State of the Workers Compensation Market Natasha Moore, FCAS, MAAA Practice Leader and Senior Actuary August 25, 2015 WCEC Orlando, Florida Copyright 2015 National Council on Compensation Insurance, Inc. All Rights Reserved.
WC Net Written Premium Growth Continued Private Carriers and State Funds $ Billions 50 40 State Funds ($ B) Private Carriers ($ B) 35.3 35.7 35.4 34.3 33.6 30.1 28.5 27.0 32.1 37.7 42.3 46.5 47.8 46.5 44.3 39.3 34.6 33.8 36.4 39.5 44.2 41.8 30 25.9 25.0 28.6 20 31.0 31.3 29.8 30.5 29.1 26.3 25.2 24.2 23.3 22.3 25.0 26.1 29.2 31.1 34.7 37.8 38.6 37.6 33.8 30.3 29.9 32.3 35.1 36.9 38.5 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014p Calendar Year p Preliminary Source: Annual Statement data Includes state insurance fund data for the following states: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, and UT Each calendar year total for state funds includes all funds operating as a state fund in that year 2
Percent 140 117 123 121 120 100 109 WC Combined Ratio Underwriting Gain Achieved 102 97 100 101 107 Private Carriers Dividends Underwriting Expense Loss Adjustment Expense Loss 115 118 122 111 110 107 103 93 101 101 110 115 115 109 102 98 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014p Calendar Year p Preliminary Source: Annual Statement data 3
Percent 25 WC Investment Gain on Insurance Transactions Ratio to Net Earned Premium Private Carriers Reported Adjusted^ 20 18.1 16.7 17.0 17.2 19.1 18.5 18.3 Average (1990 2013^): 14.2% 19.4 15 10 14.0 13.0 14.4 14.9 11.6 14.9 10.2 10.0 12.8 9.9 12.0 8.7 10.8 14.8 14.7 13.7 15.2 12 5 0 1990*1991*1992199319941995199619971998199920002001200220032004200520062007200820092010201120122013 2014p Calendar Year p Preliminary Source: Annual Statement data Investment Gain on Insurance Transactions includes Other Income *Adjusted to include realized capital gains to be consistent with 1992 and subsequent ^2013 adjusted value excludes a material realized gain resulting from a single company transaction that involved corporate restructuring 4
WC Investment Gain on Insurance Transactions Five-Year Moving Average Percent 25 Private Carriers 20 15 15.2 16.0 16.7 16.9 16.5 17.3 17.6 16.5 15.6 14.7 Average (1990 2013): 14.2% 13.0 11.9 11.6 11.0 10.7 10.9 11.2 12.2 12.5 13.8 14.1 10 5 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014p p Preliminary Calendar Year Source: Annual Statement data Investment Gain on Insurance Transactions includes Other Income Averages reflect the following adjustments: 1990, 1991 adjusted to include realized capital gains to be consistent with 1992 and subsequent 2013 adjusted to exclude a material realized gain resulting from a single company transaction that involved corporate restructuring 5
WC Pretax Operating Gain Private Carriers Percent 25 20 15 10 5 0 5 4.2 3.2 7.5 12.7 19.9 17.5 18.5 7.5 3.2 Average (1990 2013^): 5.6% 10.3 4.1 3.2 0.1 0.7 16.7 11.3 8.1 0.5 0.2 0.1 Reported Adjusted^ 17.7 13.5 5.1 14 10 15 8.6 10.0 1990*1991*1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014p Calendar Year p Preliminary Source: Annual Statement data Operating Gain Equals 1.00 minus (Combined Ratio less Investment Gain on Insurance Transactions and Other Income) *Adjusted to include realized capital gains to be consistent with 1992 and subsequent ^2013 adjusted value excludes a material realized gain resulting from a single company transaction that involved corporate restructuring 6
Workers Compensation Accident Year Results and Reserve Estimates
