Private Carriers and State Funds Percent p Preliminary Source:1996–2002 Private Carriers, A.M. Best Aggregates & Averages; 2003p, NCCI 1996–2003p State Funds—AZ, CA, CO, HI, ID, KY, LA, ME, MN, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

14  2004 National Council on Compensation Insurance, Inc. Results Vary From State to State Accident Year 2002 Combined Ratios Data is evaluated as of 12/31/02.

15  2004 National Council on Compensation Insurance, Inc. The Average Approved Bureau Rate/Loss Costs History of Average Bureau Rate/Loss Cost Level Changes Cumulative % Cumulative % Percent Cumulative % Calendar Year p Preliminary (states approved to date in 2004). Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization. The countrywide change is a weighted average of individual state changes based on state premium volumes and ignoring effective dates.

16  2004 National Council on Compensation Insurance, Inc. Status of NCCI Filing Activity Voluntary Market Filings

17  2004 National Council on Compensation Insurance, Inc. 2003/2004 Filing Cycle NCCI Voluntary Market Filing Activity Based on data evaluated as of 12/31/02. Data for 36 states has been reviewed – 21 states have filed increases – 13 states have filed decreases – 2 states will not have a filing Range of voluntary filings: -12.3% to +21.2%

18  2004 National Council on Compensation Insurance, Inc. District of Columbia* 11/1/ % Maryland * 1/1/ % Pennsylvania 4/1/ % Delaware 12/1/ % Virginia * 4/1/ % State Voluntary Market Indications

19  2004 National Council on Compensation Insurance, Inc. The Impact on Premium of Rate/Loss Cost Departures, Schedule Rating and Dividends NCCI States—Private Carriers p Preliminary. Dividend ratios are based on calendar year statistics. Based on data through 12/31/03 for the states for which NCCI provides ratemaking services.

20  2004 National Council on Compensation Insurance, Inc. Workers Compensation Claim Frequency and Severity For each of the last 5 years (and 10 of the last 12), on-the-job claim frequency for workers compensation injuries has declined from the previous year’s level Medical and indemnity costs continue to rise— somewhat negating the good news regarding reduced claims

21  2004 National Council on Compensation Insurance, Inc. While Claim Costs Rise Steadily, Frequency Continues a Slight Decline 2003p: Preliminary based on data valued as of 12/31/ –2002: Based on data through 12/31/2002, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies.

22  2004 National Council on Compensation Insurance, Inc. The Frequency of Lost-Time Claims Has Continued to Fall Through 2003 Cumulative Change of –39.7% (1991–2002) Percent Change 2003p: Preliminary based on data valued as of 12/31/ –2002: Based on data through 12/31/2002, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies.

23  2004 National Council on Compensation Insurance, Inc. Claim Frequency Declines Have Been Widespread Every major industry had declines of at least 30% Every major occupation group had declines of at least 30% Every major age group had large declines, generally greater than 20% Both male and female workers exhibited declines in excess of 30%

24  2004 National Council on Compensation Insurance, Inc. Workers Compensation Frequency of Lost-Time Claims by Inflation Adjusted Loss Ranges Percentage Change Between Policies Expiring in 1997 and 2002 Claim Frequency Per $1M of Wage Adjusted Payroll Source: NCCI WCSP data, NCCI states only Losses have been adjusted for indemnity and medical inflation based on CPS wages and Medical CPI, respectively

25  2004 National Council on Compensation Insurance, Inc. Source: NCCI WCSP data Claim Frequencies by Injury Type Percentage Change Between Policies Expiring in 1997 and 2002 Claim Frequency per $1M of Wage Adjusted Payroll

26  2004 National Council on Compensation Insurance, Inc. Workers Compensation Frequency for Selected Classes Frequency = Lost-time claims/payroll; payroll adjusted for inflation. Based on NCCI WCSP data.

