STATE OF THE WORKERS COMPENSATION MARKET. AASCIF CEO Conference Las Vegas, NV November 19, 2013

Transcription

1 STATE OF THE WORKERS COMPENSATION MARKET AASCIF CEO Conference Las Vegas, NV November 19, 2013

2 For consideration What happens in Vegas shouldn t stay in Vegas - Willis Re You know you are getting old when the candles cost more than the cake - Bob Hope A hospital bed is a parked taxi with the meter running - Groucho Marx Learn from yesterday, live for today, hope for tomorrow. The important thing is to never stop questioning - Albert Einstein One machine can do the work of 50 ordinary men, no machine can do the work of one extraordinary man - Elbert Hubbard The more things change the more they are the same - Alphonse Carr 2

3 Happening in Vegas A rising tide Premium growth, benign loss activity, favorable Accident Year development CY combined ratio; 97.9% vs % YOY $2.3B underwriting profit; net income $24.5B vs. $17.2B Return on Surplus 8.2% vs. 6.1% $614B industry surplus vs. $576.3B Better data and tools to leverage it 3

4 Waiting for you at home Storm clouds on the horizon Continued low interest rates More transparent data available to all parties Adequacy of recent AY reserves; cheating to pain? Convergence of increased retentions, excess capacity and cheap reinsurance Social and political winds of change Economic uncertainty 4

5 You know you are getting old when the candles cost more than the cake - Bob Hope INTEREST RATE/INFLATION RISK

6 Hypothetical impact of inflation on WC industry reserves Data in Billions

7 AASCIF members: Asset allocation Equities 7% Cash & Short Term 3% Other 3% AASCIF members maintained a conservative investment strategy Bond portfolio is somewhat longer duration than private market AASCIF: modified duration of 9.1 years Mono-line WC insurer: modified duration of 6.5 years Bonds 87% 7

8 Assets impacted even more Impact of Inflation on Surplus (top 100 WC Writers) 2009 Balance Sheet Net Assets ($M) (1) Reserves ($M) (2) Surplus ($M) "Expected" Inflation 387, , ,139 1% Above "Expected" Inflation 367, , ,897 Impact (19,242) 5,001 (24,243) Asset impact nearly 4 times reserve impact 15% decrease to surplus Even if held to maturity AM Best BCAR marks to market Sources: SNL Financial (1) Swiss Re, Sigma The impact of inflation on insurers, October 2010 (2) Willis Re study 8

9 A hospital bed is a parked taxi with the meter running Groucho Marx MEDICAL COST DRIVERS

10 Medical inflation tsunami? Confluence of ACA and latent demographic and economic trends Influx of new patients Looming doctor shortage Aging workforce Consolidation of health care industry Particular danger for WC carriers Limited bargaining power Higher reimbursement rates = target for cost shifting 10

11 RAND study of Massachusetts healthcare reform 8,000 Reform passed Low income Mandate goes policies available into effect Overall decline: 7%, 2008 decline 13% Monthly WC patients 7,500 7,000 6,500 6,000 No change before reform Predicted Recession 5,500 Actual 5,000 Nov-04 May-05 Nov-05 May-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 11

12 Greater gains in coverage = greater decline in WC claims Change in WC billing rate, % 4% 2% 0% -2% -4% -6% -8% Best fit slope of % -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% Change in health insurance coverage rate,

13 Massachusetts reform conclusions Decreased uninsured population 40-50% Coverage expansions reduced WC hospital bill frequency by 5-10% Shifted billing to other forms of insurance No discernible impact on claim severity Populations with greatest increase in coverage showed greatest decrease in WC billing 13

14 National implications? 8,000 Reform passed Low income Mandate goes policies available into effect Monthly WC patients 7,500 7,000 6,500 6,000 Website under construction Predicted 5,500 Actual 5,000 Nov-04 May-05 Nov-05 May-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 14

15 Medical drivers conclusion Increased demands on our healthcare system will put upward pressure on medical costs WC carriers will need to continue to develop strategies to meet this challenge Within this environment, the ACA: Offers opportunities to reverse existing cost shifting Exacerbates the demand for medical services Impact will differ from state to state 15

16 Learn from yesterday, live for today, hope for tomorrow. The important thing is to never stop questioning Albert Einstein PRIMARY MARKET UPDATE

17 Workers compensation: Positive trends Rate Change CY Premium ($B) 12% 6% 4.1% 2.6% 7.5% 7.4% 8.3% 8.1% 9.0% 9.8% 8.3% % -6% -1.6% -3.7%-3.4% Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2' '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Frequency: AY Change in Cost per Lost-Time Claim Severity: AY Change in Cost per Lost-Time Claim '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 ' % 10% 5% 0% -5% 13.5% Indemnity 10.1% 9.2% 8.8% Medical 8.8% 7.3% 7.7% 7.8% 5.4% 5.4% 6.3% 6.6% 4.1% 3.6% 3.0% 5.6% 6.2% 1.4% 3.1% 4.6% 1.0% 3.1% 0.7% 2.2% 1.0% -3.0% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 17

