Legal’s Caveats
•keep comments brief and objective
•limit comments to industry in broad sense, not carrier practices
•no comments that can be interpreted as suggesting any practices
•no discussion or comments regarding carrier practices
WORKERS COMPENSATION
- CURRENT ISSUES (SESSION WC-4)
Barry Lipton, FCAS, MAAA
– NCCI
Nancy Treitel, FCAS, MAAA
– Liberty Mutual
Casualty Actuarial Society
2004 Seminar on Ratemaking
New Orleans, Louisiana
March 10-11, 2005
WC Premium Growth Leads Other Lines
Net Written Premium by Line
Line of Business
2002
2003
2004p
Change
Personal Auto
$
139.6 B $
151.0 B $
158.0 B
4.7%
Homeowners
$
40.0 B $
47.7 B $
51.5 B
7.9%
Workers Compensation
$
36.5 B $
41.6 B $
47.4 B
14.1%
Other Liability (Incl Prod Liab)
$
30.9 B $
38.7 B $
44.1 B
13.9%
Commercial Multiple Peril
$
25.4 B $
27.4 B $
28.3 B
3.5%
Commercial Auto
$
24.6 B $
25.4 B $
25.5 B
0.3%
Fire & Allied Lines (Incl EQ)
$
15.4 B $
17.6 B $
17.9 B
1.9%
All Other Lines
$
66.4 B $
66.0 B $
62.5 B
-5.3%
Total All Lines
$ 378.9 B $ 415.3 B $ 435.2 B
4.8%
Source: Best’s Aggregates & Averages, Review/Preview
(Includes state funds for: AZ, CA, ID, LA, MD, ME, MN, OR, RI, TX, and UT)
2
© 2005 National Council on Compensation Insurance, Inc.
Combined Ratios Improved in 2003
Net Combined Ratios
Line of Business
2002
2003
2004p
Personal Auto
104%
98%
93%
Homeowners
109%
98%
101%
Workers Compensation
112%
108%
107%
Other Liability (Incl Prod Liab)
137%
116%
111%
Commercial Multiple Peril
105%
100%
99%
Commercial Auto
103%
95%
93%
89%
79%
85%
All Other
105%
95%
86%
Reinsurance Co's
126%
111%
105%
107%
100%
98%
Fire & Allied Lines (Incl EQ)
Total All Lines
Source: Best’s Aggregates & Averages, Review/Preview
(Includes state funds for: AZ, CA, ID, LA, MD, ME, MN, OR, RI, TX, and UT)
3
© 2005 National Council on Compensation Insurance, Inc.
Speaker Notes
Return on Equity for Total P&C Appears
In Line With Other Industries
Estimated 2004 After-Tax ROE for Public Companies
16%
14.5%
14.5%
14%
12%
11.0%
10%
8.5%
8.0%
7.5%
Auto Mfg.
(Big 3)
Large Banks
8%
6%
4%
2%
0%
Drug
Retail
Life Ins.
P/C Ins.
(Proj. ROS)
Source: Value-Line, latest estimates as of January 21, 2005. P/C projected 2004 ROS from Best’s Review/Preview.
4
© 2005 National Council on Compensation Insurance, Inc.
Workers Compensation Premium Volume
Continues to Grow
Workers Compensation Net Written Premium
$ Billions
$ Trillions
60
5.0
47.4
50
41.6
40
4.0
36.5
32.7
30
29.5
27.7
26.5
25.7
24.6
28.1
3.0
31.4
2.0
20
1.0
10
0
0.0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003 2004p
Calendar Year
WC Net Written Premium ($ B)
Private Nonfarm Wages and Salaries ($ T)
Source: Best’s Aggregates & Averages, Review/Preview; Economy.com
5
© 2005 National Council on Compensation Insurance, Inc.
Large Deductible Growth Continues
Calendar Year WC Earned Premiums & Premium Equivalents
NCCI States
$ Billions
33.7
35
28.9
27.7
30
23.1
25
20 18.6
20.0
25.3
25.2
21.2 21.7 20.1 20.0
20.8
18.9
15
10
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
Estimated Large Deductible premium credit
Large Deductible Net premium
Net Earned Premium excluding Large Deductible policies
Source: NCCI Large Deductible study
6
© 2005 National Council on Compensation Insurance, Inc.
