TheStateofCaliforniaWorkers’Compensation

Presentedby:MujtabaDatoo,ACAS,MAAA,FCAActuarialPracticeLeader,PublicEntities

AonGlobalRiskConsulting100BayviewCircle,Suite100,NewportBeach,CA92660(949)608-6332mujtaba.datoo@aon.com

TelescopicandMicroscopicviewofWCresults

2

3

• IndustryFinancialResults− CountrywidevsCA− P&CandWC

• CaliforniaWorkersCompensation− CostDrivers:FrequencyxSeverity− Distributionofbenefits

• Macroeconomicindicators• Emergingtrends

Sources:AMBest,NCCI,WCIRB,CWRI,III,Professionaljudgment

DiscussionPoints

CountrywideResultsAllCoverages

4

Net Written Premium – Countrywide Private Carriers2015 ~ $514B

443

441

435

418

424

438

457 477

497

514

$0

$100

$200

$300

$400

$500

$600

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Billion

8%

5

Net Written Premium – Countrywide Private Carriers2015 WC ~ 8% of Total ~ $40 Billion, CA ~ 25% of Countrywide WC

405

403

401

388

394

406

422

440

459

474

39 38 34 30 30 32

35

37

39 40

$0

$100

$200

$300

$400

$500

$600

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Billion

8%

6

Net Written Premium – Countrywide Private Carriers

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

$0

$100

$200

$300

$400

$500

$600

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Billion

PremiumtoSurplusRatioof0.7to1

7

2015 Net Written Premium – Countrywide Private Carriers

Personal Auto, 37%

Homeowners, 15%

Other Liability, 10%

Workers Compensation,

8%

Commercial Multiple Peril,

7%

Fire & Allied Lines, 5%

Commercial Auto, 5%

All Other Lines, 13%

Auto+Homeowners

~50%

8

Countrywide P&C Combined RatioCombined Ratio = Loss Ratio + Expense Ratio

100 98 101

93 96

104101 103

108104

98 98 98

-20

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

9

Countrywide P&C Combined Ratio

100 98 10193 96

104 101 103108

10498 98 98

-20

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Loss LAE Underwriting Dividend

10

Countrywide P&C Operating RatioOperating Ratio = Loss Ratio + Expense Ratio – Inv Income Ratio

-20

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Loss LAE Underwriting Dividend InvIncome Operating

11

Countrywide P&C: Combined Ratio vs. Operating Ratio

100 98 10193 96

104101 103

108104

98 98 9894 92 94

8688

10095 95

10096

9093 93

-20

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Combined Operating

12

CountrywideResultsWorkersCompensation

13

109105 103

99104 104

109

118 119111

104 10196

-20

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Countrywide Workers Compensation Combined Ratio

14

Countrywide Workers Compensation Combined Ratio

109 105 10399

104 104109

118 119111

104 10196

-20

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Loss LAE Underwriting Dividend

15

Countrywide Workers Compensation Operating Ratio

-20

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Loss LAE Underwriting Dividend InvIncome Operating

16

109 105 10399

104 104109

118 119111

104 1019698 95

9187

8993 94

96101

94

8390

84

-20

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Combined Operating

Countrywide WC Combined Ratio vs. Operating Ratio

17

California vs. Countrywide Workers Compensation Combined Ratios

191

172

150

119

84

61 58

72

96

118

139 139 137

115102

98 99109 105 103

99104 104

109

118 119111

104101 96

0

20

40

60

80

100

120

140

160

180

200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

CA Countrywide

18

California Workers Compensation Combined Ratios

191

172

150

119

84

61 58

72

96

118

139 139 137

115

102 98 99

0

20

40

60

80

100

120

140

160

180

200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

19

California Workers Compensation Combined Ratios

191

172

150

119

84

61 58

72

96

118

139 139 137

115

102 98 99

0

20

40

60

80

100

120

140

160

180

200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Loss LAE Underwriting

20

Average Workers Compensation Rate per $100 of Payroll

2.30

2.69

3.46

4.66

5.94

6.296.05

5.49

4.96

4.36

3.50

2.85 2.75

2.302.15 2.10

2.25 2.322.47 2.59

2.90 3.00 3.042.88 2.90

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

21

Average Workers Compensation Rate per $100 of PayrollRates for individual industries varies

$0.77

$0.99

$2.49

$3.79

$3.79

$6.88

$7.60

$8.09

$9.39

$11.38

$13.19

$14.53

$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14 $15

Clerical & Outside Sales

Information & Prof. Services

Finance & Real Estate

Education & Health

All Industry Average

Manufacturing

Wholesale & Retail

Hospitality & Entertainment

Administrative & Other Services

Agriculture & Mining

Construction

Transportation & Utilities

22

CostDriversFrequencyxSeverity

23

California Workers Compensation Claims per 1,000 Employees2015 = MO 66% of Total Claims, PD 16%, TD 18%

0

20

40

60

80

100

120

140

160 MedicalOnly PermanentDisability TemporaryDisability

24

California Workers Compensation Claim Changes per 1,000 EmployeesCA Frequency flattening While CW decreases

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2001 2003 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015

25

Average Cost of Indemnity ClaimCA Higher Than CW

$28,027

$23,500

0

5,000

10,000

15,000

20,000

25,000

30,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

California Countrywide

26

Change in Indemnity CostsCA more volatile than CW; Increasing in recent years

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

California Countrywide

27

Average Cost per Medical ClaimCA Much Higher Than CW

$41,234

$28,500

$0

$10,000

$20,000

$30,000

$40,000

$50,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

California Countrywide

28

Change in Medical CostsCA more volatile than CW; Slight CA increase in latest year

