WORKERS COMPENSATION - CURRENT ISSUES - (SESSION WCP-22) Robert Blanco- NCCI Kay Rahardjo- Liberty Mutual Dee Dee Mays, Moderator- NCCI Casualty Actuarial

WORKERS COMPENSATION- CURRENT ISSUES -

(SESSION WCP-22)

Robert Blanco - NCCIKay Rahardjo - Liberty MutualDee Dee Mays, Moderator - NCCI

Casualty Actuarial Society1999 Seminar on Ratemaking

March 11-12, 1999

© 1999 National Council on Compensation Insurance, Inc.

®

Line of BusinessPersonal AutoHomeownersWorkers CompensationCommercial Multiple PerilOther LiabilityCommercial AutoFire & Allied LinesTotal All Lines

1997$113.6 B

26.923.919.020.118.0

9.1$276.1 B

PREMIUM VOLUME BY LINE

1998p$118.0 B

29.124.019.219.118.1

8.5$280.9 B

Change3.9 %8.30.01.1

-5.10.6

-6.51.7 %

Source for lines other than Workers Compensation: Best's Aggregates & Averages, Property/Casualty, 1998 Edition and Best’s Review Preview, Property/Casualty, January 1999 © A. M. Best Company—used with permission

p Preliminary


®

NET WRITTEN PREMIUMPrivate Carriers

26.1 27.730.8 30.2 29.5 30.6 29.1

26.1 25.0 23.9 24

0

5

10

15

20

25

30

35

40

88 89 90 91 92 93 94 95 96 97 98p

Calendar Year

$ B

illio

ns

p Preliminary


®

REASONS FOR PREMIUMFLATTENING

High Deductibles Rate Decreases Self-Insurance New State Funds Alternative Coverages On-Going Price Competition Reinsurance Availability