Calendar Year WC Loss Ratio Showing
Slight Improvement
Workers Compensation Net Loss Ratios
Percent
1.9 % Due to
September 11th.
100
90
80
79
74
73
68
70
61
60
57
58
58
74
72
71
62
50
40
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004p
Calendar Year
Source: Best’s Aggregates & Averages, Review/Preview; 9-11 est. from NCCI
7
© 2005 National Council on Compensation Insurance, Inc.
WC Loss Ratios - Impact of Large
Deductible Policies
First
Dollar
Loss
Expense
Premium
Loss Ratio
Expense Ratio
Large
Deductible
$ 75
$ 25
$100
$ 15
$ 23
$ 38
75%
25%
40%
60%
8
WC LAE Ratios to Premium Are
Leveling Off
WC Ratio of Loss Adjustment Expense to Net Earned Premiums
Percent
20
16.2
15
14.5
13.1
12.8
1994
1995
16.2
16.0
14.2
13.5
13.1
2001
2002
14.1
13.4
10
5
0
1996
1997
1998
1999
2000
2003
2004p
Calendar Year
Source: Best’s Aggregates & Averages, Review/Preview
9
© 2005 National Council on Compensation Insurance, Inc.
WC LAE To Loss Ratios Remain
Relatively Unchanged
WC Ratio of Loss Adjustment Expense to Losses
Percent
30
25.2
25
21.7
24.6
26.1
23.8
22.5
21.7
19.6
20
17.1
17.7
2001
2002
18.7
15
10
5
0
1994
1995
1996
1997
1998
1999
2000
2003
2004p
Calendar Year
Source: Best’s Aggregates & Averages, Review/Preview
10
© 2005 National Council on Compensation Insurance, Inc.
WC Expense Ratios Showed Little
Movement in 2004
WC Ratio of Underwriting Expenses to NWP (Excl Divs)
Percent
30
24.9
25
21.0
25.6
26.3
27.5
25.8
25.0
22.7
22.5
21.1
20.8
2003
2004p
20
15
10
5
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
Calendar Year
Source: Best’s Aggregates & Averages, Review/Preview
11
© 2005 National Council on Compensation Insurance, Inc.
WC Dividend Ratios Are Flattening
WC Ratio of Policyholder Dividends to Net Earned Premium
Percent
7.5
7.0
6.9
6.6
6.7
6.0
5.4
5.4
5.0
3.5
2.6
2.5
1.4
1.4
2003
2004p
0.0
1994
1995
1996
1997
1998
1999
2000
2001
2002
Calendar Year
Source: Best’s Aggregates & Averages, Review/Preview
12
© 2005 National Council on Compensation Insurance, Inc.
Workers Compensation Calendar Year
Combined Ratio Declined in 2004
Workers Compensation Combined Ratios
1.9% Due to
September 11th
Combined Ratio
140
120
102
1994
100
102
104
1995
1996
1997
111
119
121
121
112
108
107
100
80
60
40
20
0
Loss
LAE
1998 1999 2000 2001 2002 2003
Calendar Year
Underwriting Expense
Dividends
2004p
Source: Best’s Aggregates & Averages, Review/Preview
13
© 2005 National Council on Compensation Insurance, Inc.
Speaker note updated
WC Investment Returns Remain Low
WC Ratio of Investment Gain and Other
Income to Premium
Percent
25
22.4
21.9
20
17.7
18.6
21.0
18.6
15.1
15
12.8
11.8
10.1
10.0
10
5
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003 2004p
Calendar Year
p Preliminary
Source for 1994–2003: A.M. Best Aggregates & Averages; 2004p: NCCI estimate based on data in Best’s Review/Preview
Investment gain includes investment income on insurance transactions and realized capital gains.
14
© 2005 National Council on Compensation Insurance, Inc.
WC Results in 2003 Improved Over 2002
WC Pretax Operating Gain/Loss Ratio
Percent
25
18.2
20
15
16.2
18.2
13.5
10
7.4
3.9
5
1.9
0.2
3.4
0
-0.4
-5
-10
-8.1
-15
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004p
Calendar Year
p Preliminary
Source for 1994–2003: A.M. Best Aggregates & Averages; 2004p: NCCI estimate based on data in Best’s Review/Preview
Investment gain includes investment income on insurance transactions and realized capital gains.
