1. WORKERS COMPENSATION - CURRENT ISSUES - (SESSION WC-3)
4/23/2017
WORKERS COMPENSATION - CURRENT ISSUES - (SESSION WC-3)
Barry Lipton, FCAS, MAAA – NCCI
Nancy Treitel, FCAS, MAAA – Liberty Mutual
Casualty Actuarial Society
2004 Seminar on Ratemaking
Philadelphia, Pennsylvania
March 11-12, 2004

2. WC Premium Growth Leads Most Other Lines Net Written Premium by Line
4/23/2017
WC Premium Growth Leads Most Other Lines Net Written Premium by Line
Source: Best’s Aggregates & Averages, Review/Preview
(Includes state funds for: AZ, CA, ID, LA, MD, ME, MN, OR, RI, TX, and UT)
© 2004 National Council on Compensation Insurance, Inc.

3. Combined Ratios Improved in 2003
4/23/2017
Combined Ratios Improved in 2003
Net Combined Ratios
Source: Best’s Aggregates & Averages, Review/Preview
(Includes state funds for: AZ, CA, ID, LA, MD, ME, MN, OR, RI, TX, and UT)
© 2004 National Council on Compensation Insurance, Inc.

4. 4/23/2017
Return on Equity for Total P&C Appears In Line With Other Industries Estimated 2003 After-Tax ROE for Public Companies
Source: Value-Line, latest estimates as of 1/2004. P/C projected 2003 ROS from Best’s Review/Preview.
© 2004 National Council on Compensation Insurance, Inc.

5. 4/23/2017 $ Billions $ Trillions
Workers Compensation Premium Volume Continues to Grow Workers Compensation Net Written Premium
$ Billions $ Trillions
Source: Best’s Aggregates & Averages, Review/Preview; Economy.com
© 2004 National Council on Compensation Insurance, Inc.

6. 4/23/2017
Large Deductible Growth Continues Calendar Year WC Premiums & Premium Equivalents NCCI States
Source: NCCI Large Deductible study
© 2004 National Council on Compensation Insurance, Inc.

7. 4/23/2017
Calendar Year WC Loss Ratio Showing Slight Improvement Workers Compensation Net Loss Ratios
1.9 % Due to September 11th.
Source: Best’s Aggregates & Averages, Review/Preview; 9-11 est. from NCCI
© 2004 National Council on Compensation Insurance, Inc.

8. WC Loss Ratios - Impact of Large Deductible Policies
4/23/2017
WC Loss Ratios - Impact of Large Deductible Policies
First Large
Dollar Deductible
Loss $ $ 15
Expense $ $ 23
Premium $ $ 38
Loss Ratio 75% %
Expense Ratio 25% %

9. 4/23/2017
WC LAE Ratios to Premium Appears to Have Leveled Off WC Ratio of Loss Adjustment Expense to Net Earned Premiums
Source: Best’s Aggregates & Averages, Review/Preview
© 2004 National Council on Compensation Insurance, Inc.

10. 4/23/2017
WC LAE To Loss Ratios In Recent Years Shows Slight Increase WC Ratio of Loss Adjustment Expense to Losses
Source: Best’s Aggregates & Averages, Review/Preview
© 2004 National Council on Compensation Insurance, Inc.

11. 4/23/2017
WC Expense Ratios Continue Slight Decline WC Ratio of Underwriting Expenses to NWP (Excl Divs)
Source: Best’s Aggregates & Averages, Review/Preview
© 2004 National Council on Compensation Insurance, Inc.

12. 4/23/2017
WC Dividend Ratios Continue to Decline WC Ratio of Policyholder Dividends to Net Earned Premium
Source: Best’s Aggregates & Averages, Review/Preview
© 2004 National Council on Compensation Insurance, Inc.

13. 4/23/2017
Workers Compensation Calendar Year Combined Ratio Declined in Workers Compensation Combined Ratios
1.9% Due to September 11th
Source: Best’s Aggregates & Averages, Review/Preview
© 2004 National Council on Compensation Insurance, Inc.

