WORKERS COMPENSATION
- CURRENT ISSUES (SESSION WCP-22)
Robert Blanco
Nancy Treitel
Dee Dee Mays, Moderator
- NCCI
- Liberty Mutual
- NCCI
Casualty Actuarial Society
2000 Seminar on Ratemaking
March 9-10, 2000
HOW DOES WC COMPARE?
PREMIUM VOLUME BY LINE
Line of Business
1998
1999p Change
Personal Auto
$117.3 B $120.3 B
2.6 %
Homeowners
29.0
31.4
8.4
Workers Compensation
23.3
23.0
-1.3
Commercial Multiple Peril
19.0
19.2
1.4
Other Liability
19.0
18.0
-5.6
Commercial Auto
18.1
18.3
1.3
Fire & Allied Lines
9.0
9.5
5.5
Total All Lines
$281.6 B $288.0 B
2.3 %
p Preliminary
Source for lines other than Workers Compensation:
Best's Aggregates & Averages, Property/Casualty, 1999 Edition and
Best’s Review Preview, Property/Casualty, January 2000
© A. M. Best Company—used with permission
© 2000 National Council on Compensation Insurance, Inc.
HOW DOES WC COMPARE?
COMBINED RATIOS BY LINE
Line of Business
Personal Auto
Homeowners
Workers Compensation
Commercial Multiple Peril
Other Liability
Commercial Auto
Fire & Allied Lines
Total All Lines
1997
1998 1999p
99 % 101 % 103 %
101
109
109
101
108
115
111
120
123
111
115
118
111
114
115
93
107
101
102 % 106 % 108 %
p Preliminary
Source for lines other than Workers Compensation:
Best's Aggregates & Averages, Property/Casualty, 1999 Edition and
Best’s Review Preview, Property/Casualty, January 2000
© A. M. Best Company—used with permission
© 2000 National Council on Compensation Insurance, Inc.
HOW DOES WC COMPARE?
PRETAX OPERATING GAIN/LOSS BY LINE
Line of Business
1997
1998 1999p
Personal Auto
7%
5%
3%
Homeowners
4
-5
-5
Workers Compensation
19
12
3
Commercial Multiple Peril
0
-9
-13
Other Liability
20
15
10
Commercial Auto
-1
-4
-7
Fire & Allied Lines
11
-2
3
Total All Lines
9%
5%
2%
p Preliminary
Source for lines other than Workers Compensation:
Best's Aggregates & Averages, Property/Casualty, 1999 Edition and
Best’s Review Preview, Property/Casualty, January 2000
© A. M. Best Company—used with permission
© 2000 National Council on Compensation Insurance, Inc.
1999 RETURN ON EQUITY - HOW DOES
THE P/C INDUSTRY COMPARE?
35.0%
30.5%
30.0%
25.0%
21.5%
20.5%
22.5%
21.3%
22.0%
20.5%
20.0%
18.5%
17.0%
16.5%
16.0%
15.0%
13.5%
11.0%
10.5%
10.0%
5.0%
Source: Value-Line
P/C Ins
Truck/Lsng
Life Ins
Food Whole
Retail
Lge Banks
Restaurant
Food Proc
Semicond Mfg
Med Supplies
Auto Mfg. (Big 3)
Air Trans
Drug
Tobacco
0.0%
© 2000 National Council on Compensation Insurance, Inc.
WC NET WRITTEN PREMIUM
$ Billions
Private Carriers
40
35
30
25
20
15
10
5
0
30.8 30.2 29.5 30.6 29.1
27.7
26.1 25.0
23.9 23.3 23.0
89
p Preliminary
90
91
92
93
94
95
96
97
98
99p
Calendar Year
