Workers Compensation Insurance Rating Bureau of California. January 1, 2012 Pure Premium Rate Filing

Transcription

1 Workers Compensation Insurance Rating Bureau of California January 1, 2012 Pure Premium Rate Filing Submitted: August 22, 2011

2 WCIRB California 525 Market Street, Suite 800 San Francisco, CA Tel Fax 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 this work. Copies of the filing may be made and distributed for the purpose of facilitating the transaction of workers compensation insurance in California, provided that all copyright and other proprietary notices are kept intact. 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 800, San Francisco, California

3 Table of Contents Page 1 28 Part A Pure Premium Rates A:1 Section A Proposed Pure Premium Rates Section B Computation of Indicated Average Pure Premium Rate for 2012 Policies Appendix A Exhibits 1 8 Appendix B Loss Development Methodology Appendix C Trending Methodology Appendix D Projected Loss Adjustment Expense Ratio Appendix E Experience Rating Off Balance Correction Factor Section C Classification Relativities Appendix A Exhibits 1 8 Appendix B Classification Relativity Review Sheets A:A-1 A:A-4 A:B-1 A:B-8 A:B-9 A:B-32 A:B-33 A:B-151 A:B-152 A:B-183 A:B-184 A:B-257 A:B-258 A:B-261 A:C-1 A:C-6 A:C-7 A:C-24 A:C-25 A:C-266 Part B Plans Subject to Insurance Commissioner Approval B:1 Section A Recommended Amendments to the California Workers Compensation Uniform Statistical Reporting Plan 1995 Title 10, California Code of Regulations, Section Effective January 1, 2012 Section B Recommended Amendments to the Miscellaneous Regulations for the Recording and Reporting of Data Title 10, California Code of Regulations, Section 2354 Effective January 1, 2012 Section C Recommended Amendments to the California Workers Compensation Experience Rating Plan 1995 Title 10, California Code of Regulations, Section Effective January 1, 2012 Appendix A Experience Rating Plan Values B:A-1 B:A-40 B:B-1 B:B-2 B:C-1 B:C-9 B:C-10 B:C-31 i

4 INTRODUCTION Pure Premium Rates and Plans Subject to Insurance Commissioner Approval Pursuant to the California Insurance Code (CIC) statutory framework, one of the WCIRB s primary purposes is to develop adequate pure premium rates rates that reflect the cost of losses and related loss adjustment expenses. 1 The pure premium rates proposed in this filing, which are contained in Part A, are intended to meet the WCIRB s obligation under the statutes to develop adequate pure premium rates and are being submitted to the Insurance Commissioner for approval. In addition, the WCIRB, pursuant to CIC Section 11734(c), is charged with developing rules related to specified plans subject to the Insurance Commissioner s approval. The proposed amendments to the rules presented in Part B are being submitted to the Insurance Commissioner for approval. Insurer Rates, System Cost Drivers and the Insurance Market The pure premium rates issued or approved by the Insurance Commissioner are only advisory in that insurers may, and often do, file and use rates other than those approved by the Commissioner; however, there is a misunderstanding among the public that a change in the approved pure premium rates will have a direct and commensurate impact on the rates filed and charged by insurers. In order to address this misunderstanding, the Insurance Commissioner, in a June 21, 2011 letter to the WCIRB (see Exhibit 1), advised that, I have reviewed the previous process by which the WCIRB analyzed and submitted its recommendations for pure premium rates and find that the process must focus upon current actions of workers' compensation insurers in the marketplace rather than the past advisory rate levels. In large part, the [previous] analysis did not include information on current insurer filed rates and, instead, focused upon the last approved pure premium rates. This has done nothing to alleviate the public's misunderstanding of the pure premium rate process and has contributed to the public's confusion regarding current workers' compensation rates and premiums charged to employers. It has also limited the opportunity to evaluate cost drivers and the current health of the insurance market by focusing attention away from these important issues and onto the size of the indicated change from the last approved pure premium rate level. In view of the foregoing, the Insurance Commissioner directed the WCIRB to provide the following in its pure premium rate filings: 1. The proposed pure premium rates for all classifications and the percentage difference between each proposed pure premium rate relative to the industry average filed pure premium rate for that classification. 2. The average of the proposed pure premium rates for all classifications (proposed average pure premium rate). 3. The average of the industry filed pure premium rates for all classifications (industry average filed pure premium rate). 4. The difference between the proposed average pure premium rate and the industry average filed pure premium rate. 5. The average of the industry filed manual rates for all classifications (industry average filed manual rate). 6. The industry average charged rate to assist the California Department of Insurance in evaluating profitability. 1 See California Insurance Code Sections 11730(f), and (b). 1

