The California Workers Compensation System A WCIRB Perspective

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1 W o r k e r s C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a The California Workers Compensation System A WCIRB Perspective Dave Bellusci EVP, COO and Chief Actuary Hotel Nikko San Francisco June 13, 213 Notice This material was developed by the Workers Compensation Insurance Rating Bureau of California (WCIRB) for the convenience of its users. The WCIRB has made reasonable efforts to ensure the accuracy of this material. You must make an independent assessment regarding the use of this material based upon your particular facts and circumstances. 213 Workers Compensation Insurance Rating Bureau of California. All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted in this copyright notice or by federal copyright law. No copyright is claimed in the text of statutes and regulations quoted within thiswork. Each WCIRB member company, including any registered third-party entities, (Company) are authorized to reproduce any part of this work solely for the following purposes in connection with the transaction of workers compensation insurance: (1) as necessary in connection with Company s required filings with the California Department of Insurance; (2) to incorporate portions of this work, as necessary, into Company manuals distributed at no charge only to Company employees; and (3) to the extent reasonably necessary for the training of Company personnel. Each Company and all agents and brokers licensed to transact workers compensation insurance in the state of California are authorized to physically reproduce any part of this work for issuance to a prospective or current policyholder upon request at no charge solely for the purpose of transacting workers compensation insurance and for no other purpose. This reproduction right does not include the right to make any part of this work available on any Web site or through any computer or electronic means for any purpose. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Online, X-Mod Direct, escad and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRB s prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies. To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the Workers Compensation Insurance Rating Bureau of California, 525 Market Street, Suite 8, San Francisco, California

2 Overview Premiums and Market Shares Rates Claim Frequency Claim Severity Losses and Loss Development Expenses Industry Results SB 863 Cost Evaluation 3 Reported Written Premium 25 $ Billions 23.5 Written Premium - Gross of Deductible Credits Written Premium - Net of Deductible Credits Calendar Year Full Year Forecast 4 2

3 Reported California Written Premium as Percentage of Countrywide Premium (Net of Deductibles) % of Countrywide Net Written Premium Preliminary Calendar Year Countrywide figures are from NCCI May 16, 213 State of the Line Presentation (212 estimate is preliminary). 5 Components of 16% Increase in 212 Reported Written Premium 1.% Approximate Effect in Percentage Points 9% 8.% 6.% 4.% 4% 2.% 2% 1%.% Change in Av erage Rate Lev el Increased Total Wages % Shifts in California Industrial Mix Audit Premiums on 28 and 29 Policies Other Factors 6 3

4 Market Concentration Ratios (Based on Reported Written Premium Prior to Deductible Credits) 1 % Top 5 Insurers Top 6th to 1th Insurers Top 11th to 2th Insurers Calendar Year 7 Market Share by Type of Insurer (Based on Reported Written Premium Prior to Deductible Credits) 1 75 % National Insurers California Insurers State Fund Calendar Year Note: California Insurers are defined as private insurers who write at least 8% of their workers compensation business in California. 8 4

5 Overview Premiums and Market Shares Rates Claim Frequency Claim Severity Losses and Loss Development Expenses Industry Results SB 863 Cost Evaluation 9 Estimated Average Charged Insurer Rate Per $1 of Payroll $8. $6. $6.29 $5.49 $4.36 $4. $3.46 $2. $2.59 $2.47 $2.3 $2.85 $2.3 $2.15 $2.1 $2.25 $2.31 $2.48 $2.61 $2.89 $ /3-12/3 7/4-12/4 7/5-12/5 7/6-12/6 7/7-12/ /12-6/12 7/12-12/12 1/13-3/13 Policy Period 1 5