© 2000 National Council on Compensation Insurance, Inc.
WC PREMIUMS & PREMIUM
EQUIVALENTS
$ Billions
40
30
27.7
31.4
31.4
90
91
33.3
36.9
92
93
36.4
33.2
32.3
31.2
31.3
31.0
95
96
97
98*
99*
20
10
0
89
94
Calendar Year
Estimated Large Deductible premium credit
Large Deductible Net premium
Premium excluding Large Deductible policies
* Preliminary
© 2000 National Council on Compensation Insurance, Inc.
WC LOSS RATIO
Percent
Countrywide - Net - Private Carriers
90
85
80
75
70
65
60
55
50
87.9
83.0
84.5
84.1
71.3
67.0
60.2
89
90
91
92
93
94
60.1
55.1
55.4
56.0
95
96
97
98
99p
Calendar Year
p Preliminary
© 2000 National Council on Compensation Insurance, Inc.
WORKERS COMPENSATION
LOSS RATIOS
First
Dollar
Large
Deductible
Loss
Expense
Premium
$ 75
$ 25
$100
$ 15
$ 23
$ 38
Loss Ratio
75%
40%
LAE RATIO TO PREMIUM
15.4
16
13.1
14
Percent
12
11.4
10.7
11.4
12.3
13.2
12.6
94
95
13.8
13.9
96
97
10
8
6
4
2
0
89
90
91
92
93
98
Calendar Year
© 2000 National Council on Compensation Insurance, Inc.
LAE RATIO TO LOSSES
30
Percent
25
20
15
15.5
13.8
12.7
13.0
89
90
91
21.8
22.9
94
95
24.9
24.9
25.7
96
97
98
17.3
10
5
0
92
93
Calendar Year
© 2000 National Council on Compensation Insurance, Inc.
UNDERWRITING EXPENSE RATIO
30
Percent
25
20
17.2
17.6
89
90
20.2
21.2
18.8
19.7
91
92
93
94
23.2
25.1
25.4
96
97
26.8
15
10
5
0
95
98
Calendar Year
© 2000 National Council on Compensation Insurance, Inc.
POLICYHOLDER DIVIDENDS RATIO
12
Percent
10
8
6.4
6.2
6
5.1
4.9
4.6
4.8
90
91
92
93
6.2
4.9
5.6
5.4
97
98
4
2
0
89
94
95
96
Calendar Year
© 2000 National Council on Compensation Insurance, Inc.
CALENDAR YEAR COMBINED RATIO
123.1 122.0
125
120 117.8 117.5
Percent
115.0
115
108.6
110
105
107.8
101.1
100
97.1
99.1
100.9
95
89
90
91
92
93
94
95
96
97
98
99p
Calendar Year
p Preliminary
© 2000 National Council on Compensation Insurance, Inc.
COMBINED RATIO
Calendar Year vs. Ultimate Accident Year
Countrywide - Private Carrier
Calendar Year
Accident Year
130
125
Percent
120
124
118
122
123
122
122
117
116
114
115
109
110
108
103
105
100
102
101
96
98
97
99
?
115
108
101
95
89
90
91
p Preliminary
Includes dividends to policyholders
Accident year is developed to ultimate
92
93
94
95
96
97
98
99p
Year
© 2000 National Council on Compensation Insurance, Inc.
PRIOR YEAR RESERVE ADJUSTMENTS
Countrywide - Net - Private Carriers
12
Percent
8
9.3
5.5
9.6
5.5
2.0
4
0
-4
-8
-6.3
-12
89
90
91
92
93
94
-7.7
-10.1
95
96
-5.9
-9.1
97
98
Calendar Year
Loss and LAE reserves
© 2000 National Council on Compensation Insurance, Inc.
ACCIDENT YEAR LOSS RATIOS
INCLUDING LOSS ADJUSTMENT EXPENSE
Reserve releases
Loss and LAE Ratio
100
97
94
95
90
89
89
90
88
85
85
82
80
80
78
77
75
75
68
70