5 INSURER RATES, SYSTEM COST DRIVERS AND THE INSURANCE MARKET Proposed Pure Premium Rates Relative to Industry Average Filed Pure Premium Rates The pure premium rates for the 494 standard classifications proposed by the WCIRB to be effective January 1, 2012 and the methodology used to compute these rates are shown in Part A, Section A of the filing. These proposed pure premium rates and the corresponding industry average filed pure premium rates are shown in Exhibit 2. The percentage difference between the proposed pure premium rate for each standard classification and the corresponding industry average filed pure premium rate is also presented in Exhibit 2. Comparison of Proposed Pure Premium Rates to Industry Average Rates As shown in Table 1, the pure premium rates proposed for the 494 standard classifications average $2.33; this is 1.8% less than the corresponding industry average filed pure premium rate of $2.37 as of July 1, The corresponding industry average filed manual rate as of July 1, 2011 is $3.27, and the industry average charged rate for the first quarter of 2011 after the application of most insurer rating plan adjustments is $ which is virtually the same as the industry average filed pure premium rate. $4.00 Table 1 Proposed and Industry Average Rates Per $100 of Payroll $3.00 $3.27 $2.33 $2.37 $2.38 $2.00 $1.00 Proposed Average PP Rate 1/1/12 Industry Average Filed PP Rate 7/1/11 Industry Average Manual Rate 7/1/11 Industry Average Charged Rate 1/1/11-3/31/11 The methodologies used to compute the rates shown in Table 1 are described in Exhibit 3. System Cost Drivers The proposed January 1, 2012 pure premium rates reflect significant deterioration in projected losses and loss adjustment expenses as well as less optimistic economic forecasts as compared to a year ago. This deterioration in losses and loss adjustment expenses is attributable, in part, to a significant increase in projected allocated loss adjustment expenses (ALAE) 3 that the WCIRB believes is largely the result of an increase in the volume of liens, the impact of the 2009 Worker s Compensation Appeals Board decisions in Ogilvie v. City and County of San Francisco and Almaraz v. Environmental Recovery Services/Guzman v. Milpitas Unified School District, and an increase in the rates of representation. Other factors contributing to the deterioration since the WCIRB s January 1, 2011 Pure Premium Rate Filing include (a) continued adverse loss development on recent accident years, in part attributable to a slowing rate of 2 This computation is based on reported premium at the insurer rate level, which includes the impact of all insurer rating plan adjustments except for the application of deductible credits, retrospective rating plan adjustments and terrorism charges. 3 The projected provision for ALAE as a percentage of losses has increased from 11.7% in the WCIRB s January 1, 2011 Pure Premium Rate Filing to 15.9% in this filing. 2

6 claim settlement, and (b) increased claim frequency on the 2010 accident year. These factors as well as an economic forecast of future wage inflation are discussed in Part A, Section B. As shown in Tables 2 through 4, despite modest reductions in average medical and indemnity losses per indemnity claim in 2010 that were offset by increasing claim frequency, average loss and loss adjustment expense amounts are well above the levels incurred immediately following full implementation of the 2002 through 2004 reforms in Table 2 Projected Medical Cost Per Indemnity Claim $40,000 $24,000 $23,405 $26,351 $16,917 $20,392 $30,839 $31,941 $30,257 $28,315 $41,012 $39,885 $36,555 $32,864 $29,200 $40,749 $8, As shown in Table 2, the average medical cost per indemnity claim has increased by 40% since The factors driving this increase include: 1. Medical Treatment. A 2011 study by the California Workers Compensation Institute (CWCI) analyzing increases in medical severities based on detailed medical transactional payment data through December 31, 2010 showed sharp increases in medical payments per claim over a broad range of medical treatment categories and injuries. 4 These increases were attributable to increases in the number of visits per claim, the number of procedures per visit, and the average cost of procedures. 2. Medical Liens. A 2011 report published by the Commission on Health and Safety and Workers Compensation (CHSWC) indicated that the number of medical lien filings have increased sharply since The report suggests that over 350,000 liens will be filed in 2010 and 470,000 in 2011, and that approximately $1.5 billion per year is claimed in medical lien disputes. 3. Pharmaceuticals. The cost of pharmaceuticals has increased rapidly since The 2011 CWCI study of detailed medical transactional payment data through December 31, 2010 shows that pharmaceutical costs (including durable medical equipment) per indemnity claim through 12 months of treatment have almost doubled from $279 for claims on accidents occurring in 2005 to $543 for claims on accidents occurring in Further, CWCI research suggests that this increase is, in part, attributable to sharp growth in the use of Schedule II Opioids 7 and in the utilization of compound drugs. 8 4 Analysis of Medical and Indemnity Benefit Payments, Medical Treatment and Pharmaceutical Cost Trends in the California Workers Compensation System, CWCI, August Liens Report, CHSWC, January Analysis of Medical and Indemnity Benefit Payments, Medical Treatment and Pharmaceutical Cost Trends in the California Workers Compensation System, CWCI, August Prescribing Patterns of Schedule II Opioids in California Workers Compensation, CWCI, March The Cost and Utilization of Compound Drugs, Convenience Packs and Medical Foods in California Workers Compensation, CWCI, August