WC Net Combined Ratios Calendar Year vs. Ultimate Accident Year Private Carriers Percent 130 120 110 100 103 93 101 101 99 106 110 110 118 115 115 113 109 106 102 99 98 95 90 87 86 80 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014p Calendar Year Accident Year p Preliminary Source: NCCI analysis based on Annual Statement data Accident year data is evaluated as of 12/31/2014 and developed to ultimate Includes dividends to policyholders 8
WC Loss and LAE Net Reserve Deficiencies Private Carriers $ Billions 25 33% 2014 Tabular Discount Is $4.6 Billion 20 18 20 21 18 Percent of CY Total Reserves As Reported 15 10 10 15 15 12 9 9 10 11 13 11 8% 10 5 2 5 4 2 6 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Year End Valuation Source: NCCI analysis based on Annual Statement data Considers all reserve discounts as deficiencies 9
Workers Compensation Premium Drivers
WC Components of Written Premium Change Private Carriers Written Premium Change From 2013 to 2014 Net Written Premium Countrywide +4.6% Direct Written Premium (DWP) Countrywide +4.6% Direct Written Premium (DWP) NCCI States +4.5% Components of DWP Change for NCCI States: Change in Carrier Estimated Payroll +4.7% Change in Bureau Loss Costs and Mix 1.4% Change in Carrier Discounting +0.4% Change in Other Factors +0.8% Combined Effect: +4.5% Sources: Countrywide: Annual Statement data NCCI States: Annual Statement Statutory Page 14 for all states where NCCI provides ratemaking services Components: NCCI Policy data 11
WC Direct Written Premium 2014 Growth by State Private Carriers Source: 2014, 2013, Annual Statement Statutory Page 14 12
WC Approved Changes in Bureau Premium Level By Effective Date for Total Market Percent 10 8 6 Cumulative Change 2004 2014 17.7% All States 16.3% NCCI States All States NCCI States 8.4 4 2 0 2 4 6 8 10 2.1 2.2 0.4 0.5 0.3 0.2 1.0 1.2 1.3 1.4 2.1 3.0 2.6 3.2 4.1 5.6 6.5 7.8 8.8 2.2 4.3 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015p Calendar Year p Preliminary Bureau premium level changes are countrywide approved changes in advisory rates, loss costs, assigned risk rates, and rating values, as of 6/19/2015, as filed by the applicable rating organization, relative to those previously approved 13
Percent 20 15 10 5 0 5 10 15 WC Approved or Filed and Pending Change in NCCI Premium Level by State Largest Decrease 10.9 Largest Increase +6.8 30 Decreases 1 No Change 7 Increases Latest Change for Voluntary Market Excludes Law-Only Filings 10.9 10.4 9.1 8.9 8.2 7.8 7.0 6.9 6.0 5.9 5.6 5.5 5.3 5.2 4.8 3.7 3.7 3.7 3.4 3.3 3.2 2.7 2.6 2.4 2.1 1.4 0.8 0.6 0.5 0.2 0.0 0.9 1.9 2.0 2.3 2.5 2.6 6.8 20 TX KS WV SD TN OK NE KY AZ NH VT IL OR FL MTMO IA IN NC GA MS MD AL LA AR UT AK CT NV ID CO VA SC HI NM RI ME DC Premium level changes are approved or filed and pending changes in advisory rates, loss costs, and rating values, as of 6/19/2015, as filed by the applicable rating organization, relative to those previously approved IN and NC are filed in cooperation with state rating bureaus Copyright 2015 National Council on Compensation Insurance, Inc. All Rights Reserved. 14
Percent 10 5 WC Impact of Discounting on Premium NCCI States Rate/Loss Cost Departure Schedule Rating Dividends Private Carriers 2.1 0.7 0.6 0 5 10 15 7.1 7.4 7.1 8.5 10.5 14.6 14.3 4.0 1.7 2.2 4.7 7.4 8.3 8.8 7.7 3.8 0.4 20 17.7 19.2 25 22.6 23.2 Policy Year p Preliminary Sources: Annual Statement Statutory Page 14 and NCCI Financial Call data Dividend ratios are based on calendar year statistics NCCI benchmark level does not include an underwriting contingency provision Based on data through 12/31/2014 for all states where NCCI provides ratemaking services, excluding TX 15
Workers Compensation Loss Drivers
