CALIFORNIA WORKERS COMPENSATION

CALIFORNIA WORKERS COMPENSATIONCALIFORNIA WORKERS COMPENSATION

September 2001

A System Under SiegeA System Under Siege

Presented by:Presented by:

Bill Miller, FCAS, MAAABill Miller, FCAS, MAAATillinghast–Towers PerrinTillinghast–Towers Perrin

(949) 253-5242(949) [email protected]@towers.com

CLRS0901.PPT/crf/Irvine 2

Pre-Open Rating Period 1993 to 1994

Heavily Regulated Pricing

No Pricing Deviations

Only Pricing Competition through Dividends

Profitable Results

Strong Reserves

Declining Frequency


Pre-Open Rating Period 1993 to 1994

Insurance Market

Non-Concentrated Market

Strong California Domestic Market

Heavy Capitalization (Premium/Surplus < 1.0)

Healthcare Companies Moving into Market


First Years Of Open Rating 1995 to 1996

Great Pricing Flexibility

Heavy Price Competition


100

179202

283

341317

277232

194 197

Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jul-93 Jan-94 Oct-94 1995Avg.

1996Avg.

Rate Level Index





Premium Decline


$7.8 $8.4 $8.4 $8.5 $8.9$7.7

$4

$6

$8

$10

Wri

tte

n P

rem

ium

(in

bill

ion

s)

1989 1990 1991 1992 1993 1994

Calendar Year

$5.7

1995

$5.9

1996

Written Premium





Premium Decline

Continued Declining Frequency

Calendar Year and Accident Year Results Deteriorating

Reserve Deficiencies



Insurance Market

Shifts through Withdrawals/Acquisitions/Expansions

HMO’s Move Out of Market

Still Heavy Capitalization (Premium/Net Worth = .6)

Favorable Investment Returns


Open Rating 1997 to 2000

Continued Heavy Price Competition


100%105%

112%113%

122%

99%

83%

69% 70%66%

63% 62%

78%

40%

80%

120%

Ra

te L

ev

el I

nd

ex

(1

/1/8

9 =

10

0%

)

1/1/89 1/1/90 1/1/91 1/1/92 1/1/93 1/1/94 10/1/94 1995Avg.

1996Avg.

1997Avg.

1998Avg.

1999Avg.

2000Avg.

California Workers Compensation Rate Level Index

(January 1989 Rate Level = 100%) as of 12/31/2000




Premium Growth with Expanding Economy

Continued Declines in Frequency


-5.7% -5.9%-6.2%

12.0%10.2%

-13.1%

-19.7%

-3.9% -2.1% -0.3%

-7.4%

-25%

0%

25%

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00

Accident Year

% C

han

ge

As of 12/31/2000

Estimated Percentage Change In Indemnity Claim Frequency






Sharp Severity Increases


$10,000

$20,000

$30,000

$40,000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Accident Year

Lo

ss S

ever

ity

As of 12/31/2000

Estimated Ultimate Total Loss Per Indemnity Claim







Inadequate Pure Premium Rates


30.1%

21.8%

3.1%

11.2%

27.5%

0%

10%

20%

30%

1995 1996 1997 1998 1999

Policy Year

% In

adeq

uacy

Estimated InadequacyOf Approved Pure Premium Rates


California Paid Medical Loss Development Factors

Source: WCIRB of California.

Age in Months 3/97 3/98 3/99 3/00 3/01

Trended —Selected

Reported as of

27/15

39/29

51/39

1.598

1.187

1.086

1.659

1.207

1.093

1.748

1.221

1.111

1.804

1.242

1.128

1.875

1.271

1.136

1.954

1.288

1.153


Observations About Growth in Loss Development

Occurring across all types of indemnity claims, industries, and natures of injury

Average permanent disability rating has increased markedly

Frequency of stipulated awards has been increasing

Settlements of “future medical” driving up severity

Claims with attorney involvement have higher development

Settlement “premium” increasing on permanent disability awards








Rapidly Deteriorating Industry Results


68%

11%15%

78%

12%

16%

83%

15%

16%

66%

14%16%

54%

12%15%

60%

15%

18%

84%

21%

20%

95%

22%

20%

102%

24%

21%

113%

26%

22%

116%

24%

21%

101%

22%

21%

0%

50%

100%

150%

200%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Accident Year

Losses LAE Other Expenses

Per

cen

tag

e o

f E

arn

ed

Pre

miu

m

94%106%

114%

96%81%

93%

125%137%

147%161% 161%

144%

California Workers Compensation Accident Year

Combined Loss And Expense Ratiosas of 12/31/2000








Rapidly Deteriorating Industry Results

Growing Reserve Deficiencies


$1.5

$0.7$0.4$0.2

$0.1

$0.7$0.6

$0.1

$2.8

$0.0

$1.0

$2.0

$3.0

$4.0

1970-1979

1980-1989

1990-1994

1995 1996 1997 1998 1999 2000

Accident Year

Lo

sse

s (

in b

illio

ns

)

As of 12/31/2000

Difference Between Estimated Ultimate Losses And Reported Losses



Insurance Market

Shifts through Withdrawals/Acquisitions/Insolvencies

HMOs Leaving Market

Very Low Reinsurance Rates

High Capitalization & Investment Returns


43%

17%

19%

47%

20%

20%

0%

30%

60%

90%

% M

ark

et

Sh

are

1994 1999

Calendar Year

Top 5 Insurers Top 6th to 10th Insurers Top 11th to 20th Insurers

Market Concentration Ratios


45%

36%

19%

73%

9%18%

0%

25%

50%

75%

100%

% M

ark

et

Sh

are

1994 1999

Calendar Year

Other Insurers California Specialty Insurers State Fund

Note: “California Specialty Insurers” are defined as private insurers who write at least 80% of their Workers Compensation business in California.

Market Share By Type Of Insurer


Future Outlook

1999 — Record Combined Ratio -7% Loss of Equity

2000 — Rates Up Almost 20%, Premium Up 30%

Sharply Increasing Severity/Prior Year Loss Dev.

Relatively Little Improvement Expected in 2000

2001 — Loss Cost Rates Up 10%

Continued Reserve Inadequacies

Likelihood of Large Benefit Increases


Future Outlook

Potential Employer Backlash

Insurance Market

Continued Shift through Acquisitions/Regulatory Action

Little Cheap Reinsurance/HMO’s out of WC

High Capitalization

Potentially Reduced Investment Returns

Documents

CALIFORNIA WORKERS COMPENSATION