6 Rate Comparison Based on Oregon Studies California* vs. National Median Average Charged Rate $6. $6.8 California National Median $5.23 $4. $2. $3.34 $2.26 $2.42 $2.58 $4.13 $2.48 $2.72 $2.26 $2.68 $2.4 $2.92 $1.88 $3.4 $. 1/1/ 1/1/2 1/1/4 1/1/6 1/1/8 1/1/1 1/1/12 1/13-3/13 Rate Effective Period Projected * - The information is based on the state of Oregon biennial rate comparison and is based on the state of Oregon classification mix and, as a result, the California average rates shown on this exhibit differs from other measures of the average California rate. 11 Estimated Industry Average Filed & Charged Rates (Based on 1/1/13 Filing Exposure Weights) $5. $4. $3. $2.21 $2.25 $2.38 $2.55 $3.8 $3.17 $3.38 $3.66 $2.89 $2. $1. $. Industry Industry Industry Industry Industry Industry Industry Industry Industry Av erage Filed Av erage Filed Av erage Filed Av erage Filed Av erage Filed Av erage Filed Av erage Filed Av erage Filed Av erage PP Rate 7/1/11 PP Rate 1/1/12 PP Rate 7/1/12 PP Rate 1/1/13 Manual Rate 7/1/11 Manual Rate 1/1/12 Manual Rate 7/1/12 Manual Rate 1/1/13 Charged Rate Qtr

7 Estimated Changes in Average Rates Over Last 12 Months (Based on 1/1/13 Filing Exposure Weights) $5. $4. Avg. Filed PP Rates Up 13.3% Avg. Filed Manual Rates Up 15.5% $3.66 Avg. Charged Rates Up 16.5% $3.17 $3. $2.25 $2.55 $2.48 $2.89 $2. $1. Industry Average Filed PP Rate 1/1/12 Industry Average Filed PP Rate 1/1/13 Industry Average Filed Manual Rate 1/1/12 Industry Average Filed Manual Rate 1/1/13 Industry Average Charged Rate Qtr Industry Average Charged Rate Qtr Overview Premiums and Market Shares Rates Claim Frequency Claim Severity Losses and Loss Development Expenses Industry Results SB 863 Cost Evaluation 14 7

8 Estimated Ultimate Indemnity Claim Counts Per 1, Full-Time Employees As of March 31, Months Accident Year 15 Percentage Change in Estimated Indemnity Claim Frequency % As of March 31, [1] 2.7 [1] [1].1 [1] [1] Accident Year [1] The estimate is based on partial year unit statistical data. The and estimates are based on comparison of claim counts based on WCIRB accident year experience as of March 31, 213 relative to the estimated change in statewide employment. 16 8

9 Change in Estimated Indemnity Claim Frequency California vs. NCCI States % As of March 31, California NCCI States Accident Year NCCI estimates are based on May 16, 213 State of the Line Presentation (NCCI 212 estimate is preliminary and the 21 and 211 estimates have been adjusted to remove the impact of audit premium and other factors). 17 Estimated Indemnity Claims Per 1, Workers (Based on 212 NCCI Annual Statistical Bulletin for 28 Policy Year) 2,5 2,32 2, 1,5 1,315 1, 883 1, , California Policy California Policy Year 21 Year 28 Florida Illinois New York Pennsylvania Texas Countrywide 18 9

10 Estimated Permanent Partial Claims Per 1, Workers (Based on 212 NCCI Annual Statistical Bulletin for 28 Policy Year) 1,5 1,146 1, California Policy California Policy Year 21 Year 28 Florida Illinois New York Pennsylvania Texas Countrywide 19 Estimated Proportion of California Permanent Partial and Medical- Only Claims % 6 Permanent Partial as % of Indemnity Preliminary % 8 Medical-Only as % of Total Claims Preliminary Accident Year 2 1

11 Change in Estimated California Indemnity Claim Frequency By Incurred Loss Size - Based on First Level Unit Statistical Reports % Claims Less than $2, Claims Between $2,5 and $5, Claims Greater than $5, Preliminary Policy Year 21 Estimated California Cumulative Injury Claim Percentage % 12. Estimated Fifth Report Cumulative Injury Claims as a % of Indemnity Claims Partial Accident Year 22 11

12 Reported California Cumulative Injury Claims per 1 Indemnity Claims at USR 1 st Report Level Bay Area Los Angeles Remainder of California Statewide Accident Year 23 Estimated Changes in California Cumulative Injury Claims vs. Changes in Employment % Change in Cumulative Injury Claims Change in Employment All Industries Agriculture & Mining Construction Manufacturing Real Estate Education Health 24 12

13 Overview Premiums and Market Shares Rates Claim Frequency Claim Severity Losses and Loss Development Expenses Industry Results SB Cost 863 Evaluation 25 Estimated California Ultimate Indemnity Loss per Indemnity Claim $35, As of March 31, 213 $2, 24,286 26,421 25,668 24,566 19,912 17,647 19,638 21,372 23,915 24,779 24,753 25,239 25,2 $5, % Change Accident Year 26 13

