CAMAR FALL 2012 MEETING Workers Compensation Update: A Little Information About a Lot of Topics Tim Wisecarver, Presenter October 10, 2012 1

CAMAR FALL 2012 MEETING

Workers Compensation Update: A Little Information About a Lot of Topics

Tim Wisecarver, Presenter

October 10, 2012

1

CAMAR FALL 2012 MEETINGWorkers 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

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• 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

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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

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Evaluation of Pricing ProgramsPennsylvania Construction Classification Premium

Adjustment Program (PCCPAP) 1994 - 2008

Reported Loss Ratio, Participating Risks BeforePCCPAP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . 48.5

Reported Loss Ratio, Non-Participating Risks: . . 48.9

Indicated PCCPAP Adjustment: . . . . . . . . . . . . . . 0.76%

Average Actual PCCPAP Credit: . . . . . . . . . . . . . 12.24%

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Evaluation of Pricing ProgramsDelaware Construction Classification Premium

Adjustment Program (DCCPAP) 1994 - 2008

Reported Loss Ratio, Participating Risks BeforePCCPAP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . 42.9


Indicated DCCPAP Adjustment: . . . . . . . . . . . . . -5.45%

Average Actual DCCPAP Credit: . . . . . . . . . . . . . 14.67%

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Evaluation of Pricing ProgramsPennsylvania Certified Safety Committee Program

(PCSCP) 1994 - 2008

Reported Loss Ratio, Participating Risks BeforePCSCP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.3


Indicated PCSCP Adjustment: . . . . . . . . . . . . . . .10.14%

Average Actual PCSCP Credit: . . . . . . . . . . . . . . . 4.97%

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Evaluation of Pricing ProgramsDelaware Workplace Safety Program (DWSP) 1994 - 2008

Reported Loss Ratio, Participating Risks BeforeDWSP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.8


Indicated DWSP Adjustment: . . . . . . . . . . . . . . . -5.17%

Average Actual DWSP Credit: . . . . . . . . . . . . . . .10.97%

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Evaluation of Pricing ProgramsPennsylvania Schedule Rating Plan (Credits)

(PSRP) 1996 - 2008

Reported Loss Ratio, Participating Risks BeforePSRP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48.0


Indicated PSRP Credit: . . . . . . . . . . . . . . . . . . . . . .8.59%

Average Actual PSRP Credit: . . . . . . . . . . . . . . . .21.63%

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Evaluation of Pricing ProgramsPennsylvania Schedule Rating Plan (Debits)

(PSRP) 1996 - 2008

Reported Loss Ratio, Participating Risks BeforePSRP Debits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.4


Indicated PSRP Debit: . . . . . . . . . . . . . . . . . . . . . 11.3%

Average Actual PSRP Debit: . . . . . . . . . . . . . . . . 18.0%

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Evaluation of Pricing ProgramsDelaware Schedule Rating Plan (Credits)

(DSRP) 1994 - 2008

Reported Loss Ratio, Participating Risks BeforeDSRP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.2


Indicated DSRP Credit: . . . . . . . . . . . . . . . . . . . . . 5.74%

Average Actual DSRP Credit: . . . . . . . . . . . . . . . .24.31%

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Evaluation of Pricing ProgramsDelaware Schedule Rating Plan (Debits)

(DSRP) 1994 - 2008

Reported Loss Ratio, Participating Risks BeforeDSRP Debits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.2


Indicated DSRP Debit: . . . . . . . . . . . . . . . . . . . . . 26.55%

Average Actual DSRP Debit: . . . . . . . . . . . . . . . . 17.28%

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Large Loss Impacts on Rate Level Indications

• General Considerations– Size of Market– Prevalence and Magnitude of Upper-End Claims

• NCCI– Claim Limitations Selected @ 1% of Experience Period

Expected Losses

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• 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

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• 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

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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

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• 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

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• 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

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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

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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

– 2009-2010 California Showed 9.1% Increase

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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

– 2010-2011 California Estimates a 0.3% Decrease

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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

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• 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

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• 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

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Employee Misclassification

• Employee vs. Independent Contractor

– Various Estimates Have Placed Extent of Misclassification at Substantial Levels

» Massachusetts – 4.5% to 8.9% of workersa 5.4% to 11.4% in constructiona

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, 2004

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• Employee vs. Independent Contractor

– Various Estimates Have Placed Extent of Misclassification at Substantial Levels

» Maine – 11% of workers in constructionb 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 workersc

c - Pennsylvania Compensation Rating Bureau, April 28, 2008

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• 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)

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• 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

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• 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

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www.pcrb.com or www.dcrb.com

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CAMAR FALL 2012 MEETING Workers Compensation Update: A Little Information About a Lot of Topics Tim Wisecarver, Presenter October 10, 2012 1