68
79
81
81
75
70
65
89
90
91
92
93
94
95
96
97
98
Accident Year
At First Report
As of 12/98
© 2000 National Council on Compensation Insurance, Inc.
INVESTMENT GAIN AND OTHER
INCOME RATIO DECLINING A BIT
25
20.0
Percent
20
15
17.6
14.9
13.7
15.2
17.0
16.9
17.6
95
96
19.3
18.0
14.3
10
5
0
89*
90*
91*
92
93
94
97
98
99p
Calendar Year
p Preliminary
* Adjusted to include realized capital gains to be consistent with 1992 and after.
© 2000 National Council on Compensation Insurance, Inc.
WC PRETAX OPERATING GAIN/LOSS RATIO
BIG DECLINE IN 99?
19.8
20
16
19.1
13.3
12
Percent
18.4
11.5
8.4
8
3.0
4
0
-4
-2.9
-8
-3.8
-4.4
-7.9
-12
89*
90*
91*
92
93
94
95
96
97
98
99p
Calendar Year
p Preliminary
* Adjusted to reflect realized capital gains to be consistent with 1992 and after.
© 2000 National Council on Compensation Insurance, Inc.
RESULTS ARE DETERIORATING…
BUT WHY???
Schedule
carrier discounting
(rate/loss cost departure, schedule rating,
dividends)
Roll-off
Loss
of reserve take-downs
trends flattening/increasing
Medical
inflation increasing
© 2000 National Council on Compensation Insurance, Inc.
HOW ARE FINAL WC PREMIUMS
DETERMINED?
BUREAU
INSURANCE COMPANY
Advisory Loss Costs
Final Rate Determination:
Assigned Risk Rates
– Expense Multiplier
Experience Rating Values
– Loss Cost Deviations
Experience Mods
Individual Risk Modifications:
Rating Plans and
Classifications
– Schedule Rating
– Retrospective Rating
© 2000 National Council on Compensation Insurance, Inc.
HISTORY OF AVERAGE BUREAU
RATE/LOSS COST LEVEL CHANGES
14
12.1
10.0
10
7.4
6.1
Percent
6
3.5
2.5
2
-2
-1.9
-3.5
-6
-2.3
-4.8
-4.9
-7.4
-10
89
90
91
92
93
94
95
96
97
98
99
00p
Calendar Year
p Preliminary
Countrywide approved changes in advisory rates, loss costs and
assigned risk rates as filed by the applicable rating organization.
© 2000 National Council on Compensation Insurance, Inc.
CARRIER PRICE DISCOUNTING
0
Percent
-5
-10
-7.6
-6.8
-7.8
-7.5
-15
-9.0
-10.8
-14.5
-20
-17.9
-25
-22.0
90
91
92
Rate/Loss Cost Departure
93
94
95
Policy Year
Schedule Rating
96
97
98*
Dividends
* Preliminary
Based on data through 12/31/98 for the 37 states where NCCI provides ratemaking services.
Dividend ratios are based on calendar year statistics.
© 2000 National Council on Compensation Insurance, Inc.
CHANGE IN FINAL PREMIUM
CHARGED
0
-3.5
Percent
-10
-8.7
-16.8
-20
-26.0
-30
-33.1
-34.2
98
99p
-40
94
95
96
97
Year
P Preliminary
Values are relative to 1993
© 2000 National Council on Compensation Insurance, Inc.
WORKERS COMPENSATION PRICING
Components of Price
Loss Cost = f (customer, company, and/or
industry losses, inflation, interest rate,
med technology, economy, etc.)