®

10

15

20

25

30

35

40

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98p

Calendar Year

$ B

illio

ns

p Preliminary

Impact of Deductibles

NET WRITTEN PREMIUMPrivate Carriers


®

LOSS RATIO

82.9 83.0 84.187.9

84.5

71.3

60.2

55.1 55.4 56.0

61

50

55

60

65

70

75

80

85

90

88 89 90 91 92 93 94 95 96 97 98p

Calendar Year

Per

cen

t

p Preliminary

Workers Compensation

Loss Ratios

FirstDollar LDD

Loss $ 75 $ 15Expense $ 25 $ 23Premium $100 $ 38

Loss Ratio 75% 40%


®

LOSS ADJUSTMENT EXPENSE RATIO TO PREMIUM

10.8 11.410.7

11.413.1

12.313.2 12.6

13.8 13.9 14

0

2

4

6

8

10

12

14

16

88 89 90 91 92 93 94 95 96 97 98p

Calendar Year

Pe

rce

nt

p Preliminary


®

LOSS ADJUSTMENT EXPENSE RATIO TO LOSSES

13.1 13.8 12.7 13.015.5

17.3

21.8 22.924.9 24.9

23

0

5

10

15

20

25

30

88 89 90 91 92 93 94 95 96 97 98p

Calendar Year

Pe

rce

nt

p Preliminary


®

UNDERWRITING EXPENSE RATIO

17.8 17.2 17.6 18.8 19.7 20.2 21.223.2

25.1 25.4 25

0

5

10

15

20

25

30

88 89 90 91 92 93 94 95 96 97 98p

Calendar Year

Pe

rce

nt

p Preliminary


®

POLICYHOLDER DIVIDENDS RATIO

8.08.6

9.910.6

9.8 9.4

7.86.7 6.5 6.2

4.9 4.6 4.8

6.4 6.2

4.95.6 6.0

5.1

0

2

4

6

8

10

12

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98p

Calendar Year

Pe

rce

nt

p Preliminary


®

POLICYHOLDER DIVIDENDS RATIOCalifornia

12.8

14.9

18.317.2

16.414.9

11.110.4 9.911.2

9.5

7.4 7.0

12.413.2

6.2

0.2

11.4

0

5

10

15

20

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

Calendar Year

Pe

rce

nt

Private Carriers


®

COMBINED RATIOS BY LINE


1996101 %122

99118124110

96106 %

199799 %

101101111111111

93102 %

1998p100 %112106118117115105105 %

Avg.100 %112102116117112

98104 %

p Preliminary



®

CALENDAR YEAR COMBINED RATIO

118.1 117.8 117.5

123.1 122.0

108.6

101.1

97.199.1

100.9

106

95

100

105

110

115

120

125

88 89 90 91 92 93 94 95 96 97 98p

Calendar Year

Pe

rce

nt

p Preliminary


®

INVESTMENT GAIN AND OTHER INCOME RATIO

13.714.9

13.715.2

17.6 17.014.3

16.9 17.620.0 21

0

5

10

15

20

25

88* 89* 90* 91* 92 93 94 95 96 97 98p

Calendar Year

Per

cen

t

* Adjusted to include realized capital gains to be consistent with 1992 and after.p Preliminary


®

PRETAX OPERATING GAIN/LOSS BY LINE

p Preliminary


19965 %

-1718-85

-144 %

19977 %4

190

20-111

9 %

1998p6 %

-815-613-5-16 %

Avg.6 %

-718-513-346 %



®

PRETAX OPERATING GAIN/LOSS RATIO

-4.4-2.9 -3.8

-7.9-4.4

8.4

13.3

19.8 18.4 19.1

15

-12

-8

-4

0

4

8

12

16

20

88* 89* 90* 91* 92 93 94 95 96 97 98p

Calendar Year

Pe

rce

nt

p Preliminary

* Adjusted to reflect realized capital gains to be consistent with 1992 and after.

0.0%

10.0%

20.0%

30.0%

Tob

acco

Dru

g

Air

Tra

ns

Au

to M

fg (

Big

3)

Med

Su

pp

lies

Sem

icon

d M

fg

Food

Pro

c

Resta

ura

nt

Lg

e B

an

ks

Reta

il

Food

Wh

ole

Lif

e I

ns

Tru

ck/L

sn

g

P/C

In

s

30.1%

12.9% 12.3%13.0%13.7%14.6%

15.8%16.7%17.0%

19.7%

23.0%

27.6%26.3%

27.7%

Source: Value-Line

1997 ROEsVarious Industries

2%

4%

6%

8%

10%

12%

14%

16%

1997 Reported ROE 14.2%Based on 22 Property-Casualty Stock Companies

0%

Normalized ROE10.6%

Catastrophe Impact 1.9%

Prior Year Releases in 1997 1.7%

Source: Fox-Pitt, Kelton

Contribution to 1997 ROE

Reserve ReleasesBased on 22 Property-Casualty Stock Companies

*ROE points, 1993-96 Releases 2.4% $3,321

*ROE points, pre-93 Releases -0.7% $ -859

*Total 1.7% $2,462

Source: Fox-Pitt, Kelton

Number of “Severe” Florida Hurricanes*

1917 - 1941 71942 - 1966 81967 - 1991 01992 - 1998 1

*Number of hurricanes with Simpson-Saffir category of 4 (winds between 131 mph and 155 mph) or 5 (winds above 155 mph)

Largest Earthquakes in the U.S.

Source: E.W. Blanch, General Reinsurance

Rank Mag Year Location Rank Mag Year Location1 9.2 1964 Prince Wm Sound, AK 13 7.9 1987 Gulf of Alaska2 8.8 1957 Andreanof Islands, AK 14 7.8 1872 Kodiak Island, AK3 8.7 1965 Rat Islands, AK 15 7.8 1892 Imperial Valley, CA4 8.3 1938 East of Shumagin Island, AK 16 7.7 1906 San Francisco, CA5 8.3 1958 Lituya Bay, AK 17 7.7 1915 Pleasant Valley, NV6 8.2 1899 Yakutat Bay, AK 18 7.5 1952 Kern County, CA7 8.2 1899 near Cape Yakataga, AK 19 7.3 1927 Lompoc, CA8 8.0 1986 Andreanof Islands, AK 20 7.3 1954 Dixie Valley, NV9 7.9 1811-1812 New Madrid, MO 21 7.3 1959 Mebegen Lake, MT10 7.9 1857 Fort Tejon, CA 22 7.3 1983 Borah Peak, ID11 7.9 1868 Ka'u District, Island of HI NA 7.1 1989 Loma Prieta, CA12 7.9 1900 Kodiak Island, AK NA 6.8 1994 Northridge, CA

Great Natural Catastrophes**1960-1996

Decade 1960-1969

Decade 1970-1979

Decade 1980-1989

Last 10 Years 1987-1996

Factor 80s:60s

Factor Last 10 Years:60s

Number 16 29 70 64 4.4 4.0

Economic losses* 48.4 93.0 147.6 404.4 3.0 8.4

Insured losses* 6.5 10.9 29.8 98.8 4.6 15.2

*All figures in U.S. $ billion (@1996 price level).

