Workers Compensation Insurance Rating Bureau of California. WCIRB Annual Report. WCIRBCalifornia

Transcription

1 Workers Compensation Insurance Rating Bureau of California WCIRB Annual Report 2011 WCIRBCalifornia

2 Annual Report 2011 Table of Contents WCIRB General Information... 2 President s Letter... 3 California Workers Compensation 2011 in Review... 5 A More Modern, Flexible System Coverage Information Website WCIRB President Robert Mike Retires WCIRB Committees Governing Committee Actuarial Committee Classification and Rating Committee Regulatory and Advisory Filings Actuarial Services and Research Issuance of Experience Ratings Statistical Data Collection and Validation Data Quality Enhancement Program Policy Examination Classification Inspection Program Test Audit Program Policyholder Appeals Policyholder Ombudsman Legislative Monitoring and Evaluation Customer Service Support Functions Comparative Management Accounts Membership Assessment and Expense Ratios Membership Directory

3 WCIRB General Information The Workers Compensation Insurance Rating Bureau of California (WCIRB) was established as the California Inspection Rating Bureau in 1915 by sixteen companies writing workers compensation insurance in California. Today, the WCIRB s membership is comprised of all insurance companies licensed to transact workers compensation insurance in California more than 400. The WCIRB is licensed by the California Insurance Commissioner and operates under the authority of the California Insurance Code. It is an unincorporated, nonprofit association and is the Insurance Commissioner s designated statistical agent for workers compensation insurance. WCIRB operating funds are derived from membership fees, premium assessments paid by members and revenue generated from fees for services and products. No state monies are expended to support the operations of the WCIRB. WCIRB 2011 Annual Report 2

4 President s Letter President s Letter An open letter to WCIRB member companies, valued constituencies and fellow colleagues in the California workers compensation community. In December 2011, I was appointed by the WCIRB Governing Committee to serve as President and Chief Executive Officer following Bob Mike s retirement after 42 years of dedicated service to our organization and the industry. Having spent nearly 30 years of my career in the California workers compensation industry, I am respectful of the vital role the WCIRB plays within the system, and I am honored to lead the company as we move ahead. My diverse background as a risk manager, a business consultant and an insurance company executive has granted me a broad view of the issues and stakeholder perspectives about workers compensation. I have seen first hand the positive impact made by the WCIRB, and I am excited about the potential for new opportunities moving forward. I join the WCIRB at an important inflection point in the workers compensation system. California s economic recovery is underway, albeit slowly. Statewide premiums are growing again. There has been a modest movement in average industry-charged rates; yet, they remain far below their pre-reform levels. A diverse insurance market continues to be available to employers, with insurer market-share concentration levels also well below pre-reform figures. Underlying costs of loss and loss adjustment expenses, however, are on the upturn most notably the sharp rise in costs associated with administering benefits to injured workers. As public policymakers and stakeholders discuss these trends and their impacts, the WCIRB will continue to share its independent, industry-wide research and actuarial analysis to inform the discussions and expand awareness. Since its founding in 1915, nearly 100 years ago, the WCIRB has held a key place in the California workers compensation community. It has a long history of excellence in ratemaking, actuarial research and data quality; all core functions that enable insurers, the California Department of Insurance (CDI) and other stakeholders to better navigate this complex workers compensation market. Perhaps less visible, though, are several equally important services provided by the WCIRB s operations staff, such as reviewing countless numbers of submitted insurance policies and endorsements, processing nearly one million unit statistical reports, and issuing over 130,000 policyholder experience ratings annually. As we approach our first 100 years a major milestone for any business there is a spirit of renewal and transformation within the WCIRB as we bring forth the systems, analytics and customer service needed to effectively serve our constituencies into the next 100 years. Our mainframe replacement system and our medical transaction data collection system are already in development. Both are on track for deployment in late 2012 and they will have a transformative impact on the WCIRB. When fully implemented over the coming two years, our member insurers and other stakeholders will benefit from greatly increased efficiency in the WCIRB s operations and from an array of new products and services. In addition to new internal systems, we are committed to continuing our expansion of information and services available via the Internet to the public; especially to policyholders and insurance brokers and agents. In 2011, the WCIRB made its online service for licensed agents and brokers available at no cost, greatly expanding our relationship with this important constituency. We also began providing experience rating worksheets directly to policyholders upon request. Beginning in March 2012, we will launch a coverage website, to assist any person in determining whether an employer is insured for workers compensation. Looking forward, we are exploring additional ways to leverage these new connections to increase the value we provide to all of our stakeholders and to further our external outreach. 3 WCIRB 2011 Annual Report

5 President s Letter While I have been with the WCIRB only a short time as of this writing, I have been impressed with the dedication, integrity and commitment exhibited by the WCIRB s staff in their service to the California workers compensation community. I am also impressed with, and very appreciative of, those who volunteer to serve on WCIRB committees and working groups. Lastly, and one of our greatest assets, is the strong collaboration and open dialogue we have with the Insurance Commissioner and his staff. In closing my first President s Letter, I want to personally thank Bob Mike for his 22 years of leadership at the WCIRB as its former president and for his assistance to me, both as an insurance company executive when I was outside of the WCIRB and as the incoming President during my transition. Bob led the organization through periods of great change including several major workers compensation reforms. With each successive challenge, the WCIRB adapted to its new environment and continued to provide the data, analysis and services required by each of the varied stakeholders. Bob s leadership shaped the WCIRB into one of the industry s most respected organizations. With the continued support of our membership, the CDI, our industry constituencies and the terrific WCIRB team, we will continue to serve California s workers compensation community with distinction. Bill Mudge President and CEO WCIRB 2011 Annual Report 4