27  2004 National Council on Compensation Insurance, Inc. What’s Driving the Claims Frequency Trend? Continued emphasis on workplace safety Increased use of robotics Modular design and construction techniques Power-assisted processes and cordless tools Advances in ergonomic design More and better job training Improved fraud deterrents

28  2004 National Council on Compensation Insurance, Inc. State of the Industry—A Recap Positives: Results are improving Frequency continues to decline Negatives: Medical severity continues rapid growth

29  2004 National Council on Compensation Insurance, Inc. Maryland Workers Compensation System Overview

30  2004 National Council on Compensation Insurance, Inc. Maryland Workers Compensation System— An Overview Decrease in the medical and indemnity loss ratios Several cost drivers contribute to rising costs – Average Permanent Partial (PP) indemnity claim cost higher than countrywide PP average indemnity claim cost by 18% – Higher average Vocational Rehab (VR) claim costs as compared to the countrywide average VR claim cost – High involvement by attorneys Claim frequency continues to decline Indemnity severity has decreased while medical severity continues to increase High permanent partial disability frequency, but lower average claim costs than the region

31  2004 National Council on Compensation Insurance, Inc. Maryland Accident Year Combined Ratios Source: NCCI financial data, NAIC Annual Statement data.

32  2004 National Council on Compensation Insurance, Inc. The Impact on Premium of Rate/Loss Cost Departures, Schedule Rating and Dividends in Maryland Dividend ratios are based on calendar year statistics. Based on data through 12/31/03 for the states for which NCCI provides ratemaking services..

33  2004 National Council on Compensation Insurance, Inc. Current Average Voluntary Pure Loss Costs Using Maryland’s Payroll Distribution Based on the latest NCCI published rates and loss costs in the various states.

34  2004 National Council on Compensation Insurance, Inc. Based on NCCI’s financial data. Maryland’s Loss Ratios Continue to Decrease

35  2004 National Council on Compensation Insurance, Inc. Maryland January 1, 2005 Proposed Filing

36  2004 National Council on Compensation Insurance, Inc. Maryland’s Filing Activity Voluntary Loss Cost Changes No filing Law-only filing

37  2004 National Council on Compensation Insurance, Inc. Maryland’s January 1,2005 Voluntary – Proposed Filing Summary Indicated Change Based on Experience+ 1.6% Indicated Change Based on Trend+ 0.0% Indicated Change in Benefits*+ 1.8% Indicated Change in Experience, Trend & Benefits+ 3.4% Overall Indicated Change+ 3.4% * Benefit Changes +0.5% : Increase in Maximum Weekly Benefit +0.7% : Impact of change in Hospital Fee Schedule +0.5% : Impact of Change in Medical Fee Schedule

38  2004 National Council on Compensation Insurance, Inc. Maryland’s January 1, 2005 Filing Average Changes by Industry Group

39  2004 National Council on Compensation Insurance, Inc. A Closer Look at Claim Frequency in Maryland

40  2004 National Council on Compensation Insurance, Inc. System changes Economic developments/prospects Demographic developments/prospects What Drives Changes in Frequency and Severity?

41  2004 National Council on Compensation Insurance, Inc. Frequency Continues to Decline in Maryland Based on NCCI’s financial data. Frequency of lost-time claims.

42  2004 National Council on Compensation Insurance, Inc. Maryland’s Claim Frequency Compared to Other States in the Region Frequency per 100,000 Workers—All Claims Based on NCCI’s WCSP data. Total = 3,884 Total = 1,393 Total = 4,178

43  2004 National Council on Compensation Insurance, Inc. Distribution of Frequency by Injury Type District of ColumbiaMaryland Based on NCCI’s WCSP data. Temporary TotalPermanent PartialPermanent Total/FatalMedical Only Virginia

44  2004 National Council on Compensation Insurance, Inc. Maryland Workers Compensation Commission— Statistics Fiscal Year Total Hearings30,82329,62428,825 Total Stipulations Approved2,5882,2801,900 Total Settlements Approved8,6689,1578,430 Total TT Awards16,36716,09015,589 Total Awards for Attorney/Med Fees 1,4951,2341,171 Total Permanency Awards9,8549,1608,986 Total PT Awards Total Employers’ First Reports filed 159,935146,645139,759 Total Claims filed28,46927,42227,205