**Defined as catastrophes in which the ability of the region to help itself is distinctly overtaxed, making interregional or international assistance necessary.


®

DECREASING THE COMBINED RATIO: Rate increases Reform Self-funding residual markets Flattening of loss trends Reserve releases

INCREASING THE COMBINED RATIO: Rate reductions Price competition Roll-off of offsetting reserve take-downs

REASONS FOR CHANGING RESULTS


®

2.9

-2.1 -1.4

1.70.4

12.2

8.9 9.6 8.9

6.1

12.1

7.4

10.0

2.5

-1.9-3.5

-4.9

-7.4

-4.8

-10

-6

-2

2

6

10

14

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

Calendar Year

Pe

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nt

Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization.

AVERAGE RATE/LOSS COST LEVEL CHANGES


®

RATING LAWS FOR WORKERS COMPENSATION

Loss Costs

Status as of 2/1/99

Rates

Changing

Monopolistics


®

DETERMINATION OF FINAL PREMIUM CHARGED

BUREAU

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


®

IMPACT OF PRICE FACTORS:Schedule Rating, Premium Discount, Retro Rating, and

Premium Credits for Small Deductible Policies

* 1997 is Calendar Year.Does not reflect company rate departures or dividends.Based on the 37 states where NCCI provides ratemaking services.

-13-11 -11 -11 -10

-7 -8 -9 -9 -9-10

-12 -12 -13

-16-17

-19

-8

-25

-20

-15

-10

-5

0

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97*

Policy Year

Pe

rce

nt

Workers Compensation PricingComponents of Price

Loss Cost = f (inflation, interest rate, med technology, economy, etc.) + Risk Charge + Expenses + Tax Premium

Workers Compensation PricingInflation

Suppose we have a customer whom we knowwill have one $360,000 claim this year. Theypurchase a $250,000 large dollar deductiblepolicy. This year’s price (assume no expenses)will be $110,000.

How much must we charge for next year’s policyif we know WC claims are growing 3% per year?

Workers Compensation PricingInflation

Should we charge 3% more? No.

We have to charge 10% more because($360,000 x 1.03) - $250,000 = $120,800 and$120,800/$110,000 = 1.10

Workers Compensation PricingInterest Rate

Undiscounted Loss Cost = $1,000,000 Excess of $250,000

Discounted Loss Cost @ 10% = $280,842

9% = $306,459

8% = $336,329

7% = $371,539

6% = $413,551

5% = $464,363

=> A 1% decrease in interest rate impacts thediscounted loss cost by ~ 9-12%.

Workers Compensation PricingInterest Rate

Undiscounted Loss Cost = $1,000,000

Discounted Loss Cost @ 10% = $131,983

9% = $152,914

8% = $179,104

7% = $212,083

6% = $254,083

5% = $308,205

=> A 1% decrease in interest rate impacts thediscounted loss cost by ~ 16-21%.

Excess of $1,000,000

Age at Inflation Rate

Death 5% 7% 9%

45 $5 $6 $7

60 $12 $18 $28

75 $27 $52 $103

90 $59 $145 $376

Workers Compensation Pricing

How big can a WC claim become?

Consider a 25-year old making $450 per week whose injury results in quadriplegia requiring 24-hour attendant care.

$ amounts are in millions.

Workers Compensation PricingRisk Charge

*Surplus can be allocated to lines of business, policy types, accounts

*Shareholders expect a return on the surplus

*Surplus serves as a cushion to absorb risk

*Surplus on a single year policy is a multi-year commitment


®

Impact of Benefit Reforms

Managed Care Initiatives

Enhanced Safety Measures

Antifraud Measures

Employer Loss Control Initiatives

Economic Impacts

LOSS TRENDSREASONS FOR REDUCTIONIN FREQUENCY/SEVERITY


®

AVERAGE INDEMNITY COST PER LOST TIME CLAIM

Based on data through 12/31/1997, developed to ultimate.States included: AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, MD, MI, MS, MO, MT, NE, NH, NM, NC, OK, OR, RI, SC, SD, TN, UT, VT, VA, and WI.Excludes the effects of deductible policies.