6 California Workers Compensation 2011 in Review California Workers Compensation 2011 in Review California s slow recovery from the worst economic downturn in decades continued in 2011 and for the second consecutive year, statewide workers compensation premium levels increased. The estimated statewide written premium grew approximately $600 million from $7.1 billion in 2010 to an estimated $7.7 billion in The average cost of claims also showed modest growth in 2011 and insurer expense ratios continued to remain high. As a result of the increases in claims costs and expenses, the increase in written premium was insufficient to reduce the accident year combined loss and expense ratio for 2011 which is projected to remain once again at 130% for Lawmakers in Sacramento continued to focus their efforts on tackling California s budget crisis and unacceptably high unemployment. As a result, no major legislative or regulatory changes impacting workers compensation were adopted in There was also no major judicial action impacting workers compensation in 2011; however, the industry continues to grapple with the ramifications of the 2009 Ogilvie and Almaraz/Guzman decisions. (Ogilvie v. City and County of San Francisco 74 Cal. Comp Cases 1127 (2009) and Almaraz v. Environmental Recovery Services /Guzman v. Milpitas Unified School District 74 Cal. Comp Cases 1084 (2009).) Rates Despite no change in advisory pure premium rates, many insurers filed for manual rate increases in The industry average filed manual rate as of July 1, 2011 was $3.27; however, insurers continued to significantly discount their filed manual rates. The industry average charged rate for 2011 was $2.37 a significant discount from the industry average filed manual rate and almost $4.00 below the industry average charged rate in the second half of Despite the discounting, the industry average charged rate has increased modestly for the last three consecutive years, and for the first nine months of 2011 was almost 10% over that for Nevertheless, industry average charged rates remained far below the pre-reform levels. In November, the Insurance Commissioner approved an average advisory pure premium rate of $2.30 per $100 of payroll effective January 1, 2012, which was slightly below the industry average filed pure premium rate as of July 1, 2011 of $ Average Insurer Rates per $100 of Payroll $ $2.37 $2.37 $ Industry Average Manual Rate Industry Average Charged Rate to Industry Average Filed Pure Premium Rate Approved Average Pure Premium Rate $ Dollars Average Insurer Charged Rate per $100 of Payroll 8.00 $ $5.49 $4.36 $2.85 $2.30 $2.16 $2.29 $2.32 $ Policy Year 5 WCIRB 2011 Annual Report

7 California Workers Compensation 2011 in Review Premium Despite only modest movement in industry average charged rates, statewide written premium in 2011 increased significantly for the second consecutive year. The WCIRB estimates that statewide written premium in 2011 will be approximately $7.7 billion. This represents an increase of approximately $600 million from 2010 and $1.1 billion from Nevertheless, the 2011 premium remains below the pre-recession levels in 2007 and almost $9 billion less than the pre-reform high in $ Billions Written Premium Net of Deductible Credits $16.3 $ $11.3 $8.9 $7.6 $6.6 $7.1 $ Estimated Calendar Year Claim Frequency Claim frequency in California has declined steadily for decades. The WCIRB estimates that there will be approximately 16 indemnity claims per 1,000 full-time employees in 2011 compared to almost 50 per 1,000 full-time employees in This long-term decline has generally been attributed to shifts in the California economy to less hazardous occupations, increased mechanization and greater attention to workplace safety. However, in 2010, indemnity claim frequency increased sharply, while indemnity claim frequency was unchanged through the first nine months of The WCIRB has identified a number of factors contributing to the 2010 increase in claim frequency, including an increase in cumulative injury claims, growth in the number of late-reported claims, and a shift in the mix of medical-only claims and indemnity claims. The WCIRB is continuing its investigation of recent claim patterns to determine whether the 2010 increase is a single-year aberration attributable to recent economic patterns or an indication of a permanent shift in the long-term claim frequency trend. 50 Indemnity Claim Counts per 1,000 Full-Time Employees 49.9 As of September 30, Calendar Year Preliminary WCIRB 2011 Annual Report 6