14 Estimated Change in Indemnity Claim Severity California vs. NCCI States % Change As of March 31, California NCCI States Accident Year NCCI estimates are based on May 16, 213 State of the Line Presentation (212 estimate is preliminary). 27 Estimated Ultimate California Medical Loss Per Indemnity Claim* (Including MCCP) $6, As of March 31, 213 $45, $3, 27,617 32,277 33,184 31,755 29,845 3,84 34,515 38,228 42,144 44,218 44,821 45,848 44,966 $15, $ % Change *Excludes medical-only Accident Year 28 14

15 Estimated Change in Medical Claim Severity California vs. NCCI States % Change As of March 31, California NCCI States Accident Year NCCI estimates are based on May 16, 213 State of the Line Presentation (212 estimate is preliminary). 29 Estimated Medical Cost Levels Indexed to 21 % California Insured Workers' Compensation Medical on Indemnity (Includng MCCP) California Private Self-Insured Workers' Compensation Average Total Medical Paid Per Claim California Group Health Premiums NCCI States Workers' Compensation Medical on Indemnity Claims Group health cost information from California Employer Health Benefits Survey published by the California Healthcare Foundation, NCCI estimates based in May 16, 213 State of the Line Presentation (212 estimate is preliminary). Year 3 15

16 Estimated Trend Medical Paid Per Indemnity 9 Mos. from Injury Date Based on CWCI Reported Transaction Data $6, $5, $5,486 Accident Year 25 Accident Year 212 $4, $3,556 $3, $2, $1, $ $2 $725 $497 $1,28 $131 $21 Medical Treatment Ex. Pharmaceuticals (+54%) Pharmaceuticals* (+263%) Medical Cost Containment (+17%) Medical Legal (+53%) * Includes cost of durable medical equipment 31 Medical Paid Per Indemnity 9 Mos. from Injury Date Based on CWCI Reported Transaction Data Indexed to Accident Year 22 % Medical Treatment Excluding Pharmaceuticals Pharmaceticals Medical Cost Containment Expenses Medical Legal Expenses Accident Year 32 16

17 Overview Premiums and Market Shares Rates Claim Frequency Claim Severity Losses and Loss Development Expenses Industry Results SB 863 Cost Evaluation 33 Estimated Change in Claim Cost on Indemnity Claims* (Including MCCP) % Change in Indemnity Claim Frequency As of March 31, % Change in Total Cost of Indemnity Claims % Change in Total Loss Level Accident Year *Excludes medical-only

18 Comparison of Estimated Medical Payment Patterns % of Projected Ultimate Medical Losses Paid AY96 (Pre-Minniear) NCCI Countrywide* AY3 (Pre-Reforms f 22 through 24) AY12 Projected (Pre-SB 863) AY14 Projected (Post-SB 863) As of 12 months As of 24 months As of 36 months * NCCI countrywide pattern is from NCCI 212 Annual Statistical Bulletin (2 year average) and excludes California and several other states. 35 Comparison of Estimated Indemnity Payment Patterns % of Projected Ultimate Indemnity Losses Paid AY96 (pre-minniear) NCCI Countrywide* AY3 (Pre Reform) AY12 Projected (Pre-SB 863) AY 214 (Post SB 863) As of 12 months As of 24 months As of 36 months * NCCI countrywide pattern is from NCCI 212 Annual Statistical Bulletin (2 year average) and excludes California and several other states

19 Overview Premiums and Market Shares Rates Claim Frequency Claim Severity Losses and Loss Development Expenses Industry Results SB 863 Cost Evaluation 37 Reported Calendar Year Incurred Loss Adjustment Expenses $ Billions Losses ALAE ULAE Preliminary Calendar Year 38 19

20 Reported Calendar Year Ratios of LAE to Loss 4 % ALAE 34.2 ULAE Calendar Year Preliminary 39 Calendar Year Reported Loss Adjustment Expense to Loss Ratios California vs. Countrywide % 4 California Countrywide (Private Insurers)* Preliminary Calendar Year *Countrywide estimate from NCCI May 16, 213 State of the Line Presentation was computed based on Annual Statement data. The 212 estimate is preliminary. 4 2