18 Workers compensation: Concerns / headwinds CY Combined Ratio Combined Ratio to Achieve Selected Cost of Capital 125% 110% 95% 80% 65% 118% 122% 111% 109% 107% 103% Dividend Ratio Expense Loss 101% 101% 93% 110% 115% 115% 109% 105% 100% 95% 90% 85% 101% 98% 96% 94% 93% 91% 90% 89% 88% 87% 85% 50% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 80% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Net Reserve Deficiency ($B) Residual Market Premium as % Total DPW % 10% 5% 3% 5% 11% 13% 13% 12% 10% 8% 7% 5% 5% 5% 7% 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Loss and LAE figures are based on NAIC Annual Statement Data for each valuation date and NCCI latest selections Source: NCCI analysis Considers all reserve discounts as deficiencies 0% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 18

19 Workers compensation: Where is the market cycle? Unprofitable Hard Profitable Hard Profitable Soft Unprofitable Soft AY ULR AY ULR/OLR Indicated reserve development Ceded WP Pricing Level CY LR and (CY LR / AY LR) Reported reserve development UW cash flow Workers Comp position at 2012 year-end 19

20 Workers compensation line: Premium and payroll 60, % Written Premium ($M) 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Price metric = DWP / Payroll DWP 2.75% 2.50% 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% DWP/Payroll Recent growth in DWP due to price and payroll increases Historical cycles are evident in premium and prices %

21 AASCIF members: Market share and industry price 30% 1.50% 25% 1.25% 20% 1.00% 15% 0.75% 10% 0.50% 5% 0.25% 0% 0.00% AASCIF DPW/Payroll 21

22 AASCIF members: Change in direct premium 25% 20% % Change 15% 10% 5% 0% -5% -10% -15% AASCIF companies DWP movements more volatile -20% Hard market 22

23 Workers compensation: AY development by sector Accident Year Ultimate Loss Ratio to Original Loss Ratio 1.3x 1.2x 1.1x 1.0x 0.9x 0.8x 0.7x OLR = loss 12 months ULR/OLR > 1 Initial estimate too low Soft market ULR/OLR < 1 Initial estimate too high Hard market AASCIF reserves have better withstood test of time Smarter actuaries? Wiser management? Home field advantage? AASCIF Industry 23

24 One machine can do the work of 50 ordinary men, no machine can do the work of one extraordinary man Elbert Hubbard PREDICTIVE MODELING

25 Silver bullet? AASCIF CEO Presentation 25

26 Underwriter vs. machine? 250% Effectiveness of Ensemble Model Actual Loss Ratio Relativity 200% 150% 100% 50% 0% Predicted Loss Ratio Relativity (Bin) Company U/W Predictive Model Ensemble 26

27 The more things change, the more they are the same - Alphonse Karr REINSURANCE STATE OF THE MARKET

28 Reinsurance market Overview of WC reinsurers Domestic (~22 reinsurers) Overall, domestic market does not target a specific niche; offer a wide range of products (QS, working layer and Cat) Reflected by the fact that most reinsurers can play across the board on an individual program However, there are certain reinsurers that focus only on a specific niche (e.g. lower excess layers) Can take large shares of a program for working and buffer layers (a few can offer 50% - 100% participation) For catastrophe programs, reinsurers typically offer around $10M of limit, although some can offer up to $30M Bermuda (~15 reinsurers) Strong focus on catastrophe, as most are large property catastrophe players who diversify with Workers Comp Cat As such, Bermuda reinsurers can typically assume much larger lines than domestic and London / European markets $30M line not uncommon, but pool supporting +$50M is more limited and have a higher capacity charge Handful writing non-cat business; can provide strong lead pricing and capacity for QSs, working and buffer layers We readily see reinsurers authorize 20% to 25% of working and buffer layers, sometimes up to 50% London / Europe (~22 reinsurers) London markets provide everything from QS to catastrophe protection Lead markets can provide meaningful lines (in excess of $20M for Cat and up to 50% share for non-cat) Following markets lines are generally much smaller than Bermuda or domestic (typically $5M for Cat) In the aggregate, the London market capacity can quickly add up to be the majority of a layer s capacity European reinsurers tend to focus on either Cat or non-cat, but can be a large presence on a placement For Cat business, we have seen $30M+ lines and for non-cat business they can take 100% of a layer London / European markets tend to stress relationships; familiarity breeds flexibility with pricing and contractual terms 28