8 California Workers Compensation 2011 in Review Claim Severity Following several years of increasing average claim costs after the full implementation of the reforms in 2005, claim severity growth moderated in Based on preliminary data, only a small increase is anticipated for The preliminary estimate of the average cost of an accident year 2011 indemnity claim is approximately $67,000. While this is more than 40% higher than the average cost of a 2005 claim, it is only 2% higher than the average cost of a 2009 indemnity claim. The WCIRB believes that at least some of the recent moderation of claim severity trends is attributable to an increased frequency of smaller indemnity claims. $ Thousands Estimated Total Loss per Indemnity Claim As of September 30, $63,197 $65,776 $65,495 $67, $57,543 $54,624 $51,900 $57, $47,976 $46, Preliminary Accident Year Total Benefit Cost The workers compensation insurance reforms of 2002 through 2004 led to reductions in both claim frequency and claim severity and led to significant reductions in total incurred benefit costs from their pre-reform levels. For 2006 through 2008, total statewide benefit costs increased as sharp growth in claim severities more than offset frequency declines. In 2009, total benefits declined as a result of a recession-related decline in exposure. With increasing claim frequency, the total cost of benefits increased in With modest increases in exposure and claim severity, total benefit costs in 2011 are expected to again increase modestly. $ Billions Estimated Ultimate Losses by Accident Year $12.3 $10.7 As of September 30, $7.9 $6.7 $7.2 $7.7 $8.1 $7.8 $ Accident Year 7 WCIRB 2011 Annual Report

9 California Workers Compensation 2011 in Review Loss Adjustment Expenses The cost of administering claims has continued to grow in California. In particular, the claim adjustment costs that can be allocated to a specific claim have grown sharply in recent years. The average cost of allocated loss adjustment expenses per indemnity claim in 2010 for private insurers of almost $11,000 is almost 50% above the comparable 2006 amount. Among the factors leading to this increase are sharp growth in the volume of medical liens, the impact of the Ogilvie and Almaraz/Guzman decisions, and an increase in the rate of injured workers obtaining legal representation. $ Thousands Ultimate ALAE Per Indemnity Claim Private Insurers As of September 30, $7,724 $8,115 $7,635 $7,107 $7,410 $8,000 $8,739 $9,982 $10, Accident Year Industry Results Reduced premium levels, increasing claim severities between 2006 and 2009, and high expense ratios attributable, in part, to increases in the costs of adjusting claims have eroded statewide underwriting results. The WCIRB estimates a statewide combined loss and expense ratio for accident years 2009 and 2010 of 130%, which is the highest combined ratio since accident year While full accident year 2011 results were not available at the time of publication, given the anticipated growth in premium, the WCIRB expects the accident year 2011 combined ratio to be slightly lower. 200% Accident Year Combined Loss and Expense Ratios As of September 30, 2011 Other Expenses LAE Losses 150% 143% 18% 130% 130% 18% 113% 112% 22% 22% 100% 50% 107% 16% 14% 83% 80% 15% 12% 53% 57% 55% 14% 14% 9% 10% 34% 34% 69% 16% 12% 41% 91% 18% 15% 58% 20% 23% 24% 18% 74% 85% 84% 0% Accident Year WCIRB 2011 Annual Report 8

10 California Workers Compensation 2011 in Review Industry Results The National Association of Insurance Commissioners (NAIC) annually publishes a summary of profitability by line of business and state based on information reported by insurers on their statutory annual statements The latest NAIC report shows that for the third consecutive year, the average return on net worth for the California workers compensation insurance industry of 5.2% lagged well below the Fortune Magazine All Industry average of 12.7% in Given indications of continued growth in claims costs and loss adjustment expenses, the WCIRB does not expect significant improvement in For the last 10 years, the California workers compensation return on net worth has averaged 5.6% which is well below the Fortune Magazine All Industry average of 12.9% for the same period. % Average Return on Net Worth Fortune Magazine - All Industry California Workers Compensation Calendar Year Source: NAIC Report on Profitability in Year Arithmetic Average Return California Workers Compensation 5.6% Fortune Magazine - All Industry 12.9% Reserve Levels The reforms of 2002 through 2004 significantly improved the industry s reserve adequacy. Statewide insurer-reported losses as of December 31, 2001 were more than $12 billion less than the WCIRB s estimate of the ultimate cost of losses incurred prior to that date. Conversely, at year-end 2010, the total statewide incurred losses reported by insurers exceeded the WCIRB s estimate of the ultimate cost of losses incurred prior to that date by approximately $2.7 billion. $ Billions 18 Estimated Ultimate Losses Less Reported Losses As of September 30, Evaluation Year 9 WCIRB 2011 Annual Report

11 California Workers Compensation 2011 in Review Insurance Market Since enactment of the reforms of 2002 through 2004, a number of new insurers have entered the market and others have significantly increased their capital commitment in California. With increasing private capital returning to the market and continued vigorous competition, State Compensation Insurance Fund s (State Fund) share of the market has declined and the market has continued to become less concentrated. In 2011, the ten largest insurer groups wrote 64% of the statewide market, compared to 80% in % State Fund Market Share (Gross of Deductible Credits) Private Insurers State Fund Calendar Year 9 Months % 100 Market Concentration Ratios Top 5 Insurers Top 6th to 10th Insurers Top 11th to 20th Insurers % 19% 21% 18% 20% 20% 15% 15% 12% 17% 13% 16% 12% 17% 13% 15% 15% 16% 14% 18% 15% 19% % 48% 47% 60% 63% 59% 56% 55% 49% 47% 45% Calendar Year 9 Months Legislative, Regulatory and Judicial Activity There was little in the way of major legislation impacting workers compensation in However, in September of 2011, Assembly Bill No. 378 was enacted. This bill was intended to curtail some of the costs related to compound drugs. California Governor Jerry Brown vetoed several other workers compensation bills in 2011 that some industry observers believed would have raised workers compensation system costs or fostered litigation. In his veto message, the Governor indicated that he was willing to make changes to the system so long as the changes are made in a balanced way where cost increases are offset by cost savings. The 2009 Ogilvie and Almaraz/Guzman decisions eroded the objectivity of the post-reform permanent disability rating process by permitting a rating to be rebutted by the introduction of other evidence. Data compiled by the WCIRB indicates that the Ogilvie and Almaraz/Guzman decisions have impacted permanent disability costs. Nevertheless, with a number of issues pending, it is still unclear whether these decisions represent a relatively minor adjustment to the permanent disability system or a return to a system that was generally considered inconsistent and unpredictable. WCIRB 2011 Annual Report 10