15
© 2005 National Council on Compensation Insurance, Inc.
WC Calendar Year Combined Ratios
Private Carriers Compared to
Private Carriers + A.M. Best State Funds
Combined Ratio
130
121 122 121
119 118
120
115
111 112
111
110
108
102
101
100 100
101 102
100
110
108
107 107
104
97
90
1994
1995
1996
1997
1998
1999
PC
2000
2001
2002
2003 2004p
PC+SF
p Preliminary (State Funds include: AZ, CA, ID, LA, MD, ME, MN, OR, RI, TX, and UT)
CY 1994-2003 & PC+SF 2004p: Best’s Aggregates & Averages, Review/Preview;
PC CY 2004p: NCCI estimate
16
Includes dividends to policyholders.
© 2005 National Council on Compensation Insurance, Inc.
Combined Ratio in AY 2004 Continued
to Improve
WC Calendar Year vs. Ultimate Accident Year
Countrywide—Net—Private Carriers
Combined Ratio
140
137
133
129
130
119
120
115
110
97 97
101 100
118
111
110
107
108
106
101
100
125
122
107
101
101
98
90
1994
1995
1996
1997
1998
1999
Calendar Year
2000
2001
2002
2003 2004p
Accident Year
p Preliminary
CY 1994-2003: Best’s Aggregates & Averages; AY 1994-2003: NCCI; CY & AY 2004p: NCCI estimates
Accident year data is evaluated as of 12/31/2003 and developed to ultimate.
17
© 2005 National Council on Compensation Insurance, Inc.
Includes dividends to policyholders.
What Have Been The Key Factors
Impacting Workers Compensation Results?
• Reserve Levels
• Pricing
• Loss Severity Trends (especially Medical)
• Frequency Trends
• Investments
18
© 2005 National Council on Compensation Insurance, Inc.
Workers Compensation Reserve
Strengthening Continues
Dollar Amount of Reserve Adjustments on Prior AYs
Countrywide—Net—Private Carriers
$ Billions
5
3.2
3.2
2.8
3
2.2
0.6
1
2.0
0.4
-1
-0.4
-1.8
-3
-2.0
-2.7
-1.4
-2.2
-5
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Calendar Year
Loss and LAE reserves.
19
© 2005 National Council on Compensation Insurance, Inc.
Speaker Notes
Workers Compensation Accident Year Loss
& LAE Ratios Developed Upward
Accident Year Loss Ratios Including LAE
Countrywide—Net—Private Carriers
Percent
100
98
94
95
90
92
At First Report
As of 12/2003
84
85
84
85
83
83
81
80
80
79
78
77
77
75 75
75
73
69
70
66
65
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Accident Year
Reported Loss and LAE reserves from Schedule P.
20
© 2005 National Council on Compensation Insurance, Inc.
WC Changing Development Patterns
1st to 5th Development
Index to 1995
1.15
1.10
1.05
1.00
0.95
0.90
Indemnity Paid
1995
Indemnity
Paid+Case
1996
Medical Paid
1997
Accident Year Development. First is at 12 months.
Source: NCCI's Loss Development Exhibits.
21
1998
Medical
Paid+Case
1999
How Are Final WC Premiums
Determined?
ADVISORY ORGANIZATION
INSURANCE COMPANY
Advisory Loss Costs
Final Rate Determination:
Assigned Risk Rates
–
Expense Multiplier
Experience Rating Values
–
Loss Cost Deviations
Experience Mods
Rating Plans and
Classifications
Individual Risk Modifications:
–
Schedule Rating
–
Retrospective Rating
22
© 2005 National Council on Compensation Insurance, Inc.
Speaker note updated
Average Approved Bureau
Rate/Loss Cost Still Decreasing
History of Average WC Bureau Rate/Loss Cost Level Changes
Percent
15
Cumulative 2000-2003
12.1
+17.1%
10.0
10
7.4
Cumulative 1994-1999
6.6
5
2004-2005
4.9
-27.8%
3.5
2.9
Cumulative
-6.9%
1.2
0
-1.0
-5
Cumulative 1990-1993
-2.6
-3.2
+36.3%
-5.4
-6.0
-6.4
-6.0
-8.0
-10
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004 2005*
Calendar Year
* States approved through 03/01/2005
Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization
23
© 2005 National Council on Compensation Insurance, Inc.