+ Risk Charge
+ Expenses
+ Tax
Premium
AVG INDEMNITY COST PER
LOST TIME CLAIM - INCREASING
Private Carriers
1990-1994: -0.5% annual change
$ Thousands
12
10
1994-1998: +3.7% annual change
9.4
9.9
9.9
9.8
10.0
9.7
9.9
10.2
10.7
89
90
91
92
93
94
95
96
97
11.2
98
8
6
4
2
0
Accident Year
Based on data through 12/31/1998, 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.
© 2000 National Council on Compensation Insurance, Inc.
ANNUAL CHANGE IN CPS WAGE VS.
CHANGE IN INDEMNITY COST PER
LOST TIME CLAIM
10
7.6
8
Percent
6
4
5.2 5.5
3.9
3.4
2
2.3
0.6
3.2
1.6
2.7
2.83.3
2.8
4.0
5.0 4.7 4.4
1.5
0
-2
-1.3
-2.5
-4
89
90
91
92
93
94
95
96
97
98
Year
Change in CPS wage
Change in Indemnity Cost Per Lost Time Claim
© 2000 National Council on Compensation Insurance, Inc.
AVG MEDICAL COST PER
LOST TIME CLAIM-INCREASING MORE
Private Carriers
1990-1994: +2.7% annual change
1994-1998: +5.7% annual change
$ Thousands
12
10
8
7.7
8.0
6.7
7.2
8.2
89
90
91
92
93
8.0
8.5
8.9
9.4
94
95
96
97
10.0
6
4
2
0
98
Accident Year
Based on data through 12/31/1998, 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.
© 2000 National Council on Compensation Insurance, Inc.
Percent
CHANGE IN MEDICAL CPI VS.
CHANGE IN MEDICAL COST PER
LOST TIME CLAIM
12
10
8
6
4
2
0
-2
-4
10.7
7.7
9
8.2 8.7
6.6
7.4
5.9
3.7
4.8
3.3
5.8
4.5
6.6
5.4
3.5
4.9
2.8
3.2
-2.4
89
90
91
92
93
94
95
96
97
98
Year
Change in Medical CPI
Change in Medical Cost Per Lost Time Claim
© 2000 National Council on Compensation Insurance, Inc.
WORKERS COMPENSATION PRICING
Inflation
Year 1
Year 2
% Chg
Gross Loss
$360,000
$370,800
3%
Deductible
$250,000
$250,000
-
Excess Loss $110,000
$120,800
10%
Note: excess pricing even more sensitive
WORKERS COMPENSATION PRICING
With medical technology, 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.
Age at
Death
5%
Inflation Rate
7%
9%
45
$5
$6
$7
60
$12
$18
$28
75
$27
$52
$103
90
$59
$145
$376
$ amounts are in millions.
ANNUAL CHANGE IN LOST TIME
CLAIM FREQUENCY PER WORKER
Private Carriers
Cumulative Decrease
of 24%
since 1990
Percent
10
5
3
3
0
0
-5
-4
-3
-1
-2
-6
-10
89
90
91
92
93
94
95
-6
96
-4
97
98
Accident Year
Based on data through 12/31/1998, 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.
© 2000 National Council on Compensation Insurance, Inc.
ANNUAL CHANGE IN LOST TIME
CLAIM COSTS PER WORKER
Private Carriers
20
Percent
15
12
10
10
4
5
1
0
0
-5
-1
-2
91
92
-2
-3
-2
94
95
96
-10
89
90
93
97
98
Accident Year
Based on data through 12/31/1998, 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.
© 2000 National Council on Compensation Insurance, Inc.
LOSS TRENDS - WHY ARE THEY
STARTING TO INCREASE???
POTENTIAL REASONS:

Cost containment initiatives saturation point

Medical inflation starting to rise

Managed care backlash

Frequency no longer declining

Economy
© 2000 National Council on Compensation Insurance, Inc.
CAN A STABLE LOSS COST
ENVIRONMENT BE MAINTAINED?
?
Loss Experience
NCCI Rate/Loss Costs
Schedule Carrier
Discounting *
-22%
Past
* rate/loss cost
departure,
schedule rating,
dividends
1998
Future
© 2000 National Council on Compensation Insurance, Inc.
RESIDUAL MARKET PREMIUMS
- HOW LOW CAN YOU GO?
as of 9/30/1999
6
4.8
$ Billions
5
4.4
4.0
4
4.1
3.5
2.6
3
3.1
2.8
2.1
2
1
2.0
1.2
1.0
0.6
0.5
0.3 0.3
0
84
85
86
87
88* 89* 90* 91* 92*
* Excludes Maine Residual Market Pool
** Projected to ultimate
93
94
95
96 97** 98** 99**
Policy Year
© 2000 National Council on Compensation Insurance, Inc.
RESIDUAL MARKET SHARES
(Plan Premium as a Percentage of Direct Written Premium)
30
24
25
26
23
22
21
Percent
20
18
17
17
16
16
15
11
9
10
7
5
5
4
4
98
99p
0
84
85
86
87
88
89
90
91
92
93
94
95
96
97
Calendar Year
p Preliminary
© 2000 National Council on Compensation Insurance, Inc.
RESIDUAL MARKET COMBINED RATIOS
Percent
as of 9/30/1999
200
190
180
170
160
150
140
130
120
110
100
90
187
177
165
169 166
159
143
129
115
114
105
84
85
86
87 88* 89* 90* 91* 92* 93
98
95
94
95
99
96
119
106
97
98
99
Policy Year
* Excludes Maine Residual Market Pool
© 2000 National Council on Compensation Insurance, Inc.
RESIDUAL MARKET UNDERWRITING
GAIN/LOSS
as of 9/30/1999
0.5
0.07 0.1 0.01
0.0
$ Billions
-0.5
-0.03 -0.05 -0.05
-0.19
-0.4
-0.66
-1.0
-0.9
-1.5
-1.25
-1.4
-1.8
-2.0
-1.7
-1.9
-2.1
-2.5
84
85
86
87
88* 89* 90** 91** 92** 93#
94
95
96
97
98
99
Policy Year
* Excluding Maine
** Excluding Maine and New Mexico
# Excluding New Mexico
© 2000 National Council on Compensation Insurance, Inc.
CHANGING DEVELOPMENT PATTERNS
1st to 2nd Development - Indemnity
1.100
Index to 1991
1.050
1.000
0.950
0.900
0.850
Paid
Case Incurred
91
92
93
94
95
Incurred Incl. IBNR
96
97
Accident Year Development. First is at 12 months.
Source: NCCI's Loss Development Exhibits
© 2000 National Council on Compensation Insurance, Inc.
CHANGING DEVELOPMENT PATTERNS
1st to 2nd Development - Medical
Index to 1991
1.100
1.050
1.000
0.950
0.900
0.850
Paid
Case Incurred
91
92
93
94
95
Incurred Incl.
IBNR
96
97
Accident Year Development. First is at 12 months.
Source: NCCI's Loss Development Exhibits
© 2000 National Council on Compensation Insurance, Inc.
SO WHAT ARE THE NEW HOT ISSUES
AFFECTING WORKERS COMP?
 Consumer
 Federal
Reports Article
issues:
– Black Lung compensability
– Ergonomic standards
– Privacy issues
– Beryllium
 Unicover
impact
© 2000 National Council on Compensation Insurance, Inc.
Reinsurance Pool Structure
wc insurer
wc insurer
cede prems & losses
Pool Manager
assume prems
and losses
Pool
members
wc insurer
get ceding commission
fee for pool admin; fee
for placing reinsurance
cedes prems
and losses
Reinsurance
gets ceding
Underwriting Manager
commission
assume prems Retrocessionaries
and losses
UNICOVER POOL
What Is It? Why All the Fuss?
•
•
•
•
•
•
•
•
Growth and volume much higher than expected.
Over $900 million of quota share reinsurance passed
through Unicover in its last year.
Management fees of 7.5% of EP paid.
Rules permitted ceding commissions as high as 30%.
Business appears to have been significantly
underpriced.
Losses likely to be $2 billion or more.
Some insurers are commuting contracts.
Law suits abound.
Sources: articles in Business Insurance, Moody’s, and Alliance Bulletins
LEGISLATIVE UPDATE - PROPOSALS
AK, FL, GA
IN, ME, TN
BENEFIT INCREASES
KENTUCKY
UNDOING REFORMS
ILLINOIS
PREMIUM BASIS CHALLENGE
KANSAS
EXCLUSIVE REMEDY CHALLENGE
OKLAHOMA
NEW REFORMS
© 2000 National Council on Compensation Insurance, Inc.
Changing Landscape
Comp Economics Have Changed
WC Predominating Industry Average
1988
1998 % Change
Premium
100
100
---
Reserve/Premium
Surplus/Premium
Total Assets Invested
Pre-Tax Investment
Yield
1.5
0.5
200
2.2
1.5
370
47%
200%
61%
9.2% 6.8%
-26%
© 2000 National Council on Compensation Insurance, Inc.
WORKERS COMPENSATION
Late 1980s vs 1999/2000
Workers Comp
Issues
Late 1980s
Now
Cost To Employers
Rising
System Reforms
Pressure to reform
Economy/freq/sev
Freq rising; med inflation freq declining;
high;
severity trends on rise;
Managed Care
Emerging
Pricing
Rate/loss cost increases; “Open Rating” in most
“open rating” starting
states.
Major burden
Volume so small, burden
negligible in most states
Deteriorating
Deteriorating
Residual Market
Insurer Profitability
Rising or concern that will
rise
Pressure to expand
Mature
WORKERS COMP - FUTURE TRENDS?

Calendar year 1999 vs. Accident year 1999

Overall adequacy of reserves

Impact of over-capacity in industry

Future price competition

Potential threat of reform rollback

Future medical inflation

Potential changes in the economy

Future investment gains
© 2000 National Council on Compensation Insurance, Inc.