29 Workers compensation: Reinsurance utilization AASCIF consists of the 14 members that file Statutory statements SCF of Arizona, Cal. State Compensation Ins. Fund, Pinnacol Assurance only included for 2011 & 2012 Industry starting to buy more reinsurance, State Funds steady decline flattening out 29

30 Stratifying the market Catastrophe Excess of an MAOL (Max any one life) $10m industry norm xs $20M Catastrophe Buffer layer (within a life) $5m xs $10m or $10m xs $10m Working layer (within a life coverage) Pro rata (Quota Share) Excess of loss $9.5m xs $0.5m XOL Retention Buffer/Cat $10M xs $10M Buffer/1 st cat layer $5M xs $5M $4.5M xs $0.5M Retention Working Layer Cat/clash Quota Share Quota Share 30

31 Working and buffer layer Working layer Increased appetite in expectation of market turning Reinsurers actively seeking Quota Shares Flat reinsurance renewal rates if underlying rate increases can be demonstrated Buffer layer Remains very effective as a cost of capital hedge against medical inflation More single life losses xs $10m Not recognized in reinsurers current pricing models 31

32 32 Catastrophe layers Rates have decreased 12 years in a row Cost of capital / Minimum rate on line requirements: how much longer will soft market continue? 2014 is an opportunity to drive improved contractual language Plenty of capacity available Upwards of $500m per program London market capacity changes

33 Hot topics The London merry-go-round Ironshore Barbican 1955 Ascot 1414 Jamie Lewis Lucy Town John Pilkington Aspen UK Chaucer 1084 Mike Clifton, Ryan Ward, Zack Mallen, Adam Howard Joe Bonnano Brit BM Markel BM Brit 2987 Jim Quinn, Tom Hanley Acapella 2014 Amlin 2001 Liberty 4472 Duncan Dale Paul Sandi Dale UW Partners Canopius 4444 New Capacity Existing Capacity What does all the movement mean for pricing and capacity? 33

34 Hot topics Collateralized reinsurers Historically tail risk was insurmountable Investors required 3 year exit strategy New Capital from non traditional reinsurers 1 st WC Cat Bond Dec 2011 using modeled loss trigger 1 st UNL Private Cat Bond October 2013 (no model/basis risk) Rapidly adapting market segment with voracious appetite Matter of time before they become mainstream Sea change in property market in under 5 years Could be a solution to Terrorism risk in

35 Hot topics TRIA / TRIPRA / Terrorism 2012 industry surplus for insurance companies writing TRIPRA exposed business is $589B Approximately 850+ carriers subject to program AM Best recent letter to 35 companies advising stress test failure and requiring a response in early December addressing mitigation efforts Reinsurers are able to provide significantly more coverage for conventional weapons attacks than for NBCR attacks Consensus not yet reached within market regarding available solutions Cedants pricing 2 year deals effective 1/1/14 to lock in NBCR capacity Additional capacity options for 1/1/15 AASCIF companies much better positioned than Nationwide or Super Regional carriers Aggregation limits may be placed on specific large accounts with high single location / campus employee counts Industry segments may be sub limited (e.g. manufacturing) Specific city exposures may be excluded or sub limited 35

36 AASCIF CEO Presentation APPENDIX/REGULATORY UPDATE

37 RMORSA Model Law September 2012 Effective Date: 2015 Who does it impact? Insurers with greater than $500m of premiums (or groups with greater than $1b) Smaller insurers exempt BUT, commissioner can ask any insurer for an ORSA report What is required? Risk management framework ORSA process ORSA summary report Must be shown to board To be filed with insurance department annually 37

38 NAIC guidance manual (March 2012) ORSA Summary Report - Statement from Management that the company has the level of financial resources needed to manage its current business over the next three years along with a summary of the work done to reach that conclusion. Three sections of ORSA Summary Report: 1. Description of Risk Management Framework 2. Assessment of Risk Exposures 3. Prospective Solvency Assessment ORSA will be used by regulator in developing supervisory plan (No penalties are currently envisioned for insurers that do not prepare an adequate ORSA report) 38

39 Willis 20 ERM Practices 14 are needed for ORSA Risk Identification Risk Limits and Controls Risk Measurement ERM Policies and Standards Risk Organization Key Practices Stress Testing Risk Capital Risk Appetite and Tolerance Risk Reporting Risk Management Governance Risk Management Culture Risk Learning Change Risk Risk Disclosure Risk Strategy Enhanced Practices Risk Optimization Risk-Adjusted Performance Measurement Risk-Adjusted Compensation Model Validation Emerging Risks Required for ERM review portion of ORSA Required for Risk review portion of ORSA 39