45  2004 National Council on Compensation Insurance, Inc. Economic Drivers of Frequency in Maryland

46  2004 National Council on Compensation Insurance, Inc. Maryland’s Incidence Rates for Cases With Days Away From Work Source: U. S. Department of Labor

47  2004 National Council on Compensation Insurance, Inc. Incidence Rates By Industry in Maryland Source: U. S. Department of Labor

48  2004 National Council on Compensation Insurance, Inc. Distribution of Maryland Lost-Time Claims Source: NCCI Detailed Claim Information Database

49  2004 National Council on Compensation Insurance, Inc. Relative “Riskiness” of NCCI Industry Groups Source: Economy.com and NCCI Ratio of Pct. Of Maryland Lost-Time Cases to Pct. Of Private Employment, 2002

50  2004 National Council on Compensation Insurance, Inc. Job Growth in Maryland: Forecast Gains in 2004–2005 Source: U.S. Department of Labor and Economy.com

51  2004 National Council on Compensation Insurance, Inc. The Skill-Level of the Workforce (Median Tenure) Tends to Decline When Employment Increases # Tenure data collected only for years shown * Data for 1996–2002 reflect population controls from the 1990 Census. Source: U.S. Department of Labor Private Employment Percent Change Last Year Left Axis Median Tenure Years at Current Job Right Axis National Data

52  2004 National Council on Compensation Insurance, Inc. Higher-Incidence-Rate Industries in Maryland Are Expected to Post Mixed Results in Source: Economy.com

53  2004 National Council on Compensation Insurance, Inc. Inexperienced Workers*: Disproportionately High Share of Injuries; Lowest Decline in Total Injuries Share of Employees* Share of Injuries # Percent Decline in Injuries 92/93 to 00/01 12 Months or less25%30%-28% 13 Months to 59 Months32%33%-34% 60 Months and Above44%24%-34% * Based on National Data * As of January, 2002 # As of 2001, 12% not reported Source: U.S. Department of Labor

54  2004 National Council on Compensation Insurance, Inc. Key Takeaways— Economic Drivers of Frequency in Maryland Improving overall job growth—especially in the more- hazardous construction industry—suggests some upward pressure on frequency due to economic forces Frequency trend will ultimately reflect combination of system factors, impact of short-term business conditions, and ongoing changes that affect workplace safety

55  2004 National Council on Compensation Insurance, Inc. A Closer Look at Claim Severity in Maryland

56  2004 National Council on Compensation Insurance, Inc. Countrywide, Indemnity Severity Has Been Increasing More Rapidly Than State Wages Countrywide Indemnity Severity (Right Scale) U.S.Average Weekly Wage (Left Scale) Sources: NCCI and U. S. Department of Labor. Indemnity severity shown prior to wage adjustment.

57  2004 National Council on Compensation Insurance, Inc. Wages in Maryland Are Expected to Continue to Trend Higher Through 2004 Average Annual Percent Change 1990 to 2004: 3.8% (US=3.5%) Source: U.S. Department of Census

58  2004 National Council on Compensation Insurance, Inc. Average Indemnity Severity in Maryland Actual Severity vs. Severity in Excess of Wage Growth AY ‘03 Based on NCCI’s financial data; lost-time claims only.

59  2004 National Council on Compensation Insurance, Inc. Average Indemnity Claim Severity Based on NCCI’s financial data; lost-time claims only. D.C. MD VA

60  2004 National Council on Compensation Insurance, Inc. Wages in Maryland Compared to Nearby States

61  2004 National Council on Compensation Insurance, Inc. Maryland’s Population Mix Has Shifted Toward the Older Age Groupings Source: Census Bureau

62  2004 National Council on Compensation Insurance, Inc. For Older Workers: Days-Away-From-Work Cases Tend to Be Longer National Data, 2001 Workers Aged Occupational Injuries & Illnesses 20 to 24 Years 55 to 64 Years Lasting 2 Days 16%10% Lasting 31 Days or More13%30% Source: U.S. Department of Labor

63  2004 National Council on Compensation Insurance, Inc. Average Medical Severity in Maryland Actual Severity vs. Severity in Excess of Wage Growth AY ‘03 Based on NCCI’s financial data; lost-time claims only.