14. 4/23/2017
Low WC Investment Returns Continued in WC Ratio of Investment Gain and Other Income to Premium
p Preliminary Source for 1993–2002: A.M. Best Aggregates & Averages; 2003p: NCCI estimate based on data in Best’s Review/Preview
Investment gain includes investment income on insurance transactions and realized capital gains.
© 2004 National Council on Compensation Insurance, Inc.

15. 4/23/2017 WC Results in 2003 Improved Over 2002
WC Pretax Operating Gain/Loss Ratio
p Preliminary Source for 1993–2002: A.M. Best Aggregates & Averages; 2003p: NCCI estimate based on data in Best’s Review/Preview
Investment gain includes investment income on insurance transactions and realized capital gains.
© 2004 National Council on Compensation Insurance, Inc.

16. Private Carriers Compared to Private Carriers + A.M. Best State Funds
4/23/2017
WC Calendar Year Combined Ratios
Private Carriers Compared to
Private Carriers + A.M. Best State Funds
Combined Ratio
p Preliminary (State Funds include: AZ, CA, ID, LA, MD, ME, MN, OR, RI, TX, and UT)
CY & PC+SF 2003p: Best’s Aggregates & Averages, Review/Preview;
PC CY 2003p: NCCI estimate
Includes dividends to policyholders.
© 2004 National Council on Compensation Insurance, Inc.

17. Combined Ratio in AY 2002 Continued to Improve
4/23/2017
Combined Ratio in AY 2002 Continued to Improve
WC Calendar Year vs. Ultimate Accident Year Countrywide - Private Carriers
Combined Ratio
p Preliminary CY : Best’s Aggregates & Averages; AY : NCCI; CY & AY 2003p: NCCI estimates Accident year data is evaluated as of 12/31/2002 and developed to ultimate.
Includes dividends to policyholders.
© 2004 National Council on Compensation Insurance, Inc.

18. What Have Been The Key Factors Impacting Workers Compensation Results?
4/23/2017
What Have Been The Key Factors Impacting Workers Compensation Results?
Carrier Reserves
Carrier Pricing
Loss Severity Trends (especially Medical)
Frequency Trends
Investments
© 2004 National Council on Compensation Insurance, Inc.

19. 4/23/2017
Workers Compensation Reserve Strengthening Continues Dollar Amount of Reserve Adjustments on Prior AYs WC Countrywide—Net—Private Carriers
Loss and LAE reserves.
© 2004 National Council on Compensation Insurance, Inc.

20. 4/23/2017
Reserve Releases Have Partially Offset the Upward Development on More Recent Accident Years for WC Accident Year Loss Ratios Including LAE
Reserve Releases
Reported Loss and LAE reserves from Schedule P.
© 2004 National Council on Compensation Insurance, Inc.

21. How Are Final WC Premiums Determined?
4/23/2017
How Are Final WC Premiums Determined?
ADVISORY ORGANIZATION
Advisory Loss Costs
Assigned Risk Rates
Experience Rating Values
Experience Mods
Rating Plans and Classifications
INSURANCE COMPANY
Final Rate Determination:
Expense Multiplier
Loss Cost Deviations
Individual Risk Modifications:
Schedule Rating
Retrospective Rating
© 2004 National Council on Compensation Insurance, Inc.

22. 4/23/2017
Following Six Years of Decreases, the Average Approved Bureau Rate/Loss Cost Changes Have Been Increases for the Last Three Years History of Average WC Bureau Rate/Loss Cost Level Changes
Cumulative
+36.2%
Cumulative
+17.0%
Cumulative
-27.7%
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.
© 2004 National Council on Compensation Insurance, Inc.