7 4. Medicare Set-Asides. The cost of Medicare set-asides has been increasing. According to a 2011 study conducted by the University of California at Berkeley on behalf of CHSWC, the total countrywide cost of Medicare set-asides has increased from $180 million in 2004 (approximately 1% of total medical paid) to $950 million in 2008 (approximately 4% of total medical) Medical Cost Containment Programs. 10 The cost of medical cost containment programs has increased since the implementation of the reforms of 2002 through 2004, as the reforms provided additional cost control tools to employers and insurers. While implementation of these reforms was highly effective in reducing medical costs from their pre-reform levels, the cost of medical cost containment programs has increased. The CWCI study based on medical transactional data through December 31, 2010 shows that the cost of medical cost containment programs per indemnity claim through 12 months of treatment has more than doubled from $632 for claims on accidents occurring in 2005 to $1,440 for claims on accidents occurring in $35,000 Table 3 Projected Indemnity Cost Per Indemnity Claim $20,000 $18,968 $20,720 $22,731 $26,109 $23,943 $25,372 $24,012 $19,174 $16,583 $18,212 $19,783 $21,736 $22,093 $21,701 $5, As shown in Table 3, the average indemnity cost per indemnity claim has increased by 31% since The WCIRB s analysis of data on permanent disability ratings issued by the Division of Workers Compensation Disability Evaluation Unit indicates that there has been a significant creep in permanent disability ratings since 2005 and a significant additional increase in ratings subsequent to the Ogilvie and Almaraz/Guzman decisions. Similarly, other data from the Division of Workers Compensation shows a significant increase in the cost of claim settlements following the decisions. 12 In addition to permanent disability costs, both WCIRB and CWCI diagnostic data show an increase in temporary disability duration since Working Safer or Just Working Longer? The Impact of an Aging Workforce on Occupational Injury and Illness Costs, University of California, Berkeley, February Beginning with policies incepting on or after July 1, 2010, the cost of medical cost containment programs will be reported as ALAE rather than as medical losses. 11 Analysis of Medical and Indemnity Benefit Payments, Medical Treatment and Pharmaceutical Cost Trends in the California Workers Compensation System, CWCI, August See Item AC of the August 3, 2011 WCIRB Actuarial Committee Agenda for an analysis of the latest information from the Disability Evaluation Unit and the Division of Workers Compensation on permanent disability costs. 13 See Exhibits LD-P7.1 and LD-P7.2 of Item AC of the August 3, 2011 WCIRB Actuarial Committee Agenda. 4

8 Table 4 Projected ALAE Per Indemnity Claim 14 $12,000 $9,982 $10,988 $7,146 $7,724 $8,115 $7,635 $7,107 $7,410 $8,000 $8,739 $7,000 $3,489 $4,557 $4,893 $5,688 $2, As shown in Table 4, the average ALAE per indemnity claim has increased by 55% since Among the factors leading to this increase are an increase in the volume of medical liens, the Ogilvie and Almaraz/Guzman decisions and an increase in the rate of claimant legal representation. 15 Insurance Market Despite significant increases in underlying cost drivers over the last five years, as shown in Table 5 below, industry average charged rates have not increased appreciably. The industry average charged rate for the first quarter of 2011 ($2.38) is less than one-half the level it was in the first six months of 2005 ($4.96) and 62% below the pre-reform high ($6.29). $8.00 Table 5 Industry Average Charged Rates Per $100 of Payroll $6.00 $5.94 $6.29 $6.05 $5.49 $4.96 $4.66 $4.36 $4.00 $2.00 $2.59 $2.47 $2.30 $3.46 $3.50 $2.85 $2.75 $2.30 $2.16 $2.29 $2.30 $2.38 $ /03-7/03-1/04-7/04-1/05-7/05-1/06-7/06-1/07-7/ /03 12/03 6/04 12/04 6/05 12/05 6/06 12/06 6/07 12/07 First Quarter 14 The information reflected in this table is based on the experience of private insurers only inasmuch as State Compensation Insurance Fund s recent loss adjustment expense experience has been somewhat anomalous and is therefore tempered in the WCIRB's proposed January 1, 2012 pure premium rate projection. (See Part A, Section B, Appendix D.) 15 See Exhibits ALAE-5.1 and ALAE-5.2 of Item AC of the August 3, 2011 WCIRB Actuarial Committee Agenda. 5

