CAMAR FALL 2012 MEETING Workers Compensation Update: A Little Information About a Lot of Topics Tim Wisecarver, Presenter October 10,

CAMAR FALL 2012 MEETING Workers Compensation Update Program Outline – Evaluation of Pricing Programs A Simple Method Illustrative Applications – Large Loss Impacts on Rate Level Indications General Considerations Two Local Examples (Pennsylvania and Delaware) – Large Deductible Business Brief Overview Data Reporting and Uses 2

CAMAR FALL 2012 MEETING Workers Compensation Update Program Outline (Continued) – Claim Frequency General History Recent Experience – Subclassification Design & Pricing Concepts & Statutory Requirements Practical Observations – Employee Misclassification Employee vs. Independent Contractor Prevailing Approaches A Modest Suggestion 3

CAMAR FALL 2012 MEETING Workers Compensation Update Evaluation of Pricing Programs A Simple Method – Partition Experience Data into “Participating” and “Non-Participating” Groups – Calculate Loss Ratios on Consistent Basis (Reported, Ultimate, Other) for the Two Groups Before Application of Pricing Program of Interest to Participating Risks – Compute Adjustment to Participating Group’s Premium Necessary to Make the Two Group Loss Ratios Equal – Compare Indication to Adjustments Actually Granted Under Program of Interest 4

CAMAR FALL 2012 MEETING Workers Compensation Update Evaluation of Pricing Programs Pennsylvania Construction Classification Premium Adjustment Program (PCCPAP) Reported Loss Ratio, Participating Risks Before PCCPAP Credits: Reported Loss Ratio, Non-Participating Risks: Indicated PCCPAP Adjustment: % Average Actual PCCPAP Credit: % 5

CAMAR FALL 2012 MEETING Workers Compensation Update Evaluation of Pricing Programs Delaware Construction Classification Premium Adjustment Program (DCCPAP) Reported Loss Ratio, Participating Risks Before PCCPAP Credits: Reported Loss Ratio, Non-Participating Risks: Indicated DCCPAP Adjustment: % Average Actual DCCPAP Credit: % 6

CAMAR FALL 2012 MEETING Workers Compensation Update Evaluation of Pricing Programs Pennsylvania Certified Safety Committee Program (PCSCP) Reported Loss Ratio, Participating Risks Before PCSCP Credits: Reported Loss Ratio, Non-Participating Risks: Indicated PCSCP Adjustment: % Average Actual PCSCP Credit: % 7

CAMAR FALL 2012 MEETING Workers Compensation Update Evaluation of Pricing Programs Delaware Workplace Safety Program (DWSP) Reported Loss Ratio, Participating Risks Before DWSP Credits: Reported Loss Ratio, Non-Participating Risks: Indicated DWSP Adjustment: % Average Actual DWSP Credit: % 8

CAMAR FALL 2012 MEETING Workers Compensation Update Evaluation of Pricing Programs Pennsylvania Schedule Rating Plan (Credits) (PSRP) Reported Loss Ratio, Participating Risks Before PSRP Credits: Reported Loss Ratio, Non-Participating Risks: Indicated PSRP Credit: % Average Actual PSRP Credit: % 9

CAMAR FALL 2012 MEETING Workers Compensation Update Evaluation of Pricing Programs Pennsylvania Schedule Rating Plan (Debits) (PSRP) Reported Loss Ratio, Participating Risks Before PSRP Debits: Reported Loss Ratio, Non-Participating Risks: Indicated PSRP Debit: % Average Actual PSRP Debit: % 10

CAMAR FALL 2012 MEETING Workers Compensation Update Evaluation of Pricing Programs Delaware Schedule Rating Plan (Credits) (DSRP) Reported Loss Ratio, Participating Risks Before DSRP Credits: Reported Loss Ratio, Non-Participating Risks: Indicated DSRP Credit: % Average Actual DSRP Credit: % 11

CAMAR FALL 2012 MEETING Workers Compensation Update Evaluation of Pricing Programs Delaware Schedule Rating Plan (Debits) (DSRP) Reported Loss Ratio, Participating Risks Before DSRP Debits: Reported Loss Ratio, Non-Participating Risks: Indicated DSRP Debit: % Average Actual DSRP Debit: % 12

CAMAR FALL 2012 MEETING Workers Compensation Update Large Loss Impacts on Rate Level Indications General Considerations – Size of Market – Prevalence and Magnitude of Upper-End Claims NCCI – Claim Limitations 1% of Experience Period Expected Losses 13

CAMAR FALL 2012 MEETING Workers Compensation Update Large Loss Impacts on Rate Level Indications Pennsylvania – Market in Excess of $2 Billion Annual Premium – 3-Year Experience Period Expected Losses ~$5 Billion – Extreme Known Claims ~ $17 Million – No Loss Limitations Applied for Overall Rate Level 14

CAMAR FALL 2012 MEETING Workers Compensation Update Large Loss Impacts on Rate Level Indications Delaware – Market ~$125 Million Annual Premium – 4-Year Experience Period Expected Losses ~$384 Million – Extreme Known Claims Over $8 Million – Sliding Scale of Loss Limitations Applied – December 1, 2012 Loss Limit ~$2.2 Million – Excess Loss Provision ~10% of Loss Costs 15

CAMAR FALL 2012 MEETING Workers Compensation Update Large Deductible Business “Large”- Retention per Claim or Accident of $100,000 or more Market Inception in Early 1990’s By 2000, Pennsylvania Market Share for Large Deductibles Was ~31% on a Gross Basis By 2009, Pennsylvania Market Share for Large Deductibles Was ~37% on a Gross Basis 16