Percent 12 10 8 6 4 2 0 2 4 6 8 10 WC Lost-Time Claim Frequency Change in Lost-Time Claims per $1M Pure Premium 6.5 4.5 Cumulative Change of 51.1% (1994 2013 adj.) 0.5 3.9 2.3 4.5 6.9 Private Carriers and State Funds 4.5 4.1 3.7 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014p Accident Year *Adjustments primarily due to significant changes in audit activity p Preliminary based on data valued as of 12/31/2014 Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage and voluntary loss cost level; excludes high deductible policies; 1994 2013: Based on data through 12/31/2013 For all states where NCCI provides ratemaking services, excluding WV 17 6.6 4.5 2.2 4.3 4.9 10.6 3.6 0.8 3.8 Indicated Adjusted* 5.7 2.9 2
WC Average Indemnity Cost per Lost-Time Claim Severity ($ Thousands) 25 Cumulative Change 1994 2013: +135.2% 20 15 10 +7.7% +5.9% +1.7% $9.8 $10.4 $11.2 +10.1% +9.0% $12.2 $13.4 +10.1% $14.8 Private Carriers and State Funds Average Annual Change 1994 2013 +6.6% Lost Time Indemnity Claim Severity: +4.6% +5.9% US Average Weekly Wage: +3.4% +9.2% +3.1% +4.6% +3.1% +1.0% $16.1 $16.6 $17.4 $17.5 $18.1 $19.2 $20.4 +9.1% +1.0% 2.5% +1.3% 0.0% +1.9% +4% $22.3 $22.5 $21.9 $22.2 $22.2 $22.6 $23.6 5 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014p Accident Year p Preliminary based on data valued as of 12/31/2014 Source: NCCI Financial Call data, developed to ultimate; excludes high deductible policies 1994 2013: Based on data through 12/31/2013 For all states where NCCI provides ratemaking services, excluding WV 18
Severity ($ Thousands) WC Average Medical Cost per Lost-Time Claim Private Carriers and State Funds 30 25 20 15 10 5 $9.1 Cumulative Change 1994 2013: +226.7% +4% +3.2% Average Annual Change 1994 2013 +2.4% +6.9% +4.0% +2.4% +0.5% Lost Time Medical Claim Severity: +6.4% US Medical CPI: +3.8% +5.9% +5.8% +7.8% +7.7% +5.4% +8.8% +13.5% +8.3% +10.6%+7.3% +10.1% +7.4% +5.1% $9.8 $10.8 $11.6 $12.9 $13.8 $15.7 $17.1 $18.4 $19.4 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014p $20.9 Accident Year $22.1 $23.4 $25.0 $26.0 $26.1 $26.8 $27.4 $28.3 $29.4 p Preliminary based on data valued as of 12/31/2014 Source: NCCI Financial Call data, developed to ultimate; excludes high deductible policies 1994 2013: Based on data through 12/31/2013 For all states where NCCI provides ratemaking services, excluding WV 19
Workers Compensation Residual Market
WC Residual Market Premium NCCI-Serviced WC Residual Market Pools $ Billions 5 4.8 4 3 2 1.2 1.5 1.2 1 0.3 0 Policy Year *Incomplete policy year projected to ultimate Includes pool data as of 12/31/2014 for all NCCI serviced WC residual market pool states Source: NCCI, Residual Market Quarterly Results 21
WC Residual Market Share NCCI-Serviced WC Residual Market Pools Percent 35 30 25 22 24 26 29 28 24 20 15 10 5 9 16 18 17 17 11 8 4 3 3 5 11 13 13 12 10 8 7 5 5 5 7 8 8 0 Calendar Year p Preliminary Includes pool and direct assignment data for all NCCI serviced WC residual market pool states Source: NCCI, Residual Market Management Summary 22
WC Residual Market Growth at First Quarter NCCI-Administered WC Residual Market Plan States Size of Risk Q1 2014 Q1 2015 Change $ 0 $ 2,499 $ 28.5M $ 30.1M 6% $ 2,500 $ 4,999 $ 16.6M $ 17.1M 3% $ 5,000 $ 9,999 $ 24.0M $ 24.4M 2% $ 10,000 $ 49,999 $ 73.5M $ 68.4M 7% $ 50,000 $ 99,999 $ 30.2M $ 28.6M 6% $ 100,000 and Over $ 50.0M $ 38.4M 23% Total $ 222.9M $ 206.9M 7% Total estimated annual premium Includes pool and direct assignment data for all NCCI administered WC residual market plan states 23