12 Feature Story A More Modern, Flexible System In May of 2010, the WCIRB announced the launch of a multi-year project to replace its increasingly obsolete mainframe system with a more modern, flexible system. The project, referred to as the Strategic Transformation and Replacement Project, or STAR, will result in significant technology improvements and will streamline and re-engineer many WCIRB internal processes and procedures. When fully completed in 2013, these new technology and process improvements will allow the WCIRB to more efficiently interact with its members; provide new products and services for insurers, producers and others; and better serve the California Department of Insurance (CDI) and other stakeholders. To assist in the development effort, the WCIRB is partnering with TATA Consultancy Services (TCS), a highly-respected, worldwide information technology company with significant insurance industry experience. In January 2011, consultants from TCS along with veteran WCIRB business process experts were consolidated into a dedicated business unit and moved to a satellite office close to the WCIRB s San Francisco office. To manage the project effectively, the WCIRB retained a dedicated project manager and established a formal project management structure to ensure that the project remains on track and conforms to established best practices with respect to infrastructure, security and software coding. In addition, an advisory working group of select insurance industry information technology executives was formed, and the WCIRB engaged the services of Microsoft and the Gartner Group to perform independent reviews of the project and technologies used. Through the first half of 2011, the STAR team documented the system s functional requirements, designed the system architecture, developed data migration plans, and established a quality assurance plan. By the beginning of August, all of these activities were complete and, with the close of this definition phase, the STAR project had reached its first major milestone. In the second half of 2011, STAR began building all of the systems and processes associated with unit statistical report (USR) submission processing and auditing; the systems for managing staff work queues; the systems for calculating experience modifications and issuing experience rating worksheets; and the systems for selecting policies for classification inspections and test audits. As 2011 drew to a close, many of the components that are part of this phase were in various stages of development. User acceptance testing is scheduled for the third quarter of 2012 and these functions will begin rolling out in late 2012 or early Within a few months of this initial deployment, the WCIRB will extend its online services to allow insurers online access to data submissions, USRs, USR audit errors, WCIRB queries, and WCIRB reports. The final phase of the project focuses on expanding the WCIRB s capacity to process electronic policies and policy documents. This will move the WCIRB closer to its goal of completely eliminating the processing of hard copy policy documents. This phase is scheduled for rollout in the middle of The STAR project represents a significant investment of resources by WCIRB members, but one that will ultimately pay dividends in the form of new products and services for insurers and increased efficiency in WCIRB operations. It will also provide the capabilities and flexibility needed to better service the information and data needs of insurers, the CDI and other stakeholders. 11 WCIRB 2011 Annual Report

13 Feature Story Coverage Information Website Assembly Bill No. 483 (AB 483), enacted in 2009, directs the WCIRB, pursuant to regulations to be adopted by the Insurance Commissioner, to build and maintain a website to assist any person in determining whether an employer is insured for workers compensation. The website is to be operational within one year of adoption of the regulations by the California Department of Insurance (CDI). The CDI s regulations became effective March 12, The website will provide the name of an insurer that wrote a workers compensation policy for an employer on a specific day within five years from the date of the search. Based on AB 483 and the CDI regulations, the WCIRB began developing user requirements and technical specifications for the website. The technical specifications were complicated by the fact that the website must use the existing WCIRB mainframe system as the system of record when it is launched, but it must be designed in such a way as to integrate into the new STAR system once it becomes operational in Despite these challenges, the new website was substantially completed by the end of 2011 and was scheduled to be launched March 1, The website will be located at WCIRB 2011 Annual Report 12

14 WCIRB President Robert Mike Retires WCIRB President Robert Mike Retires After 42 years of service to the California workers compensation community, President and Chief Executive Officer Robert Mike retired effective December 1, Mr. Mike started his WCIRB career as a Field Representative in 1969 after completing a twoyear stint in the U.S. Army. He went on to serve a variety of roles including Assistant Manager of Field Services ( ), Senior Classifier and Audit Reviewer ( ), Assistant Vice President ( ), Vice President, Legal Officer ( ), and Senior Vice President, Legal Officer ( ). He was appointed President and Chief Executive Officer in During his tenure as president, the workers compensation industry in California underwent a number of dramatic changes including the inauguration of California s first elected Insurance Commissioner in 1991, repeal of the minimum rate law in 1995, the workers compensation crisis and resulting insurer insolvencies at the turn of the century, and unprecedented legislative and regulatory system reforms between 2002 and This period of change, coupled with rapid technological change, exerted significant pressure on the WCIRB to modernize its underlying computer systems and accelerate its business processes to adapt to the growing needs of its stakeholders. Throughout these various modernization initiatives, Mr. Mike ensured that the WCIRB remained committed to excellence in data quality and continued to provide the information and analysis that stakeholders have relied upon throughout the WCIRB s 96- year history. As we approach the organization s 100th anniversary, the WCIRB staff and insurer members thank Mr. Mike for his leadership and his lasting contribution to the California workers compensation industry. 13 WCIRB 2011 Annual Report