9 As reflected in Table 6 below, rising severity costs combined with relatively flat industry average charged rates have led to increasing loss ratios and combined loss and expense ratios. 200% 150% 100% 50% 0% 184% 22% 21% 167% 20% 21% 141% 126% 107% Table 6 Projected Accident Year Loss and Expense Ratios 143% 18% 18% 113% 16% 14% 83% 79% 15% 12% 52% 57% 55% 14% 14% 9% 10% 34% 31% 69% 16% 12% 41% 18% 15% 57% 110% 20% 18% 72% Other Expenses LAE Losses 22% 22% 23% 24% 82% 80% % 127% 126% As shown in Table 7 below, increasing loss ratios have led to reduced profitability (return on net worth). The estimated return on net worth for calendar year 2009 for California workers compensation insurance, as reflected in the National Association of Insurance Commissioners (NAIC) most recent report on profitability, 16 is 4.6%. This is well below the 10.5% Fortune Magazine all-industry average return shown in the NAIC report. Table 7 Return on Net Worth as Reported by the NAIC 20% 10% 0% -10% -20% 14.6% -5.3% 10.4% -7.3% 10.2% -11.5% 12.6% 3.1% 13.9% 12.6% 14.9% 14.2% 16.4% 15.4% 15.2% 12.1% 13.1% Fortune Magazine - All Industry 7.0% California Workers' Compensation 10-Year Arithmetic Average Return California Workers Compensation 4.6% Fortune Magazine All Industry 11.6% % 4.6% 16 Report on Profitability by Line and State in 2009, NAIC,

10 PROPOSED PURE PREMIUM RATES (PART A) The WCIRB s proposed January 1, 2012 pure premium rates and the methodologies used to compute the average pure premium rates and classification relativities are presented in Part A of the filing. Computation of Standard Classification Pure Premium Rates The pure premium rates for the 494 standard classifications proposed to be effective January 1, 2012 and the process used to compute them are shown in Part A, Section A of this filing. Computation of Proposed Average Pure Premium Rate The January 1, 2012 proposed average pure premium rate of $2.33 per $100 of payroll is based on a comparison of the losses and loss adjustment expenses (LAE) projected to be incurred on policies incepting in 2012 to the premium that would be generated on those policies using the industry average filed pure premium rate as of July 1, The proposed average pure premium rate for policies incepting in 2012 reflects a wide range of actuarial and economic projections based on methodologies recommended by the WCIRB. Over the last several years, the WCIRB has undertaken a comprehensive review of its actuarial methodologies and processes. As a result of this review, the enhancements listed in Exhibit 4 are reflected in this filing. The principal methodologies and projections used by the WCIRB in calculating the proposed average pure premium rate shown in Part A, Section B of the filing are summarized below. 1. Loss Development Methodology The proposed 2012 pure premium rates are intended to reflect the estimated final or ultimate cost of losses and LAE on all accidents that arise on policies incepting in However, since workers compensation claims that are incurred in a particular year will be paid out over many years, the losses reported for each historical accident year are adjusted, or developed, to reflect the final or ultimate cost of all accidents that occurred during that year. This process is known as loss development. Consistent with recent WCIRB pure premium rate filings and corresponding California Department of Insurance decisions, the WCIRB is again recommending projecting statewide losses paid for each accident year to an ultimate cost level based on historical development patterns of losses paid as the claims mature. These projections also include adjustments to reflect the cost impact of the 2002 through 2004 reforms on these payment patterns. In particular, the reform adjustments to indemnity were refined based on a 2011 study of loss development that showed the reforms were continuing to impact the loss development of post-reform years. 17 Changing claim settlement rates can significantly distort projections based on historical paid loss development. Inasmuch as claim settlement rates had been declining in recent years, the WCIRB, in its January 1, 2011 Pure Premium Rate Filing, recommended a refinement to the loss development methodology to adjust for the decline in claim settlement rate. However, as shown in Table 8 below, the claim settlement rate decline, at least for the 2010 accident year, appears to have diminished. In addition, the retrospective evaluation of loss development methodologies included in the WCIRB s 2011 loss development study showed that the claim settlement rate adjustment was not significantly improving the stability and accuracy of the loss development projections. 18 As a result, the WCIRB is no longer recommending that an adjustment be made to loss development for changing claim settlement patterns. 17 See Section VI of Item AC of the June 3, 2011 WCIRB Actuarial Committee Agenda. 18 See Section I of Item AC of the June 3, 2011 WCIRB Actuarial Committee Agenda. 7