21 Estimated Ultimate ALAE per Indemnity Claim (Excl. MCCP) $15, As of December 31, 212 $1, $5, 4,997 5,529 5,671 6,6 5,977 6,18 6,772 7,59 8,639 1,53 1,889 11,329 11,756 $ % Change Accident Year 41 Reported Incurred ULAE per Weighted Open Indemnity Claim Private Insurers $1,5 $1, ,218 1,228 1,55 1,116 1,53 1, 1,116 1,74 1,11 1,45 $ $ Calendar Year 42 21

22 Reported Ratios of Other Expenses to Premium % Preliminary Calendar Year 43 DWC Reported Lien Filings In Thousands 6 EAMS Lien Filings LA Rest of State 5 463,856 1,179, , Q12 2Q12 3Q12 4Q12 1Q13 Calendar Year/Quarter 44 22

23 Overview Premiums and Market Shares Rates Claim Frequency Claim Severity Losses and Loss Development Expenses Industry Results SB 863 Cost Evaluation 45 Reported California Calendar Year 212 Insurer Benefits and Expenses ($ s in billions) General Expenses & Premium Taxes $1.1 (8.8%) Commissions & Other Acquisition Expenses $1.4 (11.5%) Paid Indemnity Benefits $3.2 (26.2%) Loss Adjustment Expenses $2.2 (18.%) Changes in Loss Reserves $1.3 (11.1%) Paid Medical Benefits $4.7 (39.1%) 46 23

24 Comparison of Estimated Change in California Claim Cost to Changes in Insurer Charged Rate Level % Change in Total Indemnity Claim Loss Level by Accident Year As of March 31, % Change in Average Insurer Rate Level Reflected in Calendar Year Earned Premium Year 47 Accident Year California Projected Combined Loss and Expense Ratios As of March 31, % Point Improvement over 6 Years % Point Deterioration over 5 Years Other Exps. LAE Losses * 12* Accident Year * The cost of medical cost containment programs is reflected in LAE for accident years 211 and 212. It is reflected in losses for all other accident years

25 Accident Year Projected Combined Ratios California vs. Countrywide 2 % As of March 31, California Countrywide (Private Insurers)* Preliminary Accident Year Countrywide estimate from NCCI May 16, 213 State of the Line Presentation was computed based on Annual Statement data. The 212 estimate is preliminary. 49 Calendar Year Insurer Reported Combined Loss and Expense Ratios 18 % Preliminary Calendar Year 5 25

26 Average Return on Net Worth As Reported by the NAIC % Fortune Magazine - All Industry Total All Lines All States California Workers' Compensation Calendar Year Source: NAIC Report on Profitability in Year Arithmetic Average Return Fortune Magazine All Industry 13.3% Total P & C All Lines All States 6.6% California Workers Compensation 7.1% 51 WCIRB Projected Ultimate Losses Less Insurer Reported Losses at Successive December 31 Evaluations 18 $ Billions As of December 31, Evaluation Year 52 26

27 Overview Premiums and Market Shares Rates Claim Frequency Claim Severity Losses and Loss Development Expenses Industry Results SB 863 Cost Evaluation 53 WCIRB Cost Evaluation of SB 863 Process WCIRB Requested by Insurance Commissioner and Director of DIR to Provide Preliminary Cost Assessments Final WCIRB Estimate Reflected in Amended 1/1/213 Filing WCIRB Assessments Reflect Review of legislative provisions Consultation with experts Review of relevant research and analyses New actuarial analyses based on data and timeframes available Judgmental estimates developed when there was consensus as to likely impact Revisions as legislation changed or new information became available Develop Plan to Proactively Monitor Emerging Costs 54 27

28 WCIRB Cost Evaluation of SB 863 Summary of WCIRB Estimates ($ s in billions) SB 863 Provisions Impact on Statewide Claim Costs % Impact on Claim Costs 213 & 214 PD Benefit Level Changes +$ % Elimination of PD Add-ons ($.2) -.9% Three-Tiered Weekly PD Benefits ($.1) -.5% Liens ($.5) -2.5% Surgical Implant Hardware ($.1) -.6% ASC Fees ($.1) -.4% IMR (Impact on Frictional Costs & TD Duration) ($.4) -2.1% Ogilvie Decision ($.2) -1.1% MPN Strengthening ($.2) -1.% Total Estimated Combined Impact of SB 863 ($.5) -2.7% Not Reflected in Above Cost Estimates New Return to work program (separate employer assessment) Independent Bill Review Independent Medical Review Impact on Medical Treatment New Fee Schedules & RBRVS 55 Anticipated Post-SB 863 Trends Indemnity ) Temporary Disability Duration IMR and MPN provisions should accelerate claims process & reduce TD duration Ogilvie and Almaraz/Guzman Effectively eliminates Ogilvie adjustments Does not address Almaraz/Guzman Permanent Disability Rating Disputes/Litigation Eliminates PD rating add-ons and 3-tiered benefit system FEC factor replaced by 1.4 adjustment Increased Indemnity Claim Frequency Partly Driven by Cumulative Injury Increase Not addressed by SB