15 WCIRB Committees WCIRB Committees Governing Committee The Governing Committee sets policy and oversees management of the operations of the WCIRB, including the actions of all other WCIRB committees. Actuarial Committee The Actuarial Committee advises the Governing Committee with respect to advisory pure premium rates and the Classification and Rating Committee with respect to classification ratemaking. The Committee also conducts research and reviews actuarial methodologies used for ratemaking. Classification and Rating Committee The Classification and Rating Committee reviews proposed changes to the California Insurance Commissioner s regulations and advises the WCIRB on a variety of administrative matters. WCIRB 2011 Annual Report 14

16 WCIRB Committees Governing Committee Organization The Governing Committee is comprised of twelve members: seven private insurers, State Compensation Insurance Fund (State Fund) and four public members. Two public members represent insured employers and two represent organized labor. Each year at the WCIRB s Annual Meeting, private insurer members are elected by the WCIRB membership to replace the insurers whose terms have expired. Governing Committee members serve three-year terms. The Insurance Commissioner appoints public members to serve two-year terms. By statute, State Fund is a permanent member of the Governing Committee. The Insurance Commissioner or a designated representative is entitled to attend all meetings. Regular meetings of the Governing Committee are open to the public; meeting dates, agenda and minutes are available on the WCIRB website. Responsibilities The Committee sets policy for the WCIRB and oversees management of the WCIRB, including the actions of all other WCIRB committees. Committee Members Insurer Members in 2011 James Little Pacific Compensation Insurance Company (Chairperson) William Miller ACE Property & Casualty Insurance Company T. Hale Johnston Employers Compensation Insurance Company Kevin Harnetiaux Hartford Accident and Indemnity Company Robert Darby Oak River Insurance Company Thomas Rowe State Compensation Insurance Fund Jon Gice Travelers Indemnity Company Public Members in 2011 Mitch Seaman Organized Labor Lee Pearson Organized Labor Karyn Smithson-Hughes Insured Employers Bruce Wick Insured Employers California Department of Insurance Representatives Christopher Citko Drake Shogun Jeffrey Jensen Zurich American Insurance Company 15 WCIRB 2011 Annual Report

17 WCIRB Committees Actions in 2011 The Committee met on seven occasions in James Little of Pacific Compensation Insurance Company presided as chairperson. In February of 2011, the Committee adopted a staff-proposed plan to expand access to information via the WCIRB website. The plan included the elimination of the fee for agents and brokers to access WCIRB Online services and the dissemination of information regarding WCIRB committee meetings to the general public via the website. In April of 2011, the Committee directed that an informational analysis of December 31, 2010 experience be submitted to the Insurance Commissioner in lieu of submitting a July 1, 2011 advisory pure premium rate filing. However, after the California Department of Insurance advised that it would treat the informational filing as an advisory pure premium rate filing and the Committee had not intended it as such, the informational filing was later withdrawn. In August of 2011, the Committee authorized the WCIRB to submit a January 1, 2012 Pure Premium Rate Filing reflecting an average pure premium rate of $2.33 per $100 of payroll. This average rate was 1.8% lower than the average pure premium rate reflected in insurer rate filings. (Additional information regarding this filing can be found in the Actuarial Committee and Regulatory and Advisory Filings sections of this report.) The Insurance Commissioner later approved pure premium rates that averaged $2.30 per $100 of payroll. In addition to the routine management of the WCIRB s internal operations and committee oversight activities, other significant Governing Committee actions in 2011 included the following: Authorized the filing of a number of proposed changes to the California Workers Compensation Uniform Statistical Reporting Plan 1995 and the California Workers Compensation Experience Rating Plan 1995 but rejected a Classification and Rating Committee proposal to increase the wage level threshold for several dual wage classifications, and instead directed that the dual wage classification program be studied, including an evaluation of its continued viability in the competitive rating environment. Adopted an update to the WCIRB strategic business plan. Received the follow-up report to the California Department of Insurance Report on the Operational Examination of the WCIRB completed in Amended the Committee s guidelines for considering a mid-year advisory pure premium rate filing. Under the revised guidelines, mid-year filings generally will not be made in the absence of highly unusual volatility in the experience or major legislative, regulatory or judicial action. Adopted amendments to the Test Audit Program to clarify the minimum standard of performance for both payroll and claims classification test audits and to provide for a system of fines for failure to submit test audit materials on a timely basis. The system of fines is to be effective July 1, 2012, while the other changes are to be effective January 1, Reviewed the Test Audit Program performance of an insurer that, subsequent to review by the Classification and Rating Committee, had failed to sustain an acceptable level of audit accuracy. The Governing Committee authorized an increase in monthly selections, the imposition of fees for all test audits, and significant monthly fines until such time as the insurer achieves the minimum standard of performance. In December of 2011, appointed William (Bill) Mudge as WCIRB President and Chief Executive Officer, replacing Robert Mike, who retired on December 1, WCIRB 2011 Annual Report 16

