Terrorism Ratemaking Methods for
Workers Compensation
2004 CAS Ratemaking Seminar
Jeff Eddinger
NCCI
March 11, 2004
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Impact of 9/11 on Workers Compensation
Initial WC Loss Estimates (6,000 deaths)
Morgan Stanley:
Tillinghast:
$3 billion
$3 billion–$5 billion
Current NCCI WC Loss Estimates (3,047 deaths / 2,250 injuries)
Self-insured losses
Losses not covered by WC
Fatalities w/o dependents
15% (includes NY Firefighters/PD)
5%
20% (lump-sum $50k payment per person)
Ultimate Direct Losses
$1.3 B–$2.0 B
Ultimate Net Losses
$0.3 B–$1.2 B
Impact on Net Acc Yr Combined Ratio
1%–4%
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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 voluntary market through the involuntary pool
2
Unique Challenges of Terrorism Ratemaking
•
Terrorism is a relatively new peril and the future level
of losses is very uncertain
•
Lack of historical data precludes the use of traditional
ratemaking methodologies
•
Because the losses result from intentionally
destructive human behavior, both frequency and
severity are difficult to estimate
•
Judgment of experts will play an important role in
pricing of coverage
3
Issues Associated with TRIA
• TRIA does not address every substantive issue
• No guidance on how insurers should allocate
multiline losses with respect to insurer retention
•
Not clear how Treasury will pay losses for long-tail
lines like Workers Compensation
•
State law requires Workers Compensation policies
to cover entire statutory liability while TRIA provides
that insurers are not responsible for losses over
$100 Billion
4
Examples of Possible Nontraditional Ratemaking
Approaches
• Probability of ruin approach
• Probable Maximum Loss approach
• Consider the cost of funding terrorism through
reinsurance or other mechanisms
•
Catastrophe modeling
5
Catastrophe Modeling
• Windstorm models have existed for many years
• These models have evolved considerably since
Hurricane Andrew in 1992
• These models have become an extremely valuable
tool in Property / Casualty ratemaking
•
Terrorism modeling is still relatively new
6
Terrorism Modeling Issues
• There is relatively little data available for terrorism
• Regulatory scrutiny – “black box”
• There may be many models which produce a wide
range of results
•
Because of the cost associated with developing a
model, modelers must be able to protect the
confidentiality of their work
• Rely heavily on judgment
7
NCCI’s Terrorism Ratemaking Approach
• NCCI partnered with EQECAT, an Oakland, CA firm
with a strong track record in catastrophe modeling
• EQECAT is a subsidiary of ABS consulting, one of
the largest risk management firms who has been
assessing terrorist threats for many years
• Terrorism was modeled at the local level, peril by
peril
• Provisional nationwide assessment of frequency
done by EQECAT with outside expert input
•
Scenarios aggregated to get statewide expected
losses
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Perils Modeled
•
•
•
•
•
Blasts
Chemical agents
Biological agents
Radiological agents
Dam breaks
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Size of Events Modeled
• Only large events modeled (a priori expectation of $15
million to $20 million in WC losses)
•
Large is defined by the size of agent rather than dollar
threshold
•
•
400 lbs. equivalent TNT rather than 1 stick
One ounce of anthrax (letters have significantly less)
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From Peril Event to Injury
• A footprint is established for each peril
• The footprint defines the intensity of peril based on
distance, size of source and wind conditions
•
Injury distributions (as a function of peril intensity) are
combined with worker density to get the number of
injuries
•
Calculations done at the census block level
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From Injury to Losses
• Injury rates are combined with distribution of
losses by injury type to get overall loss
•
Distribution of losses are those underlying NCCI
ELFs in Retrospective Rating Program
•
State specific average benefits are used
12
From Event Losses to Aggregate Annual Losses
• Census blocks are aggregated to get total losses
for each event
•
The conditional severity of the event is multiplied
by its frequency to get its annual cost
•
Events are aggregated to get statewide expected
losses for representative states
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States Modeled
– New York
– Pennsylvania
– New Jersey
– Texas
– California
– Ohio
– Washington D.C.