Speaker note updated
Average Approved Bureau Rate/Loss
All States vs All States Excluding California
Percent
Cumulative 2000-2004
+10.1% All States
+ 1.4% All States Ex CA 4.9
8
6
4
6.6
3.5
2
1.8
1.2
0.5
0.0
0
-0.1
-2
-0.3
-0.8
-1.0
-4
-6
-6.0
-8
2000
2001
2002
2003
2004
2005
Calendar Year
* States approved through 03/01/2004
Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization
24
© 2005 National Council on Compensation Insurance, Inc.
Impact of Discounting on WC
Premium
NCCI States—Private Carriers
Percent
5
0
-1.2
-5
-4.0
-10
-6.9
-7.1
-7.5
-7.0
-8.5
-10.4
-15
-14.2
-14.6
-17.7
-20
-19.2
-22.6
-25
1990
1991
1992
1993
1994
1995
1996
1997
1998
-23.2
1999
2000
2001
2002
2003
Policy Year
Rate/Loss Cost Departure
Schedule Rating
Dividends
Based on data through 12/31/2003 for the states where NCCI provides ratemaking services
NCCI benchmark level includes no provision for profit and contingency
Dividend ratios are based on calendar year statistics
25
© 2005 National Council on Compensation Insurance, Inc.
What are Some Primary Components
and Factors of WC Premiums?
Loss Cost = f (customer, company,
and/or industry losses,
inflation, interest rate, medical
technology, economy, etc.)
+ Risk Charge
+ Expenses
+ Tax
Premium
26
The Rate of Change in Workers
Compensation Indemnity Claim Costs
Is Moderating
Indemnity
Claim Cost (000s)
Lost–Time Claims
19
+4.6%
17
15
Annual Change 1991–1995:
Annual Change 1996–2003:
+0.3%
+7.6%
+9.0%
+11.2%
+9.9%
13
+8.5%
1995
1996
2001
2002
$17.2
$10.3
1994
$16.5
$9.7
1993
$16.1
$9.6
1992
$13.3
$9.1
1991
$11.1
$9.4
7
$9.7
9
+7.7%
$12.1
+1.0% -3.1%
+4.9% +1.7%
-2.8%
+5.9%
$14.7
11
+2.4%
5
1997
1998
1999
2000
2003
Accident Year
Based on data through 12/31/2003, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
27
© 2005 National Council on Compensation Insurance, Inc.
Workers Compensation Indemnity
Severity Is Outpacing Wage Inflation
Lost–Time Claims
Percent
Change
12
11.2
9.9
10
9.0
8.5
7.7
8
5.9
6
4.7
4.0
4
2
2.8
4.9
4.2
4.6
4.2
2.8
3.7
2.2 2.4
1.7
2.0
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004f
Year
Change in CPS Wage
Change in Indemnity Cost per Lost-Time Claim
Source: Calendar Year Current Population Survey, Economy.com; Accident Year Indemnity Severity, NCCI
Based on data through 12/31/2003, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
28
© 2005 National Council on Compensation Insurance, Inc.
Workers Compensation Medical Claim
Cost Trends Continue to Climb
Medical
Claim Cost (000s)
Lost–Time Claims
+10.9%
19
17
Annual Change 1991–1995:
Annual Change 1996–2003:
+8.4%
+3.9%
+9.6%
+11.9%
15
+8.5%
1996
1997
$13.9
1995
$12.8
1994
$11.6
1993
$10.8
$8.0
1992
$9.1
$8.2
1991
+9.0%
$8.7
$8.0
7
+6.8% +1.3% -2.1%
$9.8
9
+7.4%
+5.1%
$16.8
11
$15.5
+7.6%
+10.1%
$18.7
+9.9%
13
5
1998
1999
2000
2001
2002
2003
Accident Year
Based on data through 12/31/2003, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
29
© 2005 National Council on Compensation Insurance, Inc.