CAMAR FALL 2012 MEETING Workers Compensation Update Large Deductible Business Pennsylvania Data Reporting and Uses – Financial Data » Premiums and Losses » Gross and Net » Net Data is Used in Reconciliations with Carriers’ Annual Statements » Large Deductible Data is Excluded from Overall Loss Cost Indication Analysis 17

CAMAR FALL 2012 MEETING Workers Compensation Update Large Deductible Business Pennsylvania Data Reporting and Uses – Unit Statistical Data » Exposures, Premiums, Losses » Losses on a First-Dollar Basis » Used in Class Ratemaking, Size-of-Loss Analyses, Experience Rating 18

CAMAR FALL 2012 MEETING Workers Compensation Update Claim Frequency General History – Countrywide Trends Have Been Favorable for Extended Periods of Time – Pennsylvania Claim Frequencies* Declined Every Year Since Late 1980’s – Often Substantially, or Even Entirely, Offsetting Increases in Claim Severities * Indemnity Claims Per Unit of On-Level Expected Loss 19

CAMAR FALL 2012 MEETING Workers Compensation Update Claim Frequency Recent Experience – In 2011 NCCI Reported (2010 Data) Increases in Claim Frequencies – PY 2009 Delaware Showed an Increase of ~1.5% After Historical 8.6% Rate of Decline – PY 2009 Pennsylvania Showed a 3.1% Decrease – California Showed 9.1% Increase 20

CAMAR FALL 2012 MEETING Workers Compensation Update Claim Frequency (More) Recent Experience – In 2012 NCCI Reported (2011 Data) Return To Claim Frequency Declines – PY 2010 Delaware Showed a Decrease of ~4.1% – PY 2010 Pennsylvania Still Under Review – California Estimates a 0.3% Decrease 21

CAMAR FALL 2012 MEETING Workers Compensation Update Subclassification Design & Pricing Concepts & Statutory Requirements – DCO (Rating Bureau) Establishes “Uniform Classification Plan” – Carriers May Partition Uniform Classes for Marketing/Pricing Purposes – Data Reporting/Collection Must Support Uniform Classification Plan 22

CAMAR FALL 2012 MEETING Workers Compensation Update Subclassification Design & Pricing Practical Observations – Pennsylvania Authorization for Subclassifications Dates from 1993 – Meaningful Activity Took Place in Early Years After Authorization (Concurrent with Change to Competitive Rating) – Creation of New Subclassifications Has Slowed Significantly 23

CAMAR FALL 2012 MEETING Workers Compensation Update Subclassification Design & Pricing Practical Observations – Pennsylvania Subclassifications Almost Universally Carry LOWER Loss Costs and Rates Than Their “Parent” Uniform Classification – In Concept, Business Remaining in the Uniform Classification Would Bear Higher Loss Costs Than the Subclassification and the Original Uniform Classification – In Practice, Residuals of Uniform Classifications Formed by Creation of Subclassifications Carry the “Parent” Uniform Classification’s Rating Values 24

CAMAR FALL 2012 MEETING Workers Compensation Update Employee Misclassification Employee vs. Independent Contractor – Various Estimates Have Placed Extent of Misclassification at Substantial Levels » Massachusetts – 4.5% to 8.9% of workers a 5.4% to 11.4% in construction a a - The Social and Economic Costs of Employee Misclassification in Construction – Construction Policy Research Center, Labor and Worklife Program, Harvard Law School and Harvard School of Public Health – December 17,

CAMAR FALL 2012 MEETING Workers Compensation Update Employee Misclassification Employee vs. Independent Contractor – Various Estimates Have Placed Extent of Misclassification at Substantial Levels » Maine – 11% of workers in construction b b - The Social and Economic Costs of Employee Misclassification in the Maine Construction Industry – Construction Policy Research Center, Labor and Worklife Program, Harvard Law School and Harvard School of Public Health – April 25, 2005 » Pennsylvania – 9% of workers c c - Pennsylvania Compensation Rating Bureau, April 28,

CAMAR FALL 2012 MEETING Workers Compensation Update Employee Misclassification Prevailing Approaches – Claim Adjudication » Right of Direction and Control of Injured Individual(s) – Premium Obligations » Administrative or Statutory “Lists” of Criteria or Tests to be Met to Qualify as Independent Contractor (Default is Employee) 27

CAMAR FALL 2012 MEETING Workers Compensation Update Employee Misclassification Key Observations – Some Test Criteria Are Not Simple to Apply or Interpret – To Varying Degrees, Results of Popular Criteria for Independent Contractor Status Can Vary Over Time for the Same Individual, Even While Performing Services for the Same Entity – Determinations of Benefit Eligibility and Premium Obligations are Necessarily Made at Different Times and Based on Different Levels of Detail Information 28

CAMAR FALL 2012 MEETING Workers Compensation Update Employee Misclassification A Humble Suggestion – (All) Persons Performing Services Falling Within the Scope of Normal Business Operations of the Entity Served Should Be Mandatorily Subject to Workers Compensation Coverage – Individuals Purchasing Their Own WC Coverage Would Not Be Subject to Inclusion on the Policy of an Entity for Which They Were Performing Services – Absent Evidence of WC Coverage Maintained by the Individual in Question, Persons Performing Services for Another Business Entity Would Be Subject to Inclusion on the Policy of Such Entity 29

CAMAR FALL 2012 MEETING Workers Compensation Update or 30