23. Impact of Discounting on WC Premium NCCI States—Private Carriers
4/23/2017
Impact of Discounting on WC Premium NCCI States—Private Carriers
Based on data through 12/31/02 for the states where NCCI provides ratemaking services.
Dividend ratios are based on calendar year statistics.
© 2004 National Council on Compensation Insurance, Inc.

24. Loss Cost = f (customer, company,
4/23/2017
What are Some Key Components and Factors for WC Premiums?
Loss Cost = f (customer, company,
and/or industry losses,
inflation, interest rate, medical
technology, economy, etc.)
+ Risk Charge
+ Expenses
+ Tax
Premium

25. Annual Change 1991–1995: +0.3% Annual Change 1996–2002: +7.5%
4/23/2017
The Rate of Change in Workers Compensation Indemnity Claim Costs Has Accelerated Since 1995
Annual Change 1991–1995: %
Annual Change 1996–2002: %
Based on data through 12/31/02, developed to ultimate.
Based on the states where NCCI provides ratemaking services.
Excludes the effects of deductible policies.
© 2004 National Council on Compensation Insurance, Inc.

26. WC Indemnity Severity Is Outpacing Wage Inflation
4/23/2017
WC Indemnity Severity Is Outpacing Wage Inflation
Source for Indemnity Severity: NCCI, based on data through 12/31/02.
Based on the states where NCCI provides ratemaking services, excludes the effects of deductible policies.
Source for CPS (Current Population Survey): Economy.com as of Feb 2004
© 2004 National Council on Compensation Insurance, Inc.

27. Workers Compensation Medical Claim Cost Trends Continue to Accelerate
4/23/2017
Workers Compensation Medical Claim Cost Trends Continue to Accelerate
Annual Change 1991–1995: +4.0%
Annual Change 1996–2002: +9.0%
Based on data through 12/31/02, developed to ultimate.
Based on the states where NCCI provides ratemaking services.
Excludes the effects of deductible policies.
© 2004 National Council on Compensation Insurance, Inc.

28. WC Medical Severity Has Also Been Growing Faster than the Medical CPI
4/23/2017
WC Medical Severity Has Also Been Growing Faster than the Medical CPI
Source for Medical Severity: NCCI, based on data through 12/31/02, developed to ultimate.
Based on the states where NCCI provides ratemaking services, excludes the effects of deductible policies.
Source for Medical CPI: Economy.com as of Feb 2004
© 2004 National Council on Compensation Insurance, Inc.

29. 4/23/2017 2002 Medical: 50.3% Indemnity: 49.7% 1991 Medical: 44.7%
WC Medical Losses Eclipsed Half of Total WC Losses NCCI States—Private Carriers
2002
Medical: 50.3%
Indemnity: %
1991
Medical: 44.7%
Indemnity: 55.3%
Based on data through 12/31/02, developed to ultimate.
Based on the states where NCCI provides ratemaking services.
Excludes the effects of deductible policies.
© 2004 National Council on Compensation Insurance, Inc.

30. NCCI Prescription Drug Study
4/23/2017
NCCI Prescription Drug Study
In 2001, workers compensation insurers paid roughly 75% more than group health for the same drugs
Prescription drug share of medical costs in workers compensation grew from 7% in Accident Year 1997 to approximately 10% in Accident Year 2001
Utilization has a greater impact than price on workers compensation drug costs
Savings opportunities from using generic equivalents are present for less than 10% of total drug costs
Painkillers represent 55% of workers compensation drug costs
© 2004 National Council on Compensation Insurance, Inc.

31. The Impact of Inflation is More Sensitive on Excess Policies
4/23/2017
The Impact of Inflation is More Sensitive on Excess Policies

32. With Medical Technology, How Big Can a WC Claim Become?
4/23/2017
With Medical Technology,
How Big Can a WC Claim Become?
Consider a 25-year old quadriplegic
Indemnity benefits of $23,500 a year
24-hour attendant care costs of $135,000 a year
Other medical costs of $72,500 a year
These costs continue until death
$ amounts are in millions.
Attendant care assumed to increase at 3% per year

33. Cumulative Change of –39.7%
4/23/2017
The Frequency of Lost-Time Claims Has Continued to Fall Through 2002
Workers Compensation
Cumulative Change of –39.7%
( )
Based on data through 12/31/02, developed to ultimate.
Based on the states where NCCI provides ratemaking services.
Excludes the effects of deductible policies.
© 2004 National Council on Compensation Insurance, Inc.