29 WCIRB Projected Indemnity Cost Change $4, $3, +51% Average Ultimate Indemnity per Claim $26,422 +2% $26,894 $2, $17,48 $1, $ Accident Year 25 Policy Year 213 Projected (Pre-SB 863) Policy Year 213 (Adjusted for WCIRB SB 863 Estimate) 57 Anticipated Post-SB 863 Trends Medical Medical Treatment Costs ASC fees, surgical implant hardware, and MPNs provisions should reduce costs IMR process should reduce medical treatment disputes (impact on medical costs uncertain) New fee schedules and conversion to RBRVS (impact on medical uncertain) Medical Liens Filing fee and statute of limitations should materially reduce volume and cost Medical-legal Costs IMR process should reduce medical-legal disputes and cost Pharmaceutical Costs and Medicare Set-asides Not addressed by SB

30 WCIRB Projected Medical Change $8, Average Ultimate Medical per Indemnity Claim $6, +79% $55,498-5% $52,937 $4, $31,2 $2, $ Accident Year 25 Policy Year 213 Projected (Pre-SB 863) Policy Year 213 (Adjusted for WCIRB SB 863 Estimate) 59 Anticipated Post-SB 863 Trends ALAE ) Liens Lien filing fee and statute of limitations should significantly reduce volume and cost of liens IMR should reduce lien costs related to utilization review Ogilvie and Almaraz/Guzman SB 863 effectively eliminates Ogilvie Does not address Almaraz/Guzman Medical cost containment Not directly addressed although IMR process may reduce frictional costs related to medical disputes Increases in Cumulative Injury Claims and Claims with Multiple Body Parts Not addressed by SB

31 ALAE Projections After SB 863 Adjustments $2, Average Ultimate ALAE per Indemnity Claim +133% $15, $13,795-2% $1,981 $1, $5,933 $5, $ Accident Year 25 Policy Year 213 Projected (Pre-SB 863) Policy Year 213 (Adjusted for WCIRB SB 863 Estimate) 61 California Workers Compensation Claims and Wage Level Index % 175 Average Wage Level Index (Based on UCLA Data) Estimated Indemnity Claim Cost Level Index Pre-SB 863 Projected Based on Current WCIRB Cost Estimate of SB 863 Projected (projected) Policy Year 213 (projected) Accident Year 62 31

32 Summary of Anticipated Post-SB 863 Trends SB 863 could flatten the claims cost level index, if projected savings from a potentially faster, streamlined delivery process with less litigation, disputes and liens outpace increases in permanent disability benefits Additional savings opportunities could come from IMR and IBR as well as new medical fee schedules Risk lies in cost drivers untouched by SB863 Upward indemnity claims frequency Almaraz/ Guzman Pharma/ opioids and Medicare Cumulative injury and multiple body part claims 63 Summary of Key Findings ) Premiums and Market Shares Continued double digit growth in premium State Fund market share declining Rates Rates sharply increasing in 212 and 213 California among the highest charged rates in the country Claim Frequency Indemnity claim frequency remaining at higher 21 level 212 frequency change differs from countrywide average change Claim Severity Claim severity trends moderating Pharmaceutical costs continuing to increase 64 32

33 Summary of Key Findings ) Losses and Loss Development Indemnity claim cost levels relatively flat since 21 Expenses Expense ratios declining in 212 Loss adjustment expense severity trends moderating Industry Results Significant improvement in combined ratios in 212 Combined ratios remain above countrywide average SB 863 Cost Evaluation SB 863 estimated to moderate claim cost trend WCIRB to closely monitor emerging costs 65 W o r k e r s C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a The California Workers Compensation System A WCIRB Perspective Dave Bellusci EVP, COO and Chief Actuary Hotel Nikko San Francisco June 13,

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