WC Residual Market Underwriting Results NCCI-Serviced WC Residual Market Pools $ Millions 500 0 500 1,000 949 1,500 1,392 81 72 141 586 1,210 1 22 53 47 61 75 152 118 91 73 70 103 94 48 62 73 64 64 74 2,000 2,500 1,816 1,714 1,922 2,053 Policy Year *Incomplete policy year projected to ultimate Includes pool data as of 12/31/2014 for all NCCI serviced WC residual market pool states Source: NCCI, Residual Market Quarterly Results 24
Regulatory and Legislative Trends
Categories of Workers Compensation Proposals to Watch Opt Out Medical Marijuana Drug Formularies Fee Schedules Ridesharing Copyright 2015 National Council on Compensation Insurance, Inc. All Rights Reserved. 26
Top Five Regulatory/Legislative Facts on Opt Out Two states currently permit opt out TX, OK Models in two states are very different Bills have been filed to change the way opt out works Opt out bills filed in two other states TN and SC New national employer trade association is also pursuing the filing of opt out bills in additional states Copyright 2015 National Council on Compensation Insurance, Inc. All Rights Reserved. 27
Top Five Regulatory/Legislative Facts on Medical Marijuana 23 states and DC have legalized medical marijuana In 2015, legislation or ballot measures to legalize medical marijuana in 18 additional states 11 states have legalized the limited use of low-thc forms of marijuana for medical use 4 states (Alaska, Colorado, Oregon and Washington), the District of Columbia and the city of Portland, Maine have legalized the recreational use of marijuana Federal legislation introduced Copyright 2015 National Council on Compensation Insurance, Inc. All Rights Reserved. 28
Top Five Regulatory/Legislative Facts on Drug Formularies Some states currently have workers compensation drug formularies (some level of control) Studies show formularies produce savings Some states have a form of a drug formulary, such as a preferred drug list Key to effectiveness of formulary is the degree of control Several states have filed bills/proposed regulations to adopt drug formularies Copyright 2015 National Council on Compensation Insurance, Inc. All Rights Reserved. 29
Top Five Regulatory/Legislative Facts on Physician/Facility Fee Schedules Most states have physician/facility fee schedules Fee schedule introductions/changes are the most common type of medical cost containment proposal In 2015, Connecticut and North Carolina have added new fee schedules; Alaska is expected later this year Renewed attempts in 2015 to pass fee schedule bills in New Hampshire and Virginia did not succeed Fee schedule bill debates typically center around how to set an appropriate fee for the medical care provided (data and methodology) Copyright 2015 National Council on Compensation Insurance, Inc. All Rights Reserved. 30
Ridesharing: Are Drivers Employees or Independent Contractors? Employee Fares set Drivers screened Liability insurance Vehicle standards Independent Contractor Technology company App matches drivers with potential customers Drivers hired as independent contractors Copyright 2015 National Council on Compensation Insurance, Inc. All Rights Reserved. 31
Concluding Remarks
State of Workers Compensation Calm now but turbulence ahead Positives: Underwriting results improved for the third consecutive year Ongoing challenges: Claim severity increased slightly more than inflation measures Premium grew for the fourth consecutive year Claim frequency declined in NCCI states Construction and manufacturing employment remain well below prerecession levels restraining premium growth rates A continuing low interest rate environment threatens investment results over the long term Copyright 2015 National Council on Compensation Insurance, Inc. All Rights Reserved.