64  2004 National Council on Compensation Insurance, Inc. Average Medical Severity Based on NCCI’s financial data; lost-time claims only. D.C. MD VA

65  2004 National Council on Compensation Insurance, Inc. Average Permanent Partial Indemnity Cost per Case Based on NCCI’s WCSP data.

66  2004 National Council on Compensation Insurance, Inc. Average Permanent Partial Medical Cost per Case Based on NCCI’s WCSP data.

67  2004 National Council on Compensation Insurance, Inc. Average Permanent Partial Total Cost per Case Based on NCCI’s WCSP data.

68  2004 National Council on Compensation Insurance, Inc. Breakdown of Cost for Vocational Rehabilitation Claims in Maryland Average of Accident Years 1997–2000 at a Second Report Based on NCCI’s Detailed Claim Information Database

69  2004 National Council on Compensation Insurance, Inc. The Frequency of Permanent Partial Claims Varies Within the Region Permanent Partial Frequency per 100,000 Workers Based on NCCI’s WCSP data.

70  2004 National Council on Compensation Insurance, Inc. The District of Columbia’s Permanent Partial Total Costs Are Lowest in the Region Permanent Partial Costs per 100,000 Workers Based on NCCI’s WCSP data.

71  2004 National Council on Compensation Insurance, Inc. Attorney Involvement in Maryland Has Been Higher Than That Observed Countrywide Lost-Time Claims Accident Years 1997 to 2001 at 2nd report. Based on NCCI’s DCI data.

72  2004 National Council on Compensation Insurance, Inc. Maryland’s Average Indemnity Claim Costs When an Attorney Is Involved Have Been Lower Than That Observed Countrywide Based on NCCI’s DCI data.

73  2004 National Council on Compensation Insurance, Inc. Distribution of Indemnity and Medical Benefits IndemnityMedical District of Columbia Virginia Maryland Based on NCCI’s WCSP data.

74  2004 National Council on Compensation Insurance, Inc. Virginia Indemnity Loss Distribution by Injury Type Based on NCCI’s WCSP data. Temporary TotalPermanent PartialPermanent Total/Fatal MarylandDistrict of Columbia

75  2004 National Council on Compensation Insurance, Inc. Virginia Medical Cost Distribution by Injury Type Maryland Temporary TotalPermanent PartialPermanent Total/FatalMedical Only District of Columbia Based on NCCI’s WCSP data.

76  2004 National Council on Compensation Insurance, Inc. Harris vs. Howard County Board of Education

77  2004 National Council on Compensation Insurance, Inc. Impact of Harris Case On June 6, 2003, Maryland’s Court of Appeals issued its decision which overruled a judicially created doctrine permitting denial of benefits for injuries that do not result from “unusual activity” on the part of the claimant. Estimated cost impact: +2.0% Current filing contains some “post-Harris” experience, but it is very limited. Policies written after June 7, 2002 with losses that occur after June 6, 2003 would be included in policy year 2002 financial data. Aggregate indemnity and medical losses do not allow the ability to “drill-down” and identify losses associated with Harris. Unit Statistical Plan (USP) data captures more detailed loss information, however 1 st report of this information is not available until 18 months after policy inception. Thus, if a policy was written on January 1 st, 2003 and a loss occurs on June 7, 2003 (post-Harris), the 1 st statistical report will not be submitted until July 1 st, Even then, USP data would not capture certain elements necessary to identify losses as “Harris” related.

78  2004 National Council on Compensation Insurance, Inc. NCCI Research

79  2004 National Council on Compensation Insurance, Inc. NCCI Research Catastrophic Industrial Accidents Medical Costs in Workers Compensation vs. Group Health Medical Cost Indexes Medical Services by Size of Loss Prescription Drug Study Aging of the Workforce Frequency Research Experience Rating Performance Testing Classification Ratemaking Methodology