Workers Compensation Medical
Severity Has Been Growing Faster
Than the Medical CPI
Percent
Change
Lost–Time Claims
14
11.9
12
10.9
10.1
9.9
10
8.5
7.4
8
6
4.5
5.1
3.5
4
8.4
7.6
2.8
3.2
3.5
4.1
4.6
4.7
4.0
4.5
2
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004f
Year
Change in Medical CPI
Change in Medical Cost per Lost-Time Claim
Source: Calendar Year Current Population Survey, Economy.com; Accident Year medical severity, NCCI
Based on data through 12/31/2003, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
30
© 2005 National Council on Compensation Insurance, Inc.
WC Medical Losses Eclipsed More
Than Half of Total WC Losses
2003
NCCI States—Private Carriers-All Claims
Medical: 55.2%
Indemnity:
Average Claim Cost
per Lost-Time Claim (000s)
40
35
30
36
1991
32
Medical: 47.9%
Indemnity: 52.1%
18
18
17
33
29
26
25
20
44.8%
18
19
22
20
24
15
10
5
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Indemnity
Accident Year
Medical
Based on data through 12/31/03, developed to ultimate.
Based on the states where NCCI provides ratemaking services.
Excludes the effects of deductible policies.
31
© 2005 National Council on Compensation Insurance, Inc.
Rising Medical Costs – Can The
Economy Sustain Double Digit
Inflation
• Workers Compensation medical makes up 1-2% of
total medical services
• Total medical services were 17% of GDP in 2004
• Total medical services have also been growing at
much faster rate than other parts of the economy
(8.4% vs 4.8%)
• What are implications to GDP if medical services
were to grow at 10% while rest of GDP grew at 4%
32
Implications for Medical Trends
2034 GDP
All Other
2024 GDP
2004 GDP
49%
Medical
Services
17%
All Other
Medical
Services
10%
Medical
Services
90%
51%
All Other
83%
Medical services as % of GDP=17%
Medical services growth=10%, GDP Growth=4.0%
Medical Services include Medical Care, Drug Preparations and Sundries, and Ophthalmic Products and Orthopedic Appliances
33
© 2005 National Council on Compensation Insurance, Inc.
NCCI Prescription Drug Study
• The growth in WC prescription drugs' share of total medical
costs continues:
– Accident Year 1997
– Accident Year 2002
10.1%
12.1%
• Main driver of increase in WC prescription costs:
–
–
From 1997 to 2001: Utilization increases
In 2002: Rx price increases had slightly larger impact
than utilization increases
• Prescription drug fee schedules exist in 28 states —all
reimburse using average wholesale prices (AWP)
• Using Pharmacy Benefit Managers (PBMs) looks promising
as a cost containment strategy. Other factors also need to
be assessed and addressed.
34
© 2005 National Council on Compensation Insurance, Inc.
The Impact of Inflation is More
Sensitive on Excess Policies
Year 1
Year 2
Change
Gross Loss
$360,000
$385,200
7%
Deductible
$250,000
$250,000
-
Excess Loss
$110,000
$135,200
23%
35
With Medical Technology,
How Big Can a WC Claim Become?
•
•
•
•
•
Consider a 25-year old quadriplegic
Indemnity benefits of $23,500 a year
24-hour attendant care costs of $135,000 a year
Other medical costs of $72,500 a year
These costs continue until death
Medical Inflation Rate
Age at
Death
5%
7%
9%
45
$7
$8
$8
60
$16
$20
$27
75
$33
$49
$82
90
$64
$118
$266
$ amounts are in millions.
Attendant care assumed to increase at 3% per year
36
Workers Compensation Lost-Time Claim
Frequency Continues to Fall
Frequency per 100 Workers (Lost–Time Claims)
Percent Change
Cumulative Change of –42.0%
(1990-2003)
2
0.5
0.3
0
-2
-2.3
-4
-4.2
-3.7
-3.9
-4.4
-4.5
-4.2
-4.5
-6
-6.3
-6.5
-8
-10
1991
1992
-9.2
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Accident Year
Based on data through 12/31/2003, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
37
© 2005 National Council on Compensation Insurance, Inc.
NCCI’s Frequency Study Update
• The continued decline in frequency remains a bright
spot for workers, employers, and their insurers
• The claim frequency decline is most pronounced for
smaller claims, causing indemnity and medical severity
trends to be higher than those of solely prices and
utilization
• The decline in claim frequency spanned occupations,
claim types, regions, employer size, use of large
deductibles, and experience modification factors
• The significant rise in indemnity and medical costs per
claim diminishes the effect of the favorable reduction in
claim frequency on overall claim costs
38
© 2005 National Council on Compensation Insurance, Inc.