11 35% Table 8 Percentage of Indemnity Claims Settled at 15 Months 32.9% 33.1% 32.0% 30% 30.2% 30.7% 25% For informational purposes, the WCIRB has computed a series of alternative January 1, 2012 pure premium rate projections over a wide range of alternative loss development methodologies (see Exhibit 5). The resultant indicated average pure premium rates based on these alternative loss development methods range from $2.02 to $2.73 per $100 of payroll. The assumptions underlying these alternative loss development methodologies as well as the methodology recommended by the WCIRB are discussed in detail in Part A, Section B, Appendix B. 2. Trending Methodology The pure premium rates effective January 1, 2012 are intended to reflect the cost of losses and LAE incurred on all accidents that arise on policies incepting in As a result, ultimate cost (loss) information on historical accident years is adjusted, or trended, to reflect the ultimate cost of claims covered by policies incepting in First, losses are adjusted to a current, or on-level, basis by adjusting for wage inflation, statutory benefit changes and reforms, and fee schedule changes. As with accident year losses, each historical year s earned premium is adjusted to a current, or onlevel, basis by adjusting for wage level changes, rate changes and other factors impacting premiums. The recent recession significantly impacted the earned premium reported in 2009 due to abnormally high return premiums on 2007 and 2008 policies. As a result, calendar year 2009 earned premiums were significantly distorted. The earned premium for other years was also impacted by the recession, although to a lesser extent. To correct for the atypical impact on reported earned premium created by the recent recession, the WCIRB has included correction factors in the on-leveling premium adjustments that are applied to calendar years 2007, 2008, 2009 and 2010 premium. 19 The loss ratios shown for historical accident years, once adjusted to an ultimate and on-level basis, are used to project the policy year 2012 loss ratio at the industry average filed pure premium rate level as of July 1, As in the last several pure premium rate filings, the WCIRB is projecting future loss trends based on separate projections of claim frequency and claim severity. The WCIRB s forecast frequency changes are based on an econometric model developed using a long-term forty-year history of frequency changes in relation to changes in economic and other claims-related factors. The WCIRB frequency model is forecasting a decline of approximately 5% in 2010 and between 2% and 3% annually for the next three years. However, as shown in Table 9 below, preliminary information for accident year 2010 suggests a significant increase in claim frequency for See Item AC of the June 3, 2011 and August 3, 2011 WCIRB Actuarial Committee Agendas for a more complete discussion of this computation. 8

12 10% Table 9 Reported Change in Indemnity Claim Frequency 6.9% 0% -1.4% -2.7% -6.0% -2.2% -4.6% -4.9% -1.9% -10% -20% -16.8% -14.1% (3 mos.) While 2010 frequency is emerging at a level higher than forecast, accident year 2010 severity information suggests that rather than increasing at rates consistent with historical trends, accident year 2010 severities have declined (see Tables 2 and 3). The WCIRB believes the 2010 changes in claim frequency and severity are related and are partly attributed to an increase in the number of relatively small indemnity claims that would have otherwise been medical-only claims in the past. In recent pure premium rate filings, the WCIRB has generally projected future on-level losses by applying the assumed loss trends to the average of the latest two accident year on-level loss ratios. However, as in the WCIRB s January 1, 2011 Pure Premium Rate Filing, due to concerns over differences in the emergence of the latest accident year frequency and severity changes from model projections, the WCIRB is projecting the policy year 2012 on-level loss ratio by applying the separate claim frequency and severity trends to the most recent accident year (2010) on-level loss ratio. The forecast frequency growth subsequent to 2010 is based on the WCIRB s econometric model, and the forecast severity growth is based on the approximate average of the long-term pre-reform and postreform trend rates (averaging 3% for indemnity and 7% for medical). For informational purposes, the WCIRB has computed a series of alternative January 1, 2012 pure premium rate projections over a wide range of alternative trending methodologies (see Exhibit 6). The resultant indicated average January 1, 2012 pure premium rates based on these alternative trending methods range from $2.23 to $2.47 per $100 of payroll. The assumptions underlying each of these alternative trending methodologies as well as the methodology recommended by the WCIRB are discussed in detail in Part A, Section B, Appendix C. 3. Loss Adjustment Expense Projection Methodology The California Insurance Code provides that the advisory pure premium rates include the costs associated with LAE. In 2008, the WCIRB completed a comprehensive study that analyzed the impact of the 2002 through 2004 reforms on LAE. As a result of this analysis, the WCIRB is recommending projection methodologies that relate changes in LAE to changes in the number of claims and loss measures which have been shown to be correlated with LAE. 20 The WCIRB s recommended loss adjustment expense provision of 25.4% of losses for policies incepting in 2012 is predicated on these methodologies. 20 Analysis of Loss Adjustment Expense Trends, WCIRB, April 3,