18 WCIRB Committees Actuarial Committee Organization The WCIRB s Actuarial Committee is comprised of seven actuaries. The WCIRB President appoints six of the Committee members while the public members of the WCIRB Governing Committee appoint the seventh. Actuaries representing the California Department of Insurance (CDI) also participate in all Actuarial Committee deliberations. The meetings of the Actuarial Committee are open to the public. Meeting dates, agenda and minutes are available on the WCIRB website. Responsibilities The Actuarial Committee s primary responsibilities are to (1) advise the Governing Committee with respect to advisory pure premium rates, (2) conduct research in ratemaking methodologies and procedures, (3) develop the methods used to produce the rating values contained in the California Workers Compensation Experience Rating Plan 1995, (4) review the methodologies used in developing the rating values reflected in the WCIRB s advisory rating plans, and (5) provide guidance as to the type of statistical information needed to perform the WCIRB s actuarial and research functions. Committee Members Insurer Members in 2011 Guy Avagliano State Compensation Insurance Fund Rose Barrett Chartis Insurance James Gebhard Farmers Insurance Group of Companies Neal Leibowitz The Hartford Public Members Representative Mark Priven California Department of Insurance Representatives Ronald Dahlquist Robert Hallstrom Giovanni Muzzarelli Robert Meyer Zenith Insurance Company Jill Petker Liberty Mutual Group 17 WCIRB 2011 Annual Report

19 WCIRB Committees Actions in 2011 The Actuarial Committee met six times in The Committee reviewed quarterly summaries of statewide accident year experience. Based on its review of March 31, 2011 experience, the Committee recommended an average pure premium rate of $2.33 per $100 of payroll effective January 1, 2012, which was 1.8% less than the industry average filed pure premium rate as of July 1, The Actuarial Committee s recommended January 1, 2012 advisory pure premium rates reflected a number of ratemaking enhancements that were developed in 2011, including a refined methodology to apply the impact of the reforms of 2002 through 2004 to indemnity loss development, an adjustment applied to correct for the impact of the recession on audit premiums, new loss development groupings for classification ratemaking, and an enhanced methodology to adjust for inflationary impacts on allocated loss adjustment expenses. In 2011, the Committee provided input regarding the methodologies used by the WCIRB to develop the rating values of the advisory California Retrospective Rating Plan, including the methodology used to simulate individual claim incurred loss development and the application of loss trend rates that vary by the size of the claim. The Committee also reviewed an analysis of updated experience rating credibility values and thresholds that is anticipated to result in changes to be proposed in 2012 to be effective January 1, In 2011, the Committee also completed several ratemaking research studies designed to enhance the WCIRB pure premium ratemaking methodologies. These included a comprehensive review of loss development methodologies, which incorporated an analysis of the impact of declining claim settlement rates and the impact of reforms on paid loss development. In addition, the Committee reviewed an updated analysis of the cost impact of the Ogilvie and Almaraz/Guzman decisions on permanent disability benefits based on the most current emerging data, an analysis of allocated loss adjustment expense severity trends, a study of long-term medical loss development, and a retrospective assessment of the impact of the reforms of 2002 through 2004 on indemnity claim frequency and severity. The results of these analyses are now reflected in WCIRB advisory pure premium rate filings. WCIRB 2011 Annual Report 18

20 WCIRB Committees Classification and Rating Committee Organization The Classification and Rating Committee is comprised of seven members: six private insurers and State Compensation Insurance Fund (State Fund). State Fund is a permanent member of the Committee. Each year at the WCIRB s Annual Meeting, two private insurer members are elected by the WCIRB membership to serve three-year terms. A designated representative of the Insurance Commissioner is entitled to attend all meetings. Regular meetings of the Classification and Rating Committee are open to the public; meeting dates, agenda and minutes are available on the WCIRB website. Responsibilities The Committee s primary responsibility is to review proposed changes to the Insurance Commissioner s workers compensation regulations and provide recommendations to the Governing Committee with respect to these changes. Additionally, the Committee provides guidance to the WCIRB on a wide variety of administrative matters. Committee Members Insurer Members in 2011 John Gagan CompWest Insurance Company Ellen Sonkin National Union Fire Insurance Company of Pittsburgh PA Karen Sterner Pacific Compensation Insurance Company Reggie Fradkin Republic Indemnity Company of America Insurer Members in 2011 Diane Lawrence State Compensation Insurance Fund Jim McGinn Travelers Indemnity Company Margaret Tsai United States Fire Insurance Company California Department of Insurance Representatives Christopher Citko Drake Shogun Actions in 2011 Of particular note in 2011 were the Committee s recommendations to modify the California Workers Compensation Uniform Statistical Reporting Plan 1995 to amend the classifications associated with racing stables, parcel delivery companies, newspaper delivery, forest engineers, and carpentry and steel framing industries. The Committee also recommended changes to the reporting requirements to add an Estimated Audit Code to provide an automated way for insurers to indicate that unaudited exposure is the result of an uncooperative policyholder. These changes were approved by the Insurance Commissioner to be effective January 1, The Committee also recommended modifications to the California Workers Compensation Experience Rating Plan 1995 to amend the credibility primary and credibility excess values in Table III, Credibility Primary and Credibility Excess Values, to provide separate rating values for specified expected loss intervals below $8,486. These changes were approved by the Insurance Commissioner to be effective January 1, Additionally, the Committee provided input regarding the manner in which information would be presented in future WCIRB advisory pure premium rate filings in order to comply with a directive from the Insurance Commissioner, the mid-year pure premium rate filing process, several dual classification by wage level studies, other classification studies, and proposed changes to the regulatory plans and revisions to the WCIRB Test Audit Program. The Committee also approved numerous requests to use selfinsured data for experience rating. 19 WCIRB 2011 Annual Report