40 Property & casualty industry: Allocation of premium by line Direct Written Premium by Line of Business Accident & Health Aircraft Commercial Auto Commercial Multi Peril Fidelity & Surety Finl & Mrtg Grty Fire & Allied Lines Homeowner, Farmowner Marine Lines Medical Prof Liab Other Commercial Other Product Liability Private Auto Workers' Comp 2000 Total DWP = $322,605,809, Total DWP = $523,879,204,307 40

41 Property & casualty industry: Net Carried Reserves by Line Net Carried Reserves by Line of Business 2000 Total = $362,081,547,804 Workers Comp = $66,425,347,855 Accident & Health Aircraft Non Proportional Reinsurance Commercial Auto Commercial Multi Peril Fidelity & Surety Finl & Mrtg Grty Fire & Allied Lines Homeowner, Farmowner Marine Lines Medical Prof Liab Other Commercial Other Product Liability Private Auto Workers' Comp 2012 Total = $603,296,514,820 Workers Comp = $137,615,988,309 Workers Compensation accounted for 18% of net carried reserves in 2000, increasing to 23% in 2012 Source: SNL Financial Net Carried Reserves = Unpaid Reported Losses + Unpaid LAE + Unpaid IBNR Direct + Unpaid IBNR Assumed Unpaid IBNR Ceded 41

42 Top ten writers 2000 vs Workers Comp and all P&C lines 2000 All P&C Lines Direct Premiums Written Rank Group/Company Direct Premiums Market Written ($000) Share (%) 1 State Farm Mutl Automobile Ins 33,740, Allstate Corp. 19,841, Liberty Mutual 17,020, Travelers Companies Inc. 15,893, American International Group 14,751, Farmers Insurance Group of Cos 13,885, Nationwide Mutual Group 11,280, CNA Financial Corp. 10,140, Berkshire Hathaway Inc. 7,913, Hartford Financial Services 6,691, Workers' Compensation Direct Premiums Written Rank Group/Company Direct Premiums Market Written ($000) Share (%) 1 Liberty Mutual 3,487, Travelers Companies Inc. 1,720, American International Group 1,607, CNA Financial Corp. 1,549, Arrowpoint Capital Corp. 1,085, Hartford Financial Services 1,056, Zurich Insurance Group Ltd. 1,018, Fairfax Financial Holdings 951, Legion Insurance Co. 632, Allianz Group 595, All P&C Lines Direct Premiums Written Rank Group/Company Direct Premiums Market Written ($000) Share (%) 1 State Farm Mutl Automobile Ins 53,654, Liberty Mutual 28,297, Allstate Corp. 26,652, American International Group 23,596, Travelers Companies Inc. 22,695, Berkshire Hathaway Inc. 20,236, Farmers Insurance Group of Cos 18,311, Nationwide Mutual Group 17,042, Progressive Corp. 16,559, USAA Insurance Group 13,286, Workers' Compensation Direct Premiums W Rank Group/Company Direct Premiums Written ($000) 1 Liberty Mutual 4,179,078 2 Travelers Companies Inc. 3,801,993 3 Hartford Financial Services 3,286,686 4 American International Group 2,952,157 5 Zurich Insurance Group Ltd. 2,409,805 6 State Ins Fund Workers' Comp 1,943,838 7 Berkshire Hathaway Inc. 1,256,635 8 Old Repub International Corp. 1,110,916 9 Chubb Corp. 1,049, AmTrust Financial Services 995,575 Source: SNL Financial based on SNL Groups and Unaffiliated 42

43 Top 100 WC writers State Funds Rank (of Top 100) State Funds in Top 100 Workers' Compensation Writers Direct Premiums Group/Company Written ($000) Market Share (%) 6 State Ins Fund Workers' Comp 1,943, Texas Mutual Insurance Co. 906, State Compensation Ins Fund 903, Pinnacol Assurance 414, SAIF Corp. 399, CompSource OK 271, MEMIC Group 199, Chesapeake Employers Ins Co. 194, State Workers' Insurance Fund 191, SCF Insurance Group 186, Workers Compensation Fund 174, Louisiana Workers' Comp Corp. 167, Montana State Fund 165, Idaho State Insurance Fund 161, SFM Mutual Insurance Co. 139, MO Employers Mutual Ins Co. 136, Kentucky Employers' Mutual Ins 125, Beacon Mutual Insurance Co. 101, New Mexico Mutual Casualty Co. 79, Does not include monopolistic state funds State Fund Total 6,864, Top 100 Total 45,883, P&C Total 48,536, State funds in Top 100 Workers Comp writers based on direct premiums written State funds account for 14.96% of Top 100 DPW and 14.14% market share State funds combined as a single entity are largest workers compensation writer 43