13 For informational purposes, the WCIRB has computed a series of indicated loss adjustment expense provisions based on a variety of alternative loss adjustment expense projection methodologies. Estimates of the unallocated component of LAE range from 8% to 14% of losses as compared to 9.5% reflected in this filing (see Exhibit 7.1). Estimates of the allocated component of LAE range from 11% to 18% of losses as compared to 15.9% reflected in this filing (see Exhibit 7.2). The assumptions underlying each of the alternative loss adjustment expense projection methodologies as well as the methodologies recommended by the WCIRB are discussed in Part A, Section B, Appendix D. Computation of Standard Classification Relativities The process by which the classification relativities that underlie the proposed standard classification pure premium rates are computed is described in Part A, Section C. PROPOSED CHANGES TO THE INSURANCE COMMISSIONER S PLANS (PART B) The WCIRB s January 1, 2012 Pure Premium Rate Filing proposes amendments to the rules contained within the California Workers Compensation Uniform Statistical Reporting Plan 1995 (USRP), Miscellaneous Regulations for the Recording and Reporting of Data (Miscellaneous Regulations) and the California Workers Compensation Experience Rating Plan 1995 (ERP). Proposed Changes to the USRP (Part B, Section A) The WCIRB has proposed combining (a) the classifications applicable to residential and commercial carpentry and (b) the classifications applicable to residential and commercial steel framing. In addition, the WCIRB has proposed amendments to the definitions of the boilermaking and engineering classifications. Proposed Changes to the Miscellaneous Regulations (Part B, Section B) The WCIRB has proposed amendments for clarity and consistency with proposed rule revisions to other plans subject to Insurance Commissioner approval. Proposed Changes to the ERP (Part B, Section C) The WCIRB has proposed the annual updates to the rating values of the ERP to reflect the most current experience. In addition, the WCIRB has proposed amendments to the table of credibility primary and credibility excess values that was adopted last year to be effective January 1, 2012 to extend the table to include separate values for smaller expected loss size intervals. These changes are being proposed in order to avoid a significant impact to an employer s experience modification solely due to the application of the new 2012 experience rating formula. 10

14 Exhibit 1 11

15 Exhibit 1 12

16 Exhibit 2 Comparison of January 1, 2012 Proposed Pure Premium Rates with Industry Average Filed Pure Premium Rates as of July 1, 2011 NOTE: THE INDUSTRY AVERAGE FILED PURE PREMIUM RATE SHOWN BELOW FOR EACH CLASSIFICATION REFLECTS THE MIX OF INSURERS WRITING BUSINESS IN THAT CLASSIFICATION AS WELL AS THEIR UNDERWRITING AND RATE FILING PRACTICES. THE DIFFERENCES SHOWN BELOW ARE NOT NECESSARILY INDICATIVE OF FUTURE CHANGES IN ANY INDIVIDUAL INSURER S FILED PURE PREMIUM RATE OR THE RATE IT WILL CHARGE ITS POLICYHOLDERS AS INSURERS MAY, AND OFTEN DO, FILE AND USE RATES OTHER THAN THOSE PROPOSED OR APPROVED BY THE COMMISSIONER. Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference % % % % % % % % % % % % % % % % % % % % % % % % % 2123* 6.08 N/A N/A 0096* 6.62 N/A N/A % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. * This classification was established January 1, 2010; therefore, no policy year 2009 exposure information for this classification was available for deriving an industry average filed pure premium rate.

17 Exhibit 2 Comparison of January 1, 2012 Proposed Pure Premium Rates with Industry Average Filed Pure Premium Rates as of July 1, 2011 (continued) Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted.