34. Workers Compensation Frequency Trends
4/23/2017
Workers Compensation Frequency Trends
Workers Compensation Frequency is Composed of Two Key Components:
Long-term improving trend due to working conditions
Short-term cyclical behavior that correlates with the economy
© 2004 National Council on Compensation Insurance, Inc.

35. 4/23/2017
Rate of Work-Related Injuries Decreases Over Time Due to Improved Working Conditions
Source: Bureau of Labor Statistics and Federal Reserve Bank of Dallas
© 2004 National Council on Compensation Insurance, Inc.

36. 4/23/2017
Workplace Injury Incidence Rates— Decreases During Recessions and Increases in Recovery Countrywide—Six Recessions Since 1960
Source: Bureau of Labor Statistics and National Bureau of Economic Research
© 2004 National Council on Compensation Insurance, Inc.

37. Percent Change Between Policies Expiring in 1997 and 2001
4/23/2017
Frequency by Loss Range Without Inflation Adjustment (Lost Time Claims)
Percent Change Between Policies Expiring in 1997 and 2001
Source: NCCI
* Actual policy expiration between 9/30/1996 and 8/31/1997
** Actual policy expiration between 9/30/2000 and 8/31/2001
© 2004 National Council on Compensation Insurance, Inc.

38. Frequency by Loss Range With Inflation Adjustment (Lost Time Claims)
4/23/2017
Frequency by Loss Range With Inflation Adjustment (Lost Time Claims)
Percent Change Between Policies Expiring in 1997 and 2001
Source: NCCI
* Actual policy expiration between 9/30/1996 and 8/31/1997
** Actual policy expiration between 9/30/2000 and 8/31/2001
Loss ranges have been adjusted for indemnity (4%) and medical (3%) inflation.
© 2004 National Council on Compensation Insurance, Inc.

39. The Annual Change in Lost-Time
4/23/2017
The Annual Change in Lost-Time
Claim Costs per Worker Continued to Increase in 2002
Workers Compensation
Based on data through 12/31/02, developed to ultimate.
Based on the states where NCCI provides ratemaking services.
Excludes the effects of deductible policies.
© 2004 National Council on Compensation Insurance, Inc.

40. What Are Today’s Key Issues in Workers Compensation?
4/23/2017
What Are Today’s Key Issues in Workers Compensation?
WC Medical Inflation
Growth in Residual Markets
Expiration of Terrorism Risk Insurance Act (TRIA) 12/31/2005
Insurer and Reinsurer Downgrades, Insolvencies, and Consolidations
Legislative Issues

41. WC Residual Market Premium Increased as of September 30, 2003
4/23/2017
WC Residual Market Premium Increased as of September 30, 2003
$1. 4B
$1.1B
$626M
* Excludes Maine Residual Market Pool.
** Incomplete PY Projected to Ultimate
© 2004 National Council on Compensation Insurance, Inc.

42. WC Residual Market Combined Ratios as of September 30, 2003
4/23/2017
WC Residual Market Combined Ratios as of September 30, 2003
* Excludes Maine Residual Market Pool.
** Incomplete PY Projected to Ultimate
© 2004 National Council on Compensation Insurance, Inc.

43. Underwriting Results Show Slight Deterioration
4/23/2017
WC Residual Market
Underwriting Results Show Slight Deterioration
as of September 30, 2003
* Excludes Maine Residual Market Pool.
** Incomplete PY Projected to Ultimate
© 2004 National Council on Compensation Insurance, Inc.