The Annual Change in Lost-Time
Claim Costs per Worker Continued to
Increase in 2003
Percent Change
Cost Per Worker
15
9.4
10
7.3
7.1
5.1
3.8
5
0
3.7
3.4
1.8
0.9
-0.8
-5
-3.2
-5.5
-10
-11.5
-15
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Accident Year
Based on data through 12/31/2003, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
39
© 2005 National Council on Compensation Insurance, Inc.
What Are Today’s Key Issues in
Workers Compensation?
•
•
•
•
WC Medical Inflation
Reserve Levels
Growth in Residual Markets
Expiration of Terrorism Risk Insurance Act
(TRIA) 12/31/2005
• Legislative Issues
• Developments in Ratemaking
40
© 2005 National Council on Compensation Insurance, Inc.
Workers Compensation Residual
Market Premium Volume
NCCI-Serviced Workers Compensation Residual Market Pools
$ Billions
as of September 30, 2004
6
4.8
5
4.4
4.0
4
3.5
2.6
3
2.8
2.1
2
4.1
$1.6B
3.1
$1.4B
$1.1B
2.0
$0.6B
1.2
1.0
0.6
1
0.3 0.3 0.4
0
**
04
20 *
*
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
*
92
19
*
91
19
*
90
19
*
89
19
*
88
19
87
19
86
19
85
19
* Excludes Maine Residual Market Pool
** Incomplete Policy Year Projected to Ultimate
Policy Year
41
© 2005 National Council on Compensation Insurance, Inc.
Workers Compensation Residual
Market Shares Continue to Rise
Workers Compensation Insurance Plan States*
Premium as a Percent of Direct Written Premium
Percent
30
29 28
26
24
25
24
22
20
16
18 17
17
15
10
11
9
11
12
13
8
4
5
6
3
3
0
p
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
19
85
19
p Preliminary
* NCCI Plan states plus DE, IN, MA, MI, NJ, NC
Calendar Year
42
© 2005 National Council on Compensation Insurance, Inc.
Speaker Note
Workers Compensation Residual
Market Combined Ratios
NCCI-Serviced Workers Compensation Residual Market Pools
Percent
As of September 30, 2004
200
180
177
165
169 166
159
160
143
140
120
127
115
112
103
100
97 94 99
119 118
114 115 113 112
103
80
**
04
20 * *
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19 *
92
19 *
91
19 *
90
19 *
89
19 *
88
19
87
19
86
19
85
19
* Excludes Maine Residual Market Pool
** Incomplete Policy Year Projected to Ultimate
Policy Year
43
© 2005 National Council on Compensation Insurance, Inc.
WC Residual Market Underwriting
Results Continue to Decline
NCCI-Serviced Workers Compensation Residual Market Pools
As of September 30, 2004
$ Millions
500
81
118
15
0
-14 -48 -52 -63 -84
-139
-500
-164 -180 -191
-558
-1,000
-1,500
-2,000
-933
-1,192
-1,368
-1,690
-1,784
-1,883
-2,065
-2,500
**
04
20 * *
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19 *
92
19 *
91
19 *
90
19 *
89
19 *
88
19
87
19
86
19
85
19
* Excludes Maine Residual Market Pool
** Incomplete Policy Year Projected to Ultimate
Policy Year
44
© 2005 National Council on Compensation Insurance, Inc.
Unique Challenges of Workers
Compensation and Terrorism
Coverage
• Coverage mandated by law, exclusions are not possible
• Benefits are defined by law, limits aren’t possible
• Risks that aren’t written voluntarily will be backed by the
entire market through the involuntary pool
• Terrorism Risk Insurance Act (TRIA) expires 12/31/2005
– Government backstop goes away, unless Congress
renews
– Any policy effective after 1/1/2005 has exposure
– Notification endorsement in the event of TRIA’s
expiration
• Congressional Budget Office Report
45
© 2005 National Council on Compensation Insurance, Inc.
When Does TRIA Make a Difference?
