Senate Bill No. 863 Cost Monitoring – Current Update W o r k e r s’ C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a ® Senate Bill No. 863 Cost Monitoring – Current Update Dave Bellusci WCIRB California State Senate Committee on Labor and Industrial Relations March 25, 2015 Sacramento, California 1

Senate Bill No. 863 Cost Monitoring – Current Update 2 The information provided in this Presentation was developed by the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) solely for the purpose of discussion during this Presentation. The WCIRB shall not be liable for any damages, of any kind, whether direct, indirect, incidental, punitive or consequential, arising from the use, inability to use, or reliance upon information provided in this Presentation. © 2015 Workers’ Compensation Insurance Rating Bureau of California. All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers’ Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted by federal copyright law. Workers’ Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Online, X-Mod Direct, eSCAD and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRB’s prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies. To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the Workers’ Compensation Insurance Rating Bureau of California at

Senate Bill No. 863 Cost Monitoring – Current Update Overview  Average Workers’ Compensation Premium Rates Since 1978  Countrywide Comparison of Average Premium Rates  Senate Bill No. 863 Update 3

Senate Bill No. 863 Cost Monitoring – Current Update 4 California Premium Rating System  Pre-1995 Minimum Rate Law – Uniform Set of Full Premium Rates Approved by Insurance Commissioner  Post 1995 – Advisory Pure Premium (Loss Cost) Rates Approved by the Insurance Commissioner – Insurers file their own premium rates and plans with Commissioner – Very competitive market (over 400 insurers licensed))

Senate Bill No. 863 Cost Monitoring – Current Update Estimated Average Charged Insurer Rate Per $100 of Payroll 5 Policy Period Sources: WCIRB Aggregate Financial Data Calls and Unit Statistical Submissions Average charged rate is 2% below 1978 and 53% below the 2003 level, but is up 36% since 2008

Senate Bill No. 863 Cost Monitoring – Current Update 83% Reduction in claim frequency in the past 50 years from 1 in 5 injured to 1 in 25 Long-Term California Claim Frequency Indexed to Source: Based on reported unit statistical claim counts to reported payroll adjusted for wage inflation

Senate Bill No. 863 Cost Monitoring – Current Update Overview  Average Workers’ Compensation Premium Rates Since 1978  Countrywide Comparison of Average Premium Rates  Senate Bill No. 863 Update 7

Senate Bill No. 863 Cost Monitoring – Current Update Rate Comparison Based on Oregon Studies California* vs. National Median Average Charged Rate *The information is based on the state of Oregon biennial rate comparison and is based on the state of Oregon classification mix and, as a result, the California average rates shown on this exhibit differs from other measures of the average California rate. Projected 8 In 2014 California is only state in the Oregon study with an average rate over $3.00 per $100

Senate Bill No. 863 Cost Monitoring – Current Update Countrywide Estimated Permanent Partial Disability Claims per 100,000 Employees 9 Source: 2014 NCCI Annual Statistical Bulletin for 2010 policy year at first report level. Median = 320

Senate Bill No. 863 Cost Monitoring – Current Update Countrywide Incurred Medical Benefits per Indemnity Claim 10 Source: NCCI Annual Statistical Bulletin for 2010 policy year at first report level. Median = $26,124 California has the second highest medical cost per indemnity claim in the country 80% higher than the Countrywide median California has the second highest medical cost per indemnity claim in the country 80% higher than the Countrywide median

Senate Bill No. 863 Cost Monitoring – Current Update Average Benefit Delivery Costs; Claims with 7+ Days of Lost Time California vs. WCRI 16 State Median (at 36 Months) 11 Source WCRI Compscope Benchmarks, 14 th Edition for claims arising from October 1, 2008 through September 30, 2009 evaluated as of March 31, California is nearly 70% higher than the WCRI median

Senate Bill No. 863 Cost Monitoring – Current Update Overview  Average Workers Compensation Premium Rates Since 1978  Countrywide Comparison of Average Premium Rates  Senate Bill No. 863 Update 12

Senate Bill No. 863 Cost Monitoring – Current Update 13 SB 863 Summary  Signed by the Governor on September 18, 2012  Includes Benefit Increases Effective 1/1/2013 and 1/1/2014  Series of Structural Reforms to Benefit Delivery System  Initially Evaluated by WCIRB as Small Net Savings  WCIRB Retrospectively Evaluating Cost Impacts

Senate Bill No. 863 Cost Monitoring – Current Update WCIRB Prospective Cost Evaluation of SB 863 Summary of WCIRB Initial Prospective Estimates ($’s in billions) SB 863 Provisions Impact on Statewide Claim Costs % Impact on Claim Costs 2013 & 2014 PD Benefit Level Changes +$ % Liens ($0.5)-2.5% IMR (Impact on Frictional Costs & TD Duration) ($0.4)-2.1% Other Reforms ($0.5)-2.7% Total Estimated Impact of SB 863 ($0.2)-1.1% 14

Senate Bill No. 863 Cost Monitoring – Current Update Senate Bill No. 863 Cost Monitoring 15 Emerging Better Than Projected Emerging Worse Than Projected Reductions in Liens Claim Frequency Increases More IMRs than Projected Loss Adjustment Expenses Per Claim Increasing Average Indemnity Cost Per Claim Average Medical Cost Per Claim

Senate Bill No. 863 Cost Monitoring – Current Update Number of Liens Filed Calendar Year/Quarter Source: EAMS Liens Data In Thousands lien filings down more than 80% from 2012 and almost 60% from 2011 as compared to 40% projected reduction

Senate Bill No. 863 Cost Monitoring – Current Update Cumulative Change in Average Cost Per Indemnity Claim in 2013 & Medical Costs Per Claim Emerging Much Lower than Projected

Senate Bill No. 863 Cost Monitoring – Current Update Senate Bill No. 863 Cost Monitoring 18 Emerging Better Than Projected Emerging Worse Than Projected Reductions in Liens Claim Frequency Increases More IMRs than Projected Loss Adjustment Expenses Per Claim Increasing Average Indemnity Cost Per Claim Average Medical Cost Per Claim

Senate Bill No. 863 Cost Monitoring – Current Update Changes in Estimated Indemnity Claim Frequency from 2011 to 2014 % As of December 31,

Senate Bill No. 863 Cost Monitoring – Current Update Counts of 2014 IMR Filings Source: DWC collected from IMR vendor 20

Senate Bill No. 863 Cost Monitoring – Current Update Changes in Average Loss Adjustment Expense Per Indemnity Claim 21 Actual ALAE changes are projected ultimate changes in private insurer ALAE per indemnity claim as of December 31, 2014 for 2013 and 2014, while the actual ULAE change is the changes in private insurer calendar year paid ULAE per indemnity claim for 2013.

Senate Bill No. 863 Cost Monitoring – Current Update 22 SB 863 Provisions WCIRB Original Cost Estimates ($’s in billions) Updated WCIRB Assessment 2013 & 2014 PD Benefit Changes +$1.2 Liens ($0.5) IMR (Impact on Frictional Costs) ($0.4) Other Reforms ($0.5) Indemnity Claim Frequency Small Increase Indemnity Severities Increase Medical Severities Small Increase ALAE and ULAE Severities Significant Declines Total Estimate – All Items ($0.2) WCIRB SB 863 Cost Monitoring – Updated WCIRB Assessments