Workers Compensation Loss Reserving in California Michele P. Bernal

General Challenges in CA WC b 99.8% loss ratio projected for AY98 (source WCIRB 6/99 projection)

CA Direct Loss Ratios

General Challenges in CA WC b 99.8% loss ratio projected for AY98 b WCIRB projects $3 billion reserve shortage on a direct basis

General Challenges in CA WC b 99.8% loss ratio projected for AY98 b WCIRB projects $3 billion reserve shortage on a direct basis b 146% Combined Ratio Projection for AY98

Projected Industry-wide Direct Combined Ratio 146% Combined Ratio Projection for AY98 Loss Ratio (1/00 filing)100% Loss Ratio (1/00 filing)100% LAE Ratio (1/00 filing) 24% LAE Ratio (1/00 filing) 24% Other Expense (CY98) 22% Other Expense (CY98) 22% Direct Combined Ratio146% Direct Combined Ratio146%Source:WCIRB

General Challenges in CA WC b 99.8% loss ratio projected for AY98 b WCIRB projects $3 billion reserve shortage on a direct basis b 146% Combined Ratio Projection for AY98 b Pricing Continuing to deteriorate through 1999 (Fully loaded rates are 92% of Advisory Pure Premium) (source WCIRB)

General Challenges in CA WC b 99.8% loss ratio projected for AY98 b 146% Combined Ratio Projection for AY98 b Pricing Continuing to deteriorate through 1999 (Fully loaded rates are 92% of Advisory Pure Premium) b Costs are increasing

On-Level Loss Ratios Indemnity + Medical Source: WCIRB (1/00 Filing)

Reserving Challenges in California Workers Comp b 1/1/94 Reforms b 1/1/95 Open Rating b 4/1/97 Change in PD Rating Schedule b 1/1/98 Change in ALAE Definition b 9/18/96 Minniear’s Decision b Medical Management b 1/1/99 New Medical Fee Schedule b Buy-down Reinsurance Programs

1/1/94 California Reforms b Reduced # of stress cases b Anti-fraud measures b Vocational Rehab Cap of $16,000 b Advancing of PD benefits b Increased penalties for late payments b Large part of the improvement was seen prior to the reforms

On-Level Loss Ratios Indemnity + Medical Source: WCIRB (1/00 Filing)

Reserving Challenges in California Workers Comp b 1/1/94 Reforms b 1/1/95 Open Rating b 4/1/97 Change in PD Rating Schedule b 1/1/98 Change in ALAE Definition b 9/18/96 Minniear’s Decision b Medical Management, etc b 1/1/99 New Medical Fee Schedule b Buy-down Reinsurance Programs

CA Direct Loss Ratios

On-Level Loss Ratios Indemnity + Medical Source: WCIRB (1/00 Filing)

Reserving Challenges in California Workers Comp b 1/1/94 Reforms b 1/1/95 Open Rating b 4/1/97 Change in PD Rating Schedule b 9/18/96 Minniear’s Decision b 1/1/98 Change in ALAE Definition b Medical Management, etc b 1/1/99 New Medical Fee Schedule b Buy-down Reinsurance Programs

Other Changes Impacting Reserves b 9/18/96 Minniear’s Decision Presumption of the Correctness of the Treating PhysicianPresumption of the Correctness of the Treating Physician b ALAE Definition Change 1/1/98 Different from NCCI DefinitionDifferent from NCCI Definition Medical Management expenses are Medical Loss, not ALAEMedical Management expenses are Medical Loss, not ALAE Some Fraud expenses are ALAE, not ULAESome Fraud expenses are ALAE, not ULAE

Other Changes Impacting Reserves b Medical Management/Early Intervention/Provider Networks Reduced Cost?Reduced Cost? Return to Work?Return to Work? Accelerated claims closure?Accelerated claims closure?

Other Changes Impacting Reserves b 1/1/99 New Medical Fee Schedules WCIRB projects 2.0% increase in medical costsWCIRB projects 2.0% increase in medical costs Lots of uncertaintyLots of uncertainty –Hot/Cold pack treatments may be replaced with more expensive modalities –Inpatient Hospital Fee Schedule varies charges by individual facility –Expanded ability for physicians to charge for chart information & other reports

Other Changes Impacting Reserves b Buy-Down Reinsurance Quick payout of net lossesQuick payout of net losses Substantial uncertainty as to timing of payouts unless your data systems have the ability to restate historical development at new limit (indexed)Substantial uncertainty as to timing of payouts unless your data systems have the ability to restate historical development at new limit (indexed) Use caution when using industry LER’sUse caution when using industry LER’s

Coming Up... SB320 Benefit Increases b Initially $3.2 billion (30%) effective 1/1/00 approved by senate b In Assembly 6/30 revision: Phase in over 3 years6/30 revision: Phase in over 3 years 9/7 revision: $2 billion phased in over 5 years9/7 revision: $2 billion phased in over 5 years 9/9 revision: $2 billion phased in over 6 years9/9 revision: $2 billion phased in over 6 years b Governor’s Plan (9/4) $ billion

SB320 Benefit Increases b Only cost increases; no reform provisions  Increase in maximum weekly benefits  Increase in maximum & duration of permanent partial disability payments  Increase in death benefits  Additional administrative costs  Treating physician retains presumption of correctness only if pre-designated

General Notes b Very important to communicate with claims and underwriting departments b Look for trends that are explainable based on that communication b Can’t assume long term averages are accurate