21 WCIRB Core Services WCIRB Core Services Regulatory and Advisory Filings Actuarial Services and Research Issuance of Experience Ratings Statistical Data Collection and Validation WCIRB Data Quality Enhancement Program Policy Examination Classification Inspection Program Test Audit Program Policyholder Appeals Policyholder Ombudsman Legislative Monitoring and Evaluation Customer Service Support Functions WCIRB 2011 Annual Report 20

22 WCIRB Core Services Regulatory and Advisory Filings As a licensed rating organization and the California Insurance Commissioner s designated statistical agent, the WCIRB makes recommendations to the Insurance Commissioner with respect to advisory pure premium rates and the rules and regulations contained in the California Workers Compensation Uniform Statistical Reporting Plan 1995 (Uniform Statistical Reporting Plan), Miscellaneous Regulations for the Recording and Reporting of Data (Miscellaneous Regulations), and the California Workers Compensation Experience Rating Plan 1995 (Experience Rating Plan). These recommendations are contained in the WCIRB s pure premium rate filing and submitted annually to the California Department of Insurance (CDI). Once submitted, the CDI holds a public hearing, after which the Insurance Commissioner issues a decision. The pure premium rates approved by the Insurance Commissioner are advisory only; insurers are not required or obligated to use them. The Insurance Commissioner does not set rates in California. January 1, 2012 Pure Premium Rate Filing On August 22, 2011, the WCIRB submitted its January 1, 2012 Pure Premium Rate Filing to the Insurance Commissioner, recommending an average pure premium rate of $2.33 per $100 of payroll, which was 1.8% less than the corresponding industry average filed pure premium rate of $2.37 as of July 1, The proposed January 1, 2012 advisory pure premium rates reflected premium, loss and loss adjustment expense experience as of March 31, 2011, the latest available loss and payroll experience by classification, and loss projection methodologies that were generally consistent with those in the WCIRB s January 1, 2011 Pure Premium Rate Filing. The filing also included proposed changes to the Uniform Statistical Reporting Plan, Miscellaneous Regulations, and Experience Rating Plan. On September 27, 2011, the CDI held a public hearing to consider all matters included in the WCIRB s January 1, 2012 Pure Premium Rate Filing. On November 4, 2011, the Insurance Commissioner issued his Decision approving advisory pure premium rates by classification that reflected an average of $2.30 per $100 of payroll. The CDI approved all of the WCIRB s proposed amendments to the Uniform Statistical Reporting Plan, the Miscellaneous Regulations and the Experience Rating Plan, with the exception that a proposed amendment to the boilermaking classification was not approved pending further study. Actuarial Services and Research WCIRB actuaries provide information and analyses on workers compensation costs and exposures to WCIRB committees, the California Department of Insurance (CDI), member insurers, the California Legislature, and others in the workers compensation community. The WCIRB makes a number of actuarial reports available on the WCIRB website in the Data and Reports section. Other actuarial research is incorporated into Actuarial Committee agenda and minutes which are also available on the website. On a quarterly basis, WCIRB actuaries prepare a comprehensive evaluation of insurer experience for review by the Actuarial Committee. The December 31, 2010 evaluation of statewide experience was reviewed in consideration of a potential mid-year pure premium rate filing. The March 31, 2011 evaluation formed the basis of the WCIRB s January 1, 2012 Pure Premium Rate Filing submitted to the CDI on August 22, 2011, and included a detailed review of the factors anticipated to impact the costs of 2012 policies, a summary of insurer pricing information, and a comprehensive summary of a wide range of alternative loss and loss adjustment projection methodologies. In addition, WCIRB actuarial staff (1) published quarterly summaries of industry financial results, (2) provided quarterly reports to the California Insurance Commissioner on individual insurer results for solvency monitoring purposes, (3) conducted an analysis of large deductible experience, (4) published annual reports on statewide paid benefit costs and the latest reported policy year premium and loss information, and (5) published two comprehensive summaries of loss development, trend and loss adjustment expenses for review by both the Actuarial Committee and the Claims Subcommittee. 21 WCIRB 2011 Annual Report