44. Unique Challenges of Workers Compensation and Terrorism Coverage
4/23/2017
Unique Challenges of Workers Compensation and Terrorism Coverage
Coverage mandated by law, exclusions are not possible
Benefits are defined by law, limits aren’t possible
Risks that aren’t written voluntarily will be backed by the entire market through the involuntary pool
Terrorism Risk Insurance Act (TRIA) expires 12/31/2005
Government backstop goes away, unless Congress renews
Any policy effective after 1/1/2005 has exposure
NCCI developing filing strategy

45. Impacts of Insolvencies and Market Concentration
4/23/2017
Impacts of Insolvencies and Market Concentration
Market Concentration-has accelerated since 1992
Only three of the top 10 groups of 20 years ago remain in the top 10 today
Insolvencies continue to be an issue
Impact remaining insurers
Create cash flow problems for states due to caps on annual recoupment from insurers
Impact allocation of Pool results to carriers – resulted in redistributions of over $84M to the residual market pool members in 2003
Create data problems for advisory organizations

46. Legislative Update Issues and Trends 2003 Session Overview
4/23/2017
Legislative Update Issues and Trends Session Overview
Most active session since the mid-1990s
Over 1000 bills introduced, more than 150 enacted
Many proposals for benefit increases, but few enacted
State budget issues abound
Many new governors, legislators and regulators

47. Legislative Update Issues and Trends 2003 Key Themes
4/23/2017
Legislative Update Issues and Trends Key Themes
Medical cost controls
Expanded presumption of compensability for safety workers and emergency responders
Clarification of coverage for adverse reactions to smallpox vaccine
Medical Privacy
Indemnity benefit increases
Attorney fees

48. Legislative Update 2003 Key Enacted Legislation
4/23/2017
Legislative Update Key Enacted Legislation
California
Significant reforms signed into law 9/30/03 aimed at controlling medical costs. Included fee schedule changes, medical utilization controls, and repeal of voc rehab. WCRIB estimated impact on 2004 Pure Premium Rate Level -13.3% to -15.7%
Florida
SB 50A: numerous benefit changes resulting in –14.0% impact effective 10/01/03
Medical fee schedule changes went into effect 01/01/04
Maryland
Attorney fees, hospital fees, MD Supreme Court decision (Harris) with combined impact of +6.0%

49. Legislative Update 2003 Key Enacted Legislation (cont’d)
4/23/2017
Legislative Update Key Enacted Legislation (cont’d)
Montana
Indemnity benefits, Montana court case (Stavenjord) with combined impact of +6.2% effective 7/1/03
Nevada
Adoption of the 5th edition of the AMA Guides, introduction of COLA for PT claims, combined impact of +3.4%
New Mexico
Indemnity benefits, attorney fees and medical fee schedule changes with combined impact of +6.1% effective 7/1/03
Oregon
Complete overhaul of PPD system to become effective in 2005

50. Legislative Update Issues and Trends 2004 Emerging Themes
4/23/2017
Legislative Update Issues and Trends Emerging Themes
Employer vs Employee Choice of Physician
Erosion of Exclusive Remedy
Medical Fee Schedules
Attorney Fees
Indemnity Benefit Increases
Second Injury Funds
Containing Medical Costs

51. Workers Compensation Key Issues for the Future
4/23/2017
Workers Compensation Key Issues for the Future
How will the industry deal with terrorism exposure? And will the government renew TRIA?
Will severity trends continue to accelerate or start to moderate?
Will written premiums continue to increase?
What impact will changes in the economy have, especially on frequency?
What impact will reserve deficiencies have on results?
Will potential threats to rollback reforms or expand benefits succeed?
Where are investment returns headed?
© 2004 National Council on Compensation Insurance, Inc.

52. WORKERS COMPENSATION - CURRENT ISSUES - (SESSION WC-3)
4/23/2017
WORKERS COMPENSATION - CURRENT ISSUES - (SESSION WC-3)
Q & A