– Georgia
– Illinois
– Indiana
– Florida
– Arizona
– Michigan
– Iowa
– Massachusetts
– North Carolina
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Modeling Results for NCCI States
Terrorism Loss Costs for States Modeled by EQECAT
State
(1)
Arizona
DC
Florida
Georgia
Illinois
Indiana
Iowa
Loss Cost
per Employee
(excluding LAE)
Lower Range*
(2)
2.33
168.25
2.33
2.49
6.45
1.08
1.71
Loss Cost
per Employee
(excluding LAE)
Upper Range*
(3)
11.63
841.24
11.66
12.43
32.27
5.39
8.54
Estimated
Impact of
Terrorism Risk
Insurance Act**
(4)
70%
50%
70%
70%
60%
85%
85%
State
Average
Weekly
Wage***
(5)
Loss Cost per
$100 of payroll
(exc. LAE)
Lower Range
(6) =
(2)x(4)/((5)x52/100)
620.72
722.64
579.54
628.79
647.75
595.11
557.31
0.005
0.224
0.005
0.005
0.011
0.003
0.005
Loss Cost per
$100 of payroll
(exc. LAE)
Upper Range
(7) =
(3)x(4)/((5)x52/100)
0.025
1.119
0.027
0.027
0.057
0.015
0.025
Selected
Loss Cost
(exc. LAE)
(8)
0.02
0.04
0.02
0.02
0.03
0.01
0.02
* Source: Loss cost information developed by EQECAT for terrorism events
** This adjustment reflects the impact of the federal backstop relative to foreign terrorism events
*** 2001 U.S. Bureau of Labor Statistics, Current Population Survey
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Impact of the Federal Backstop
•
Domestic terrorism is assumed to be 10% of the
total expected losses
•
Federal share of certified losses range from 15%
to 50% by state
•
The larger the expected loss for a state, the
larger the expected federal share
•
The larger the expected loss for a state, the
larger the reduction in loss costs
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Pricing the Impact of the Federal Backstop
•
The threshold is on an all lines basis
•
The cap on Federal and industry losses is on an all lines
basis
•
The Workers Compensation portion of total losses is a
key assumption
•
Which claims (and therefore which line of business) will
be allocated to the company retention is unclear – Will it
be based on payment date of the claim? Report date?
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What is the Workers Compensation Portion of
All Lines Terrorism Losses?
•
World Trade Center Workers Compensation losses
were approximately 5% of total losses
•
Extremely high mortality rate meant very few medical
losses
•
Prospectively, 10% is more likely
•
If biological agents are used, the proportion could be
even higher
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Other Federal Backstop Analysis Issues
•
The impact of the backstop depends on which companies
get the bulk of the losses
•
The backstop picks up relatively more of the state’s
certified losses when there are regional monoline
companies with high market shares
•
Due to statutory nature of benefits, employers will not get
the benefit of the $100 Billion cap
•
There is a potential for the courts to overturn the
application of the liability cap to WC insurers (NCCI’s loss
costs consider this possibility)
•
After generating many scenarios, NCCI used actuarial
judgment to estimate the overall loss cost impact
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NCCI’s Terrorism Filing
• The filing relied on EQECAT results in modeled
states
•
Proxy states were used for the other non-modeled
states
•
•
Voluntary loss costs were filed in most NCCI states
•
Assigned Risk rates were filed in 22 states
Rates were filed in Florida, Idaho, Arizona, Illinois,
Rhode Island and Iowa
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NCCI’s Terrorism Filing
• For the voluntary market, the effective date was
December 20, 2002
•
For the residual market, most states have an
effective date was January 1, 2003
•
The loss costs apply to new and renewal policies
only
•
The rates/loss costs are for foreign terrorism only
(net of anticipated federal recoveries)
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NCCI’s Terrorism Filing
• Rates/loss costs were filed on the Miscellaneous Values
Page of NCCI’s Basic Manual
• It is a rate/loss cost per $100 of total payroll
• It is not subject to premium discount, experience rating,
schedule rating or retrospective rating or deductible
credits
•
Because the non-terrorism rate/loss cost for clerical risks
is lower than other risks, the terrorism charge has a
larger percent impact on their premium
•
Terrorism provisions have been approved in all NCCI
states
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Other NCCI Actions
• NCCI established a new statistical class code (9740) for
these premium charges
•
The new code facilitates the tracking of premiums
charged for terrorism exposure as defined in the federal
Act
•
NCCI filed a Terrorism Risk Insurance Act Endorsement
for carriers to use to satisfy their policyholder disclosure
obligations under the Act
•
The new endorsement also addresses an insurer’s limit of
liability for certified terrorism losses when aggregate
losses exceed $100 billion
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