CAMAR FALL 2012 MEETING
Workers Compensation Update: A Little Information About a Lot of Topics
Tim Wisecarver, Presenter
October 10, 2012
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CAMAR FALL 2012 MEETING
Workers Compensation Update
• Program Outline
– Evaluation of Pricing Programs
• A Simple Method
• Illustrative Applications
– Large Loss Impacts on Rate Level Indications
• General Considerations
• Two Local Examples (Pennsylvania and Delaware)
– Large Deductible Business
• Brief Overview
• Data Reporting and Uses
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CAMAR FALL 2012 MEETING
Workers Compensation Update
• Program Outline (Continued)
– Claim Frequency
• General History
• Recent Experience
– Subclassification Design & Pricing
• Concepts & Statutory Requirements
• Practical Observations
– Employee Misclassification
• Employee vs. Independent Contractor
• Prevailing Approaches
• A Modest Suggestion
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Evaluation of Pricing Programs
• A Simple Method
– Partition Experience Data into “Participating” and
“Non-Participating” Groups
– Calculate Loss Ratios on Consistent Basis (Reported,
Ultimate, Other) for the Two Groups Before
Application of Pricing Program of Interest to
Participating Risks
– Compute Adjustment to Participating Group’s
Premium Necessary to Make the Two Group Loss
Ratios Equal
– Compare Indication to Adjustments Actually Granted
Under Program of Interest
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Evaluation of Pricing Programs
Pennsylvania Construction Classification Premium
Adjustment Program (PCCPAP) 1994 - 2008
Reported Loss Ratio, Participating Risks Before
PCCPAP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . 48.5
Reported Loss Ratio, Non-Participating Risks: . . 48.9
Indicated PCCPAP Adjustment: . . . . . . . . . . . . . . 0.76%
Average Actual PCCPAP Credit: . . . . . . . . . . . . . 12.24%
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Evaluation of Pricing Programs
Delaware Construction Classification Premium
Adjustment Program (DCCPAP) 1994 - 2008
Reported Loss Ratio, Participating Risks Before
PCCPAP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . 42.9
Reported Loss Ratio, Non-Participating Risks: . . 40.7
Indicated DCCPAP Adjustment: . . . . . . . . . . . . . -5.45%
Average Actual DCCPAP Credit: . . . . . . . . . . . . . 14.67%
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Evaluation of Pricing Programs
Pennsylvania Certified Safety Committee Program
(PCSCP) 1994 - 2008
Reported Loss Ratio, Participating Risks Before
PCSCP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.3
Reported Loss Ratio, Non-Participating Risks: . . 51.5
Indicated PCSCP Adjustment: . . . . . . . . . . . . . . .10.14%
Average Actual PCSCP Credit: . . . . . . . . . . . . . . . 4.97%
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Evaluation of Pricing Programs
Delaware Workplace Safety Program (DWSP) 1994 - 2008
Reported Loss Ratio, Participating Risks Before
DWSP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.8
Reported Loss Ratio, Non-Participating Risks: . . 33.1
Indicated DWSP Adjustment: . . . . . . . . . . . . . . . -5.17%
Average Actual DWSP Credit: . . . . . . . . . . . . . . .10.97%
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Evaluation of Pricing Programs
Pennsylvania Schedule Rating Plan (Credits)
(PSRP) 1996 - 2008
Reported Loss Ratio, Participating Risks Before
PSRP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48.0
Reported Loss Ratio, Non-Participating Risks: . . 52.5
Indicated PSRP Credit: . . . . . . . . . . . . . . . . . . . . . .8.59%
Average Actual PSRP Credit: . . . . . . . . . . . . . . . .21.63%
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Evaluation of Pricing Programs
Pennsylvania Schedule Rating Plan (Debits)
(PSRP) 1996 - 2008
Reported Loss Ratio, Participating Risks Before
PSRP Debits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.4
Reported Loss Ratio, Non-Participating Risks: . . 52.5
Indicated PSRP Debit: . . . . . . . . . . . . . . . . . . . . . 11.3%
Average Actual PSRP Debit: . . . . . . . . . . . . . . . . 18.0%
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Evaluation of Pricing Programs
Delaware Schedule Rating Plan (Credits)
(DSRP) 1994 - 2008
Reported Loss Ratio, Participating Risks Before
DSRP Credits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.2
Reported Loss Ratio, Non-Participating Risks: . . 34.2
Indicated DSRP Credit: . . . . . . . . . . . . . . . . . . . . . 5.74%
Average Actual DSRP Credit: . . . . . . . . . . . . . . . .24.31%
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Evaluation of Pricing Programs
Delaware Schedule Rating Plan (Debits)
(DSRP) 1994 - 2008
Reported Loss Ratio, Participating Risks Before
DSRP Debits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.2
Reported Loss Ratio, Non-Participating Risks: . . 34.2
Indicated DSRP Debit: . . . . . . . . . . . . . . . . . . . . . 26.55%
Average Actual DSRP Debit: . . . . . . . . . . . . . . . . 17.28%
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Large Loss Impacts on Rate Level Indications
• General Considerations
– Size of Market
– Prevalence and Magnitude of Upper-End Claims
• NCCI
– Claim Limitations Selected @ 1% of Experience Period
Expected Losses
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Large Loss Impacts on Rate Level Indications
• Pennsylvania
– Market in Excess of $2 Billion Annual Premium
– 3-Year Experience Period Expected Losses ~$5 Billion
– Extreme Known Claims ~ $17 Million
– No Loss Limitations Applied for Overall Rate Level
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Large Loss Impacts on Rate Level Indications
• Delaware
– Market ~$125 Million Annual Premium
– 4-Year Experience Period Expected Losses ~$384 Million
– Extreme Known Claims Over $8 Million
– Sliding Scale of Loss Limitations Applied
– December 1, 2012 Loss Limit ~$2.2 Million