1980-1990Annual Growth = 8%


4.3 4.75.4 5.6 6.0

6.67.3 7.8

8.69.2

9.8 9.4 9.6 9.5 9.5 9.8 9.99.7

0

2

4

6

8

10

12

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

Accident Year

$ T

ho

us

an

ds


®

AVERAGE MEDICAL COST PER LOST TIME CLAIM


2.4 2.8 3.3 3.6 3.9 4.34.8 5.2

5.96.5

7.5 7.6 7.8 7.8 7.98.4 8.5

7.0

0

2

4

6

8

10

12

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

Accident Year

$ T

ho

us

an

ds




®

11.0 10.711.6

8.8

6.2 6.37.5

6.6 6.57.7

9.0 8.7

7.4

5.94.8 4.5

3.52.8 3.2

0

2

4

6

8

10

12

14

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

Year

Pe

rce

nt

ANNUAL CHANGE IN MEDICAL CPI


®

ANNUAL CHANGE IN LOST TIME CLAIM FREQUENCY PER WORKER


-2

3

-7

7

12

-1-3

13 3

-4-3 -3

0

-6-4

-1

3

-10-8-6-4-202468

101214

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

Accident Year

Pe

rce

nt


®

ANNUAL CHANGE IN LOST TIME CLAIM COSTS PER WORKER


9

14

9

13

21

8 8 9

1512

-1-4

-1 -1

-6

0 0

10

-10

-5

0

5

10

15

20

25

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

Accident Year

Pe

rce

nt

1980-1990 Annual Growth = 12%

1990-1997Annual Growth = - 2%


®

* Excludes Maine Residual Market Pool** Projected to ultimate

RESIDUAL MARKET PREMIUMSas of 9/30/1998

0.3

1.0

2.0

3.1

4.14.4

4.03.5

2.82.6

0.5

1.2

2.1

4.8

0.6

0

1

2

3

4

5

6

84 85 86 87 88* 89* 90* 91* 92* 93 94 95 96 97** 98**

Policy Year

$ B

illi

on

s


®

Residual Market Pools Eliminated: Florida Hawaii Kentucky Louisiana Maine Rhode Island Texas

Accounted For Over $1 Billion in Residual Market Underwriting Losses in 1990

RESIDUAL MARKET RELIEF


®

NEW STATE FUNDSINSURER OF LAST RESORT

MARKET SHARES

92 93 94 95 96 97Florida - - 5 4 1 naHawaii - - - - - 3Kentucky - - - 9 27 18Louisiana 2 55 60 49 42 39Maine - 58 66 67 56 50Rhode Island 0 68 84 78 62 51Texas 8 19 31 29 23 13


®

RESIDUAL MARKET SHARES

5

8

11

17

24

2728

2524

212019

16

10

6

0

5

10

15

20

25

30

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98p

Calendar Year

Pe

rce

nt

p PreliminaryAverage based on states with pools


®

* Excludes Maine Residual Market Pool

RESIDUAL MARKET COMBINED RATIOSas of 9/30/1998

117110

1019698

106115

130

145

160167170166

178189

90100110120130140150160170180190200

84 85 86 87 88* 89* 90* 91* 92* 93 94 95 96 97 98

Policy Year

Per

cen

t


®

* Excluding Maine** Excluding Maine and New Mexico# Excluding New Mexico

RESIDUAL MARKET UNDERWRITING GAIN/LOSS

as of 9/30/1998

-0.4

-0.9

-1.4

-1.8 -1.9-2.1

-1.8

-1.3

-0.7

-0.2

0.05 0.07

-0.06 -0.06-0.01

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

84 85 86 87 88* 89* 90** 91** 92** 93# 94 95 96 97 98

Policy Year

$ B

illio

ns


®

118 118 117

123 122

109

101

9799

101

106

95

100

105

110

115

120

125

130

88 89 90 91 92 93 94 95 96 97 98p

Year

Pe

rce

nt

Calendar Year

COMBINED RATIOCalendar Year

Countrywide - Private Carrier

p PreliminaryIncludes dividends to policyholders


®

118 118 117

123 122

109

101

9799

101

124 125123

116

104

9799

103

108

115

106

?