18 Exhibit 2 Comparison of January 1, 2012 Proposed Pure Premium Rates with Industry Average Filed Pure Premium Rates as of July 1, 2011 (continued) Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted.

19 Exhibit 2 Comparison of January 1, 2012 Proposed Pure Premium Rates with Industry Average Filed Pure Premium Rates as of July 1, 2011 (continued) Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % 7227* 8.71 N/A N/A % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. * This classification was established January 1, 2010; therefore, no policy year 2009 exposure information for this classification was available for deriving an industry average filed pure premium rate.

20 Exhibit 2 Comparison of January 1, 2012 Proposed Pure Premium Rates with Industry Average Filed Pure Premium Rates as of July 1, 2011 (continued) Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference % % % % % % % % % % % % % % 7707** % % % % % % 7722** % % % % % % % % % % % % % % % % % 8278** % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. ** The rates for classifications 7707 and 7722 are per capita, and the rate for classification 8278 is per race.

21 Exhibit 2 Comparison of January 1, 2012 Proposed Pure Premium Rates with Industry Average Filed Pure Premium Rates as of July 1, 2011 (continued) Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted.

22 Exhibit 2 Comparison of January 1, 2012 Proposed Pure Premium Rates with Industry Average Filed Pure Premium Rates as of July 1, 2011 (continued) Class Code Proposed January 1, 2012 Pure Premium Rates Industry Average Filed Pure Premium Rates as of July 1, 2011 Difference % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted.

23 Exhibit 3 Computation of Proposed and Industry Average Rates A. Computation of Industry Average Filed Manual Rate as of July 1, For each of the 120 largest insurers in California, 2 the WCIRB determined the filed manual rate for each standard classification as of July 1, 2011 based on the insurer s rate filing information submitted to the California Department of Insurance (CDI). In instances when an insurer s filed manual rates reflected a deviation from the standard classification system (e.g., by sub-classification, tier, or territory), the WCIRB obtained additional information from the insurer as to the volume of business written for each of the deviated classifications. This information was used to compute the insurer s average filed manual rate for the applicable standard classification. 2. For each of the 120 insurers, the payroll reported to the WCIRB on unit statistical reports (USR) for 2009 policies 3 (reported payroll) for each standard classification (classification) was extended by the insurer s applicable filed manual rate. 4 For each classification, the resulting premium for all 120 insurers was summed and divided by the total reported payroll for the classification for all 120 insurers to produce an industry average filed manual rate for the classification. 3. The total reported payroll for each classification for all insurers was extended by the industry average filed manual rate for the classification. The resulting premium for each classification was summed and divided by the total reported payroll for all classifications for all insurers to produce the industry average filed manual rate. B. Computation of Industry Average Filed Pure Premium Rate as of July 1, For each of the 120 largest insurers in California, the WCIRB determined the filed pure premium rate for each classification as of July 1, 2011 by adjusting each insurer s filed manual rate by classification, derived as described in Section A, paragraph 1 above, to remove the applicable underwriting expense loading factor reflected in the insurer s rate filing information. 2. For each of the 120 insurers, the reported payroll for each classification was extended by the insurer s applicable filed pure premium rate. For each classification, the resulting pure premium for all 120 insurers was summed and divided by the total reported payroll for the classification for all 120 insurers to produce an industry average filed pure premium rate for the classification. 3. The total reported payroll for each classification for all insurers was extended by the industry average filed pure premium rate for the classification. The resulting pure premium for each classification was summed and divided by the total reported payroll for all classifications for all insurers to produce the industry average filed pure premium rate. 1 The average filed manual rate varies dramatically across insurers for a variety of reasons including the mix of classifications written, underwriting practices and use of rating plan adjustments. For example, an insurer with relatively high manual rates may as a matter of underwriting practice apply higher schedule credits than an insurer with lower manual rates. 2 In total, these insurers wrote in excess of 99% of the California workers compensation insurance market in The most current USRs available were for policies incepting December of 2008 through November of If an insurer filed deviations from standard classifications, the average filed manual rate for the applicable standard classification, derived as described in Section A, paragraph 1, was used instead. 5 An insurer s filed pure premium rates are a function of the set of advisory pure premium rates referenced in its rate filing as well as the manner in which the rate filing was developed. An insurer with an average filed pure premium rate greater than the industry average filed pure premium rate may or may not have higher than average filed manual rates, as the insurer may choose to apply a relatively small expense loading to develop the manual rates filed with the CDI. For example, for the 120 insurers studied, the percentage loadings in insurer rate filings applied to an insurer s pure premium rates to develop manual rates ranged from 3.4% to 73.6%. The average pure premium rate varies dramatically across insurers due to a variety of reasons including the mix of classifications written, underwriting practices, the manner in which the insurer rate filing was prepared, and use of rating plan adjustments. 20

