1. 1 Garland Actuarial LLC California Workers’ Compensation Update CAS 2005 Annual Meeting Phoenix, Arizona May 15-18, 2005 Roberta J. Garland, FCAS, MAAA Roberta@GarlandActuarial.com

2. 2 Garland Actuarial LLC The Problem Source: WCIRB

3. 3 Garland Actuarial LLC Loss Rates by State Source: Oregon DOI Survey 2004

4. 4 Garland Actuarial LLC The History 1995 Open Rating – Led to Severe Under-pricing and Insurer Insolvencies. 2001-2002 Benefit Increases and Medical Cost Inflation led to higher loss costs on new claims and open claims. Reaction of Insurers to insolvencies and reserve deficiencies was to raise rates dramatically. Small Employers - Rate Increases affecting their ability to stay in business. Large Self-Insured Employers – Reserve deficiencies impacting earnings. State of California – Businesses leave or threaten to leave. 2003-2004 Governor Recalled. Workers’ Compensation becomes major campaign issue in election.

5. 5 Garland Actuarial LLC Early Attempts at Reform In the fall of 2003, two pieces of WC legislation were signed by Governor Davis, AB 227 and SB 228. This legislation primarily targeted increased medical costs by providing limitations on chiropractic and physical therapy visits, as well as requiring that medical treatment be provided in accordance with MediCal and Medicare fee schedules. It was widely viewed by employer advocates as insufficient to stop or even slow down increasing costs.

6. 6 Garland Actuarial LLC With a Little Arm-Twisting The California Legislature Passes Substantive Reform in April 2004, SB 899

7. 7 Garland Actuarial LLC And the Early Results Are WCIRB advisory rates have declined. More insurers are entering the market. Charged rates are lower. Claims adjusters are implementing cost-effective reforms. Self-insurers and insurance companies are starting to see early positive results in loss costs. Frequency in 2004 is declining. Average reported and paid loss costs for 2004 are declining. Insurers’ loss ratios for 2004 are the lowest in decades.

8. 8 Garland Actuarial LLC Average Reported Claim Costs for 2004 are Lower (Compared to prior year at 12 months of development)

9. 9 Garland Actuarial LLC Average Paid Losses in 2004 are Lower (Compared to prior year at 12 months of development)

10. 10 Garland Actuarial LLC Claim Frequency is Decreasing (Compared to prior year at 12 months of development)

11. 11 Garland Actuarial LLC Insurer Rates are Declining Source: WCIRB

12. 12 Garland Actuarial LLC Insurers are Experiencing Declining Loss Ratios Further Rate Decreases Expected Source: WCIRB

13. 13 Garland Actuarial LLC Clouds on the Horizon Disability Schedule challenged by California Applicants Attorneys Association Suit filed by Worker Groups against Division of Workers’ Compensation California Labor Federation opposes Permanent Partial Disability Schedule Some California legislators stating that reforms went too far in reducing benefits