– Excess Loss Provision ~10% of Loss Costs
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Large Deductible Business
• “Large”- Retention per Claim or Accident of
$100,000 or more
• Market Inception in Early 1990’s
• By 2000, Pennsylvania Market Share for Large
Deductibles Was ~31% on a Gross Basis
• By 2009, Pennsylvania Market Share for Large
Deductibles Was ~37% on a Gross Basis
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Large Deductible Business
• Pennsylvania Data Reporting and Uses
– Financial Data
» Premiums and Losses
» Gross and Net
» Net Data is Used in Reconciliations with Carriers’
Annual Statements
» Large Deductible Data is Excluded from Overall
Loss Cost Indication Analysis
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Large Deductible Business
• Pennsylvania Data Reporting and Uses
– Unit Statistical Data
» Exposures, Premiums, Losses
» Losses on a First-Dollar Basis
» Used in Class Ratemaking, Size-of-Loss Analyses,
Experience Rating
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Claim Frequency
• General History
– Countrywide Trends Have Been Favorable for
Extended Periods of Time
– Pennsylvania Claim Frequencies* Declined Every Year
Since Late 1980’s
– Often Substantially, or Even Entirely, Offsetting
Increases in Claim Severities
* Indemnity Claims Per Unit of On-Level Expected Loss
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Claim Frequency
• Recent Experience
– In 2011 NCCI Reported (2010 Data) Increases in Claim
Frequencies
– PY 2009 Delaware Showed an Increase of ~1.5% After
Historical 8.6% Rate of Decline
– PY 2009 Pennsylvania Showed a 3.1% Decrease
– 2009-2010 California Showed 9.1% Increase
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Claim Frequency
• (More) Recent Experience
– In 2012 NCCI Reported (2011 Data) Return To Claim
Frequency Declines
– PY 2010 Delaware Showed a Decrease of ~4.1%
– PY 2010 Pennsylvania Still Under Review
– 2010-2011 California Estimates a 0.3% Decrease
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Subclassification Design & Pricing
• Concepts & Statutory Requirements
– DCO (Rating Bureau) Establishes “Uniform
Classification Plan”
– Carriers May Partition Uniform Classes for
Marketing/Pricing Purposes
– Data Reporting/Collection Must Support Uniform
Classification Plan
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Subclassification Design & Pricing
• Practical Observations
– Pennsylvania Authorization for Subclassifications
Dates from 1993
– Meaningful Activity Took Place in Early Years After
Authorization (Concurrent with Change to
Competitive Rating)
– Creation of New Subclassifications Has Slowed
Significantly
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Subclassification Design & Pricing
• Practical Observations
– Pennsylvania Subclassifications Almost Universally Carry
LOWER Loss Costs and Rates Than Their “Parent” Uniform
Classification
– In Concept, Business Remaining in the Uniform Classification
Would Bear Higher Loss Costs Than the Subclassification and
the Original Uniform Classification
– In Practice, Residuals of Uniform Classifications Formed by
Creation of Subclassifications Carry the “Parent” Uniform
Classification’s Rating Values
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Employee Misclassification
• Employee vs. Independent Contractor
– Various Estimates Have Placed Extent of
Misclassification at Substantial Levels
» Massachusetts – 4.5% to 8.9% of workersa
5.4% to 11.4% in constructiona
a
- The Social and Economic Costs of Employee Misclassification in Construction – Construction Policy Research Center, Labor and
Worklife Program, Harvard Law School and Harvard School of Public Health – December 17, 2004
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Employee Misclassification
• Employee vs. Independent Contractor
– Various Estimates Have Placed Extent of
Misclassification at Substantial Levels
» Maine – 11% of workers in constructionb
b
- The Social and Economic Costs of Employee Misclassification in the Maine Construction Industry – Construction Policy Research
Center, Labor and Worklife Program, Harvard Law School and Harvard School of Public Health – April 25, 2005
» Pennsylvania – 9% of workersc
c
- Pennsylvania Compensation Rating Bureau, April 28, 2008
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Employee Misclassification
• Prevailing Approaches
– Claim Adjudication
» Right of Direction and Control of Injured
Individual(s)
– Premium Obligations
» Administrative or Statutory “Lists” of Criteria or
Tests to be Met to Qualify as Independent
Contractor (Default is Employee)
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Employee Misclassification
• Key Observations
– Some Test Criteria Are Not Simple to Apply or
Interpret
– To Varying Degrees, Results of Popular Criteria for
Independent Contractor Status Can Vary Over Time
for the Same Individual, Even While Performing
Services for the Same Entity
– Determinations of Benefit Eligibility and Premium
Obligations are Necessarily Made at Different Times
and Based on Different Levels of Detail Information
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CAMAR FALL 2012 MEETING
Workers Compensation Update
Employee Misclassification
• A Humble Suggestion
– (All) Persons Performing Services Falling Within the Scope of
Normal Business Operations of the Entity Served Should Be
Mandatorily Subject to Workers Compensation Coverage
– Individuals Purchasing Their Own WC Coverage Would Not Be
Subject to Inclusion on the Policy of an Entity for Which They
Were Performing Services
– Absent Evidence of WC Coverage Maintained by the Individual
in Question, Persons Performing Services for Another Business
Entity Would Be Subject to Inclusion on the Policy of Such Entity
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CAMAR FALL 2012 MEETING
Workers Compensation Update
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