23 WCIRB Core Services In 2011, WCIRB actuarial staff implemented a number of new data validation processes intended to further enhance the reliability of the data underlying the WCIRB s ratemaking. In May of 2011, staff implemented a new data certification form. This form requires each insurer s actuary or senior officer to respond to a wide range of specific questions pertinent to the reporting of aggregate financial data underlying WCIRB pure premium rate filings. In 2011, WCIRB actuarial staff continued its multi-year review of overall ratemaking methodologies and made a number of additional methodology and process enhancements in the January 1, 2012 Pure Premium Rate Filing. Also, staff undertook a comprehensive review of the methodology underlying the rating values published in the advisory California Retrospective Rating Plan and the advisory California Large Risk Deductible Plan and continued to implement a number of process enhancements in preparation for the updated advisory plans to be published in Finally, the actuarial staff presented a number of cost analyses to the Actuarial Committee, including analyses of the impact of the 2009 Ogilvie and Almaraz/Guzman Workers Compensation Appeals Board decisions on costs, the impact of the recession on audit premiums, the slowdown in indemnity claim development, and the increasing trend in allocated loss adjustment expenses. Issuance of Experience Ratings California s workers compensation experience rating system is a merit rating system intended to provide employers a direct financial incentive to reduce work-related accidents. The experience rating system objectively distributes the cost of workers compensation insurance more equitably among employers assigned to particular industry classifications. The WCIRB administers the California Department of Insurance (CDI) regulations governing the Experience Rating System. These regulations are contained in the California Workers Compensation Experience Rating Plan (Experience Rating Plan) and are part of the California Code of Regulations (Title 10, Section ). The Experience Rating Plan is approved by the Insurance Commissioner. As of the end of 2011, approximately 112,500 California policyholders qualified for experience rating, and the WCIRB issued a total of 133,606 experience modifications, approximately 98% of which were issued prior to their effective dates. Experience Rated Policyholders Active Experience Rated Risks 120, , , , ,551 Original Ratings Issued 126, , , , ,339 Revised Ratings Issued 15,834 16,676 17,483 15,384 15,267 WCIRB 2011 Annual Report 22

24 WCIRB Core Services Statistical Data Collection and Validation The WCIRB collects and processes Unit Statistical Reports (USR) containing policy level payroll and loss information. This data, which is required to be submitted by insurers for each California workers compensation insurance policy, is used to produce experience ratings for eligible policyholders and to develop advisory pure premium rates. The WCIRB audits USR data to ensure accuracy for experience rating and ratemaking purposes. In 2011, the WCIRB processed 885,066 USRs. Unit Statistical Reports First Reports 573, , , , ,235 Second Reports 55,648 66,298 49,706 48,705 43,341 Third Reports 40,390 40,537 39,732 39,995 37,336 Fourth Reports 38,391 34,383 30,950 34,156 32,608 Fifth Reports 33,810 33,219 28,472 26,973 28,915 Sixth Reports* 10,062 30,861 27,283 23,494 22,513 Seventh Reports* n/a 10,167 23,012 21,499 18,688 Eighth Reports* n/a n/a 7,761 18,606 16,967 Corrections 45,468 54,566 87,313 76,640 72,463 Totals 797, , , , ,066 * Sixth, seventh and eighth reports were not required for policies incepting prior to January 1, Data Quality Enhancement Program The Data Quality Enhancement Program (Program) is part of the WCIRB s commitment to continuously improve the quality of Unit Statistical Report (USR) submissions. Insurer groups that write at least 100 policies and $40 million in total statewide California workers compensation written premium (prior to the application of deductible credits) participate in the Program. Affiliated insurer groups are treated as a single insurer. There are approximately 30 insurer groups that are part of the program. The WCIRB evaluates USR data submissions in aggregate against a number of data quality measurements including the percentage of USRs containing unaudited payroll, percentage of first level USRs submitted on large policies with no claims, the percentage of first level USRs submitted on large policies with few indemnity claims and the total number of claims reported to the WCIRB for the first time on a second or subsequent level USR. The WCIRB sends quarterly data quality reports to each insurer group showing the group s performance compared to the established thresholds for each measurement. These reports may be used by insurers to proactively identify potential systemic data reporting deficiencies. If an insurer s performance over a four-quarter period exceeds the designated tolerance for one or more of the key measurements, the insurer is required to provide the WCIRB with a detailed explanation regarding its performance. Following a review of the detailed explanation provided, if the WCIRB determines that the insurer s performance reflects one or more data reporting deficiencies, the insurer is required to submit a remedial plan to rectify the data reporting deficiencies. Insurers that fail to promptly rectify data reporting deficiencies are referred to the WCIRB s committees for further action, up to and including fines and citation to the California Department of Insurance. In 2011, three insurers received acceptance of their remediation plan by WCIRB staff and are currently being monitored to ensure sustained performance. Four insurers subject to remedial action successfully completed a two-year monitoring period. One insurer was cited to the Classification and Rating Committee for failing to improve the quality of its USR data submissions pursuant to its remedial plan submitted to the WCIRB. 23 WCIRB 2011 Annual Report