24 Exhibit 3 C. Computation of Proposed Average Pure Premium Rate The industry average filed pure premium rate as of July 1, 2011 derived as described in Section B, paragraph 2 above, is multiplied by the indicated total loss and loss adjustment expense to industry average filed pure premium ratio (line 3 of Part A, Section B, Appendix A, Exhibit 8) to produce the proposed average pure premium rate. D. Computation of Industry Average Charged Rate for the First Quarter of The average advisory pure premium rate for 2011 is estimated by extending the January 1, 2011 advisory pure premium rate for each classification by the reported payroll for the classification for all insurers. 2. The industry average charged rate for the first quarter of 2011 is estimated by multiplying (a) the average advisory pure premium rate for 2011, derived as described in Section D, paragraph 1 above, by (b) the average policy year 2011 ratio of premium written at the industry average charged rate level to premium written at the advisory pure premium rate level based on the WCIRB s quarterly calls for experience 6 through March 31, Premiums reported on the WCIRB s quarterly calls for experience exclude the impact of deductible credits, retrospective rating plan adjustments and terrorism charges. 21

25 Exhibit 4 WCIRB Ratemaking Methodology and Process Enhancements as Reflected in the WCIRB s January 1, 2012 Pure Premium Rate Filing A. General Enhancements 1. Formed a Claims Subcommittee of individuals with expertise in claims and legal matters to meet on a regular basis to advise the WCIRB s Actuarial Committee on emerging claims-related issues that could impact the cost levels underlying pure premium rates. 2. Created an to the filing that is intended to provide non-actuaries with a highlevel summary of the most critical components of the filing. B. Loss Development Methodology Enhancements 1. Updated the WCIRB s study on the impact of reforms of 2002 through 2004 on loss development patterns to reflect the most recent information in the WCIRB s loss development projections (Impact of Recent Reform Legislation on Loss Development Patterns 2008 Update, published by the WCIRB on April 2, 2008). 2. Working through a special multi-discipline committee formed in 2009, developed a broad range of loss development diagnostic measures that are reviewed by the WCIRB Actuarial Committee and Claims Subcommittee twice a year in preparation for the WCIRB s pure premium rate filing. 3. Prepared an analysis of the stability of loss development projections across a number of alternative loss development methodologies (Part A, Section B, Appendix B, Exhibits 12.1 through 12.7 and Agenda item AC of the WCIRB Actuarial Committee meeting of June 3, 2011). 4. Completed an analysis comparing variability of paid development across insurers with that of incurred development (Agenda item AC of the WCIRB Actuarial Committee meeting of June 24, 2009). 5. Completed an analysis of post-reform indemnity loss development that confirmed that reform adjustments to the future loss development of post-reform accident years continued to be appropriate, and refined the methodology of applying those adjustments (Agenda item AC of the WCIRB Actuarial Committee meeting of June 3, 2011). 6. Augmented the series of loss development diagnostic statistics regularly presented in WCIRB pure premium rate filings with new diagnostic measures. The new loss development measures presented include accident year frequency and severity distributions by type of injury (Part A, Section B, Appendix B, Exhibits 8.1 and 8.2). 7. Augmented the series of alternative loss development projections regularly presented in WCIRB pure premium rate filings to include projections based on incurred patterns adjusted for changes in case reserve adequacy levels (Part A, Section B, Appendix B, Exhibits 16.1 through 16.11). 8. Augmented the series of alternative loss development projections regularly presented in WCIRB pure premium rate filings to include projections based on paid patterns adjusted for changes in the claim settlement pattern (Part A, Section B, Appendix B, Exhibits 20.1 through 20.13, 21.1 through and 22.1 through 22.3). 9. Augmented the series of alternative loss development projections regularly presented in WCIRB pure premium rate filings to include projections based on incurred and paid development patterns adjusted for changes in the market composition of insurers (Part A, Section B, Appendix B, Exhibits 15.1 through 15.3, 19.1 through 19.3, and 22.1 through 22.3). 10. Augmented the series of alternative loss development projections regularly presented in WCIRB pure premium rate filings to include projections based on incremental paid losses by period (Part A, Section B, Appendix B, Exhibits 23.1 through 23.4, 24.1 through 24.2, and 25.1 through 25.7). 22