Issues in California Workers Compensation

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Issues in CaliforniaWorkers Compensation

• Michele Bernal, FCAS
• VP Actuary, American Re
• 6/15/00

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Issues in California Workers Comp

• Overview of the Primary Market
• Trends in Primary Loss Costs
• Development of Primary Losses
• Legislative Initiatives
• Reinsurance Pricing

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Issues in California Workers Comp

• Overview of the Primary Market
• Trends in Primary Loss Costs
• Development of Primary Losses
• Legislative Initiatives
• Reinsurance Pricing

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Accident Year Combined Loss and Expense Ratios
as of 12/31/99
142
141
133
128
116
110
105
98
94
92
84
Source WCIRB Final Summary of Year-End 1999
Experience
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Watch Carrier Projections

• WCIRB Estimates a 4.3 billion deficiency in
  carried reserves at 12/99 (1999 earned premium
  was 6.9 billion)
• Carriers are reporting a 72 loss ratio for AY99,
  compared with the WCIRBs projection of 100
• For AY98, carriers initially reported 75 at
  12/98, increasing to 91 at 12/99, but still
  short of the WCIRBs estimate of 101

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Whats Happening?
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California Primary PricingRelative to 1991
Charged Rates
1/1/95 Open Rating
Source WCIRB Final Summary of Year-End 1999
Experience
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California Primary PricingRelative to Advisory
Pure Premium
1/1/95 Open Rating
Source WCIRB Final Summary of Year-End 1999
Experience
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Issues in California Workers Comp

• Overview of the Primary Market
• Trends in Primary Loss Costs
• Development of Primary Losses
• Legislative Initiatives
• Reinsurance Pricing

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Trend in California Loss Costs
Source WCIRB Final Summary of Year-End 1999
Experience
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Trend in Loss Costs
Sources WCIRB Final Summary of Year-End 1999
Experience NCCI Annual Issues
Symposium
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Trend in Indemnity Claim Frequency
Sources WCIRB Final Summary of Year-End 1999
Experience NCCI Annual Issues
Symposium
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Trend in Per Indemnity Claim Average Medical
Sources WCIRB Final Summary of Year-End 1999
Experience NCCI Annual Issues
Symposium
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Cost Drivers - Medical

• 9/18/96 Minniears Decision
• Treating Physician Presumption of Correctness
• 1/1/98 Change in ALAE Definition
• Medical Cost Containment now coded with Medical
  Losses
• 1/1/99 Medical Fee Schedule

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Trend in Per Indemnity Claim Average Indemnity
Sources WCIRB Final Summary of Year-End 1999
Experience NCCI Annual Issues
Symposium
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Cost Drivers - Indemnity

• Benefit Changes resulting from 1989 1994
  reforms
• 15 expected impact overall
• 4/1/97 Change in PD Rating Schedule
• Presumably for new claims only
• Presumably revenue neutral
• Minniears?

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Issues in California Workers Comp

• Overview of the Primary Market
• Trends in Primary Loss Costs
• Development of Primary Losses
• Legislative Initiatives
• Reinsurance Pricing

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Loss Development Factors Incurred Indemnity
Development Year
Age in Months
Source WCIRB Actuarial Committee Agenda - 5/31/00
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Loss Development Factors Paid Indemnity
Development Year
Age in Months
Source WCIRB Actuarial Committee Agenda - 5/31/00
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Loss Development Factors Incurred Medical
Development Year
Age in Months
Source WCIRB Actuarial Committee Agenda - 5/31/00
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Loss Development Factors Paid Medical
Development Year
Age in Months
Source WCIRB Actuarial Committee Agenda - 5/31/00
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Possible Development Drivers

• Schaffer Ambulance (AB1913 SB1217)
• Possible reduction in case reserves in response
  to class action suits alleging over-reserving,
  claiming high X-mods low dividends as damages
• Optimism regarding Medical Management
• PD Rating Creep
• Claim Inflation

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Loss Development Selections

• WCIRB uses latest year paid through 60 months of
  development, then converts to incurred
  development
• Development Varies Significantly by Industry
  Group
• Increasing for all industry groups
• Development for Professional Clerical Services
  classes substantially higher than for
  Construction classes

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Issues in California Workers Comp

• Overview of the Primary Market
• Trends in Primary Loss Costs
• Development of Primary Losses
• Legislative Initiatives
• Reinsurance Pricing

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Legislative Initiatives

• Benefit Increase (SB 996)
• Privacy (AB 435)
• Reinsurance Notification (SB 1959)

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Legislative Initiatives

• Benefit Increase (SB 996)
• Not likely to pass
• 2.6 billion (25 of pure premiums)
• Repeal presumption of correctness of treating
  physician
• Gov. Davis vetoed previous 2.5 billion bill
  indicating he would sign if change was less than
  1 billion

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Legislative Initiatives

• Privacy (AB435 - effective 10/99)
• Limits amount and type of medical information
  insurers and TPAs may share with injured
  workersemployers
• Initially intended to prevent HIV information
  from getting to employers, since WC is
  specifically excluded from the Confidentiality of
  Medical Information Act
• Legislative efforts in the works to allow
  employers access to limited information

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Legislative Initiatives

• Reinsurance Notification (SB 1959)
• Passed Senate now in Assembly Insurance
  Committee
• Would require that Reinsurers notify the CDI of
  their intent to reinsure a workers comp program
  in the state.
• Current law requires a bond of the PV of
  estimated future payments at 6 per annum
• Discount rate would change to lower of 6, or
  reinsurance companys IRIS test 5 investment
  yield
• If reinsurer fails to post bond, ceding company
  may not claim reinsurance for reserve credit

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Issues in California Workers Comp

• Overview of the Primary Market
• Trends in Primary Loss Costs
• Development of Primary Losses
• Legislative Initiatives
• Reinsurance Pricing

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Reinsurance Pricing

• 2001 Draft Loss Elimination Ratios
• Update of 1997 Tables
• Still in Draft Form
• Reviewing correlation of Medical Indemnity on
  Large Claims
• Still working on Loss ALAE LERs
• Will be filed with 1/1/01 pure premiums
• New Table M and Table L in 2002

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2001 LERs

• Significant Changes since 1997
• Stochastic claim development
• Increased claim development
• Increased inflation
• Update data to Policy Year 1993 1994

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WCIRB Draft 2001 LERs
Loss Limit
Source WCIRB Actuarial Committee Agenda 5/31/00
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WCIRB Draft 2001 LERsAdditional Thoughts

• Now more consistent with LERs in other states
• Data is based on Policy Year 1993 and 1994, which
  were almost the best years in California workers
  comp
• Additional inflation could impact tables quickly
• Increased life expectancies

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California WC ReinsuranceFinal Thoughts

• Monitor primary pricing
• Pure premium changes arent enough
• Make sure you obtain schedule credit info
• Make independent projections of ultimate losses
• Watch out for Inflation
• Watch incurred loss development
• Use paid development when possible
• Dont rely exclusively on 1997 LERs