• TRIA’s direct financial impact is limited to
infrequent extreme events
• TRIA is not triggered under approximately 98% of
the modeled scenarios
• TRIA enables the P&C market to function
effectively with minimal financial exposure to
taxpayer funds
46
© 2005 National Council on Compensation Insurance, Inc.
Under Most Scenarios TRIA Is
Dormant But When TRIA Is
Triggered It Is Vital
P&C U/W Loss With and Without TRIA Support
U/W Loss ($ B)
250
68%
200
150
Total Loss as % of P&C
Surplus
100
20%
12%
50
2%
2%
4%
1/20
1/25
3/100
6%
0
9/10
3/4
1/2
1/4
1/50
1/100
1/500
1/1000
Chance of an Event
Industry Loss with TRIA
Federal Contribution
Excess of TRIA Limit
Source: EQECAT, NCCI
47
© 2005 National Council on Compensation Insurance, Inc.
Speaker notes TBD
Legislative Update
Issues and Trends
2004 Session Overview
• Fairly active session
• More than 85 enacted
• Many proposals for benefit increases, but few
enacted
• Workers Compensation high on the radar for
governors as they compete to attract business
48
Speaker notes TBD
Legislative Update
Issues and Trends
2004 Key Themes
• Medical cost controls – physician fee
schedules, hospital schedules
• Expanded presumption of compensability for
safety workers and emergency responders
• Medical Privacy
• Indemnity benefit increases
• Attorney fees
49
Speaker notes TBD
Include Nancy’s portion
Impacts filed and approved
Legislative Update
2004 Key Enacted Legislation
• California
− SB 899: major reform effort
• Tennessee
− HB 3531: numerous benefit changes resulting in –6.3%
impact
− Medical fee schedule to be implemented effective in 2005
• Vermont
− H-632: several definitional changes and administrative
modifications resulting in a –1.2% impact
− Medical fee schedule to be implemented effective in 2005
50
Speaker notes TBD
Legislative Update
Include Nancy’s portion
Impacts filed and approved
2004 Key Enacted Legislation (cont’d)
• Iowa
− HF 2581: changes use of loss of earnings capacity,
apportionment for 2nd injuries, resulting in a –2.6% impact
• Nebraska, Florida, Maryland, South Dakota, Texas
− Changes in medical fee schedules
− Adopting most recent Medicare RBRVS
51
Speaker notes TBD
Legislative Update
Issues and Trends
2005 Emerging Themes
• Containing Medical Costs
– Employer vs Employee Choice of Physician
– Medical treatment networks, managed care
– Medical Fee Schedules
– Treatment guidelines
•
•
•
•
Indemnity Benefit Increases
Second Injury Funds
OK and TX major reform initiatives
WV marketplace to allow private carriers
52
Developments in Ratemaking
Expanded Data Reporting
• Large Loss Call
• Expansion of Unit Statistical Plan to 10
reports
New Ratemaking Procedures and Methods
• Aggregate Ratemaking
• Class Ratemaking Re-engineering
• Retrospective Rating
53
© 2005 National Council on Compensation Insurance, Inc.
Ratemaking Procedures
Aggregate Ratemaking
• Large Loss Procedure
• Catastrophe Provision
• Implemented in 2004
(with filings effective 1/1/2005 and after)
• Revamped Econometric Trending Model Underway
Class Ratemaking Re-engineering
•
•
•
•
Loss Development by Body Part
Large Loss Treatment
Credibility Methodology
Analyses/Projects Currently Underway
54
© 2005 National Council on Compensation Insurance, Inc.
Ratemaking Procedures
(continued)
Retrospective Rating
• New ELF procedure
• Catastrophe Provision
• Implemented During 2004
(with filings effective 1/1/2005 and after)
55
© 2005 National Council on Compensation Insurance, Inc.
Workers Compensation
Key Issues for the Future
• How will the industry deal with terrorism exposure? And will
the government renew TRIA?
• Where are severity trends headed – will they accelerate or
moderate?
• Will written premiums continue to increase?
• What impact will changes in the economy have, especially
on frequency?
• What impact will reserve deficiencies have on results?
• Will potential threats to rollback reforms or expand benefits
succeed?
• Where are investment returns headed?
56
WORKERS COMPENSATION
- CURRENT ISSUES (SESSION WC-4)
Q&A