95

100

105

110

115

120

125

130

88 89 90 91 92 93 94 95 96 97 98p

Year

Pe

rce

nt

Calendar Year

Accident Year

COMBINED RATIOCalendar Year vs. Ultimate Accident Year

Countrywide - Private Carrier

p PreliminaryIncludes dividends to policyholdersAccident year is developed to ultimate


®

ACCIDENT YEAR LOSS RATIOSINCLUDING LOSS ADJUSTMENT EXPENSE

8789 89 90

88

8280

78 7779

95 9794

86

75

69 69

7376

65

70

75

80

85

90

95

100

88 89 90 91 92 93 94 95 96 97

Accident Year

Lo

ss

an

d L

AE

Ra

tio

At First Report As of 12/97

Reserve releases


®

CHANGING DEVELOPMENT PATTERNS1st to 2nd Development

0.850

0.900

0.950

1.000

1.050

Paid Case Incurred Incurred Incl. IBNR

Ind

ex

to

19

91

91 92 93 94 95 96

Accident Year Development. First is at 12 months.Source: NCCI's Loss Development Exhibits


®

IMPACT OF LOSS DEVELOPMENT CHANGES ON ULTIMATE PROJECTIONS

Development Method: Incurred Including IBNR

0.700

0.800

0.900

1.000

1.100

AY 1992 AY 1993 AY 1994 AY 1995 AY 1996

Ind

ex

to

19

91

1st 2nd 3rd 4th 5th 6th



®


Development Method: Case Incurred

0.700

0.800

0.900

1.000

1.100

AY 1992 AY 1993 AY 1994 AY 1995 AY 1996

Ind

ex

to

19

91




®


Development Method: Paid

0.700

0.800

0.900

1.000

1.100

AY 1992 AY 1993 AY 1994 AY 1995 AY 1996

Ind

ex

to

19

91




®

WORKERS COMPENSATIONPAID TO INCURRED RATIOS

TOTAL LOSSES

AccidentYear 1st 2nd1991 .232 .4951992 .216 .4811993 .210 .4751994 .215 .4901995 .222 .4931996 .238 .5271997 .251 ---



®

WORKERS COMPENSATIONPAID TO CASE-INCURRED RATIOS

TOTAL LOSSES

AccidentYear 1st 2nd1991 .386 .6351992 .388 .6491993 .389 .6641994 .401 .6691995 .408 .6651996 .407 .6741997 .407 ---



®

WORKPLACE SUBSTANCE ABUSE

Current hot topic in state legislatures Compensability standards for claims involving

substance abuse Common "incentive" device - DFW programs:

– currently in 9 states– premium credit– employer participation– insurer participation


®

LEGISLATIVE UPDATE - PROPOSALS

AK,AZ,CO,GA,OR,TN Benefit increases

DC PPD benefit reductions, med fee schedule change, SIF elimination

FLORIDA WC rate deregulation discussion

HAWAII Med fee schedules changes

ILLINOIS Hours worked and SF creation

INDIANA Hours worked

KANSAS “Right to sue” bills

SOUTH DAKOTA SIF elimination

VIRGINIA Deregulation


®

SECOND INJURY FUND ELIMINATION

Kansas 7/1/94

Utah 7/1/94

Connecticut 7/1/95

Nebraska 12/1/97

Florida 1/1/98

Rhode Island 7/3/98


®

MULTIPLE STAT AGENTS AND ADVISORY ORGANIZATIONS

Concept being discussed in a growing number of states

Important issues to consider:– uniformity in class and statistical plans– uniformity in experience rating process– data integrity / fragmentation– cost efficiencies– equity– rate filing process


®

ISSUES

Divergence of calendar year and accident year results Adequacy of reserves

– Loss development changes– Large deductible policies

Potential loss trend changes Impact of reinsurance Potential for reform rollback Managed Care backlash Test of Residual Market changes Potential changes in the economy Future investment gains

Documents

WORKERS COMPENSATION - CURRENT ISSUES - (SESSION WCP-22) Robert Blanco- NCCI Kay Rahardjo- Liberty Mutual Dee Dee Mays, Moderator- NCCI Casualty Actuarial