-10%

-5%

0%

5%

10%

15%

20%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

California Countrywide

29

Loss Adjustment Expenses as a % of Losses

27.4%28.5%

29.5% 29.2%27.6% 26.8% 26.0% 26.1%

29.0%

0%

5%

10%

15%

20%

25%

30%

35%

2007 2008 2009 2010 2011 2012 2013 2014 2015

30

Estimated Ultimate ALAE per Indemnity Claim

5,110

6,015

7,5078,053

8,6008,136

7,8588,228

8,977

9,917

11,111 11,298 11,133 11,35111,747

12,509

13,598

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

31

Change in ALAE Cost

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

32

ModelingYourWCCosts

33

DistributionofBenefits

34

2015 Distribution of Paid Indemnity Benefits

Temporary Disability, 50%

Permanent Partial

Disability, 41%

Permanent Total Disability,

3%

Other, 4%Death, 2%

TD+PD~90%

35

2015 Distribution of Paid Medical Costs

Physicians, 27%

Injured Worker, 28%Hospitals, 13%

Pharmacies, 7%

Medical-Legal Evaluations, 7%

Medical Liens, 6%

Medical Supplies and

Equipment, 5%Other,

6%

36

2015 Distribution of Physician Costs

Evaluation and Management,

34%

Surgery, 18%Physical

Medicine, 20%

Radiology, 9%

Special Services &

Reports, 8%

Medicine, 5% Other, 6%

37

2015 Distribution of Pharmacy CostsOpiates Doubled in last 7 years

Opiates30%Non

Opiates71%

27.5%

27.2%

29.5%

72.5%

72.8%

70.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015Opiates Non-opiates

38

2015 Distribution of Hospital Costs

Inpatient 50%

Outpatient50%

56.6%

53.7%

50.1%

43.4%

46.3%

49.9%

2013 2014 20150%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Inpatient Outpatient

39

Weeks of Temporary Disability for claims with more than 7 lost-time daysCA higher than most other states

9 9 9 10 10 10

12 12 12 12 13

14 14 14 15 15

17

12

0

2

4

6

8

10

12

14

16

18

40

Assumptions,forIllustrativePurposes

• 2,200Employees• $50,000averagesalary• $50,000x2,200=$110millionpayroll• $2.90insurancerateper$100payroll• ~$3.2millionexpectedcosts($110millionpayroll/$100*$2.90)

41

66

18

16

0

20

40

60

80

100

Expected Counts = 100

LAE

Permanent Disability

Temporary Disability

Medical Only

$66,000

$1,278,000

$1,136,000

$718,505

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

Expected Cost ~ $3,200,000

42

Distributecostsbytypeofbenefit

MO 0.07

TD$1.28

PD$1.14

LAE$0.72

Expected Cost $3.2M

Med$0.76

Ind$0.52

TD

Med$0.67

Ind$0.46

PDMedical

MedicalSupplies&Equipment

MedicalLiens

Med-LegalEvaluations

Pharmacies

Hospitals

InjuredWorker

Physicians

Hospital

Pharmacies

Opiates

Non-opiates

Physicians

OtherMedicineSpecialServices&Reports

Radiology

PhysicalMedicine

Evaluationand

Management

Other

Surgery

43

AllocateCostsbyTypeofBenefittoServices

Permanent Disability Temporary Disability Total

Amount % Amount %

Indemnity $464,000 14% $522,000 16% $986,000

Medical- Physicians

• Eval & Management• Surgery• Physical Medicine• Radiology• Spec Serv &Reports• Medicine• Other

- Injured Worker- Hospitals

• Inpatient• Outpatient

- Pharmacies• Opiates• Non-opiates

- Med-Legal Evaluations- Medical Liens- Med Supplies/Equip- Other

$672,000

62,60433,14336,82616,57214,7309,206

11,048185,472

44,77744,599

14,27334.11149,05643,00834,94437,632

21%

2.0%1.0%1.2%0.5%0.5%0.3%0.3%5.8%

1.4%1.4%

0.4%1.1%1.5%1.3%1.1%1.2%

$756,000

70,42937,28641,42918,64316,57210,35712,429

208,656

50,37550,173

16,05738,37555,18848,38439,31242,336

24%

2.2%1.2%1.3%0.6%0.5%0.3%0.4%6.5%

1.6%1.6%

0.5%1.2%1.7%1.5%1.2%1.3%

$1,428,000

Medical Only (2%) $66,000

LAE (22%) $718,505

Total $3,198,505

AllocateCostsbyServices– usingstatewidepercentagesYoucancreateyourowntemplate!

MacroeconomicIndicatorsImpactonWCCosts

45

MacroeconomicIndicators

• Employmentrate• Wagegrowth• Medicalinflation• Interestrate

46

EmergingTrendsHowwilltheyimpactWC?

47

EmergingIndustryPractices

• On-demandemployment(e.g.Uber,Lyft)• Robotics• UnmannedVehicles(e.g.Driverlesscars,drones)• “Obamacare”

48

Summary

49

Summary

50

• Insuranceindustryfinanciallystableandprofitable– wellcapitalized– ROElowerthanotherindustries– WrittenPremium- increasing

• CaliforniaWorkersCompensation– CombinedRatios–cyclical,buttrendingdown– CostDrivers

• Frequency– Californiaflattening(whereascountrywidedecreasing)• Severity– increasing

– CostDistributions• PD/TDdrivesthecosts• TDhaslongdurationrelativetootherstates

Summary,continued

51

• Opportunitytocontaincosts– ReturntoWorkprograms– C&Rs– Litigatedclaims– earlyintervention?– Etc.

• SB863– Stillinflux– Someimprovement,somedeterioration(ALAE)

• DynamicSystem!!

Questions?

52

ThankYou!