CALIFORNIA WORKERS COMPENSATION
A System Under Siege
Presented by:
Bill Miller, FCAS, MAAA
Tillinghast–Towers Perrin
(949) 253-5242
millerw@towers.com
September 2001
Pre-Open Rating Period 1993 to 1994
Heavily Regulated Pricing
 No Pricing Deviations
 Only Pricing Competition through Dividends
Profitable Results
Strong Reserves
Declining Frequency
CLRS0901.PPT/crf/Irvine
1
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
CLRS0901.PPT/crf/Irvine
2
First Years Of Open Rating 1995 to 1996
Great Pricing Flexibility
Heavy Price Competition
CLRS0901.PPT/crf/Irvine
3
Rate Level Index
341
317
283
179
277
232
202
194
197
100
Jan-73
Jan-78
Jan-83
Jan-88
Jan-93
Jul-93
Jan-94
Oct-94
1995
Avg.
1996
Avg.
CLRS0901.PPT/crf/Irvine
4
First Years Of Open Rating 1995 to 1996
Great Pricing Flexibility
Heavy Price Competition
Premium Decline
CLRS0901.PPT/crf/Irvine
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Written Premium
Written Premium
(in billions)
$10
$7.8
$8.4
$8.4
$8.5
$8.9
$7.7
$8
$5.7
$5.9
$6
$4
1989
1990
1991
1992
1993
1994
1995
1996
Calendar Year
CLRS0901.PPT/crf/Irvine
6
First Years Of Open Rating 1995 to 1996
Great Pricing Flexibility
Heavy Price Competition
Premium Decline
Continued Declining Frequency
Calendar Year and Accident Year Results Deteriorating
Reserve Deficiencies
CLRS0901.PPT/crf/Irvine
7
First Years Of Open Rating 1995 to 1996
Insurance Market
 Shifts through Withdrawals/Acquisitions/Expansions
 HMO’s Move Out of Market
 Still Heavy Capitalization (Premium/Net Worth = .6)
 Favorable Investment Returns
CLRS0901.PPT/crf/Irvine
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Open Rating 1997 to 2000
Continued Heavy Price Competition
CLRS0901.PPT/crf/Irvine
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California Workers
Compensation Rate Level Index
Rate Level Index (1/1/89 = 100%)
(January 1989 Rate Level = 100%) as of 12/31/2000
122%
112%
120%
113%
105%
100%
99%
83%
78%
80%
69%
70%
66%
63%
62%
40%
1/1/89 1/1/90 1/1/91 1/1/92 1/1/93 1/1/94 10/1/94 1995
Avg.
1996
Avg.
1997
Avg.
1998
Avg.
1999
Avg.
2000
Avg.
CLRS0901.PPT/crf/Irvine
10
Open Rating 1997 to 2000
Continued Heavy Price Competition
Premium Growth with Expanding Economy
Continued Declines in Frequency
CLRS0901.PPT/crf/Irvine
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Estimated Percentage Change
In Indemnity Claim Frequency
As of 12/31/2000
25%
% Change
12.0%
10.2%
0%
-5.7%
-3.9%
-2.1%
-0.3%
-6.2%
-7.4%
-5.9%
-13.1%
-19.7%
-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
CLRS0901.PPT/crf/Irvine
12
Open Rating 1997 to 2000
Continued Heavy Price Competition
Premium Growth with Expanding Economy
Continued Declines in Frequency
Sharp Severity Increases
CLRS0901.PPT/crf/Irvine
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Estimated Ultimate
Total Loss Per Indemnity Claim
1993
6,
64
$3
$3
4,
14
$2 4
6,
44
2
$2
9,
84
1992
$2
8,
35
5
$1
9,
37
5
$2
1,
38
9
8,
05
$1
$10,000
$1
$20,000
5,
07
1
$1
6,
67
$1 1
7,
76
1
3
$30,000
$1
Loss Severity
4
$40,000
3,
25
6
3
As of 12/31/2000
1989
1990
1991
1994
1995
1996
1997
1998
1999
2000
Accident Year
CLRS0901.PPT/crf/Irvine
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Open Rating 1997 to 2000
Continued Heavy Price Competition
Premium Growth with Expanding Economy
Continued Declines in Frequency
Sharp Severity Increases
Inadequate Pure Premium Rates
CLRS0901.PPT/crf/Irvine
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Estimated Inadequacy
Of Approved Pure Premium Rates
30.1%
% Inadequacy
30%
27.5%
21.8%
20%
11.2%
10%
3.1%
0%
1995
1996
1997
1998
1999
Policy Year
CLRS0901.PPT/crf/Irvine
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California Paid
Medical Loss Development Factors
Reported as of
3/98
3/99
3/00
Trended —
Selected
Age in
Months
3/97
27/15
1.598
1.659
1.748
1.804
1.875
1.954
39/29
1.187
1.207
1.221
1.242
1.271
1.288
51/39
1.086
1.093
1.111
1.128
1.136
1.153
3/01
Source: WCIRB of California.
CLRS0901.PPT/crf/Irvine
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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
CLRS0901.PPT/crf/Irvine
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Open Rating 1997 to 2000
Continued Heavy Price Competition
Premium Growth with Expanding Economy
Continued Declines in Frequency
Sharp Severity Increases
Inadequate Pure Premium Rates
Rapidly Deteriorating Industry Results
CLRS0901.PPT/crf/Irvine
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California Workers
Compensation Accident Year
Combined Loss And Expense Ratios
as of 12/31/2000
200%
161%
161%
147%
144%
Percentage of Earned
Premium
137%
125%
150%
106%
114%
93%
81%
100%
15%
11%
50%
68%
16%
12%
78%
20%
20%
22%
16%
15%
83%
21%
26%
24%
21%
96%
94%
22%
16%
14%
66%
24%
21%
22%
21%
18%
15%
12%
15%
84%
54%
95%
102%
113%
116%
101%
60%
0%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Accident Year
Losses
LAE
Other Expenses
CLRS0901.PPT/crf/Irvine
20
Open Rating 1997 to 2000
Continued Heavy Price Competition
Premium Growth with Expanding Economy
Continued Declines in Frequency
Sharp Severity Increases
Inadequate Pure Premium Rates
Rapidly Deteriorating Industry Results
Growing Reserve Deficiencies
CLRS0901.PPT/crf/Irvine
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Difference Between Estimated Ultimate
Losses And Reported Losses
As of 12/31/2000
Losses ( in billions)
$4.0
$2.8
$3.0
$2.0
$1.5
$0.7
$0.7
$0.6
$1.0
$0.1
$0.1
$0.2
$0.4
1996
1997
$0.0
19701979
19801989
19901994
1995
1998
1999
2000
Accident Year
CLRS0901.PPT/crf/Irvine
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Open Rating 1997 to 2000
Insurance Market
 Shifts through Withdrawals/Acquisitions/Insolvencies
 HMOs Leaving Market
 Very Low Reinsurance Rates
 High Capitalization & Investment Returns
CLRS0901.PPT/crf/Irvine
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Market Concentration Ratios
% Market Share
90%
20%
19%
60%
20%
17%
30%
0%
43%
47%
1994
1999
Calendar Year
Top 5 Insurers
Top 6th to 10th Insurers
Top 11th to 20th Insurers
CLRS0901.PPT/crf/Irvine
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Market Share By Type Of Insurer
% Market Share
100%
18%
9%
19%
75%
36%
50%
25%
0%
73%
45%
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.
CLRS0901.PPT/crf/Irvine
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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
CLRS0901.PPT/crf/Irvine
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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
CLRS0901.PPT/crf/Irvine
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