Examining Costs and Trends of Workers Compensation Claims

(1)

Consulting Actuaries

Examining Costs and trEnds of WorkErs CompEnsation Claims in ConnECtiCut

Authors

Scott J. Lefkowitz, FCAS, MAAA, FCA Eric. J. Hornick, FCAS, MAAA, FCA

(2)

1. IntroductIon 1

2. AverAge clAIm costs In connectIcut 2

2.1. IntroductIon 2

2.2. connectIcut clAIm costs 2

2.3. BenchmArkIng 4

3. clAIm Frequency 6

the average cost of workers compensation claims naturally increases over time. Wage inflation has a direct impact on the cost of indemnity (wage replacement) benefits, while increases to the cost of medical services and pharmaceuticals have a highly leveraged impact on the cost of workers compensation claims, where medical care is generally more complex and costly than services associated with general health care.

Average claim costs and trends will vary between states. Each individual state has its own workers compensation benefit structure, administrative system, and governing statutes. Compensation rates, maximum and minimum weekly benefits, automatic adjustments to maximum and minimum benefits, system utilization, industry mix, administrative efficiency, constraints on medical care, and general cost of living levels all potentially vary by jurisdiction and represent a sample cross section of items that directly impact variances by state.

the purpose of this paper is as follows:

• Present current estimates of average workers compensation claim costs in Connecticut based on the most recent available data from the nCCI¹;

• Benchmark average Connecticut claim costs against claim costs in other states; and

• Present current claim incidence rates in Connecticut.

Footnote references throughout the paper provide additional detail and context around the text.

1 the national Council on Compensation Insurance is the workers compensation data collecting organization in Connecticut. the nCCI is an extension of the insurance industry and analyzes collected workers compensation claims data generated by all insurance companies doing business in Connecticut. the nCCI uses this data to calculate, among other items, the cost of wage replacement benefits, medical benefits, and claim adjustment expense per unit of $100 payroll for all employee classifications. Individual insurance companies develop their own unique premium rates by factoring insurance company expense and profit provisions.

(4)

2. AvErAgE CLAIM CoStS In ConnECtICut

2.1. IntroduCtIon

“Lost time” and “medical only” are the two most general categories of workers compensation claims. Lost time claims are sufficiently serious to warrant lost work time of sufficient duration² such that the employee qualifies for wage replacement benefits. Conversely, medical only claims are cases where wage replacement benefits have not been and are not expected to be paid. Medical only claims are characterized by minor injuries requiring minimal medical treatment with little or no lost work time³. generally, lost time claims represent only 25% of total claim volume, but generate 95% of total workers compensation benefit costs. Conversely, medical only claims represent 75% of total claim volume, but generate only 5% of total workers compensation costs.

Claim costs are measured using policy year data⁴. data from policy years 2001 through 2008⁵ are currently available for Connecticut claims.

2.2. ConnECtICut CLAIM CoStS

the table to the right displays average lost time claim costs, average medical only claim costs, and average combined total claim costs, by policy year.⁶ of note is the very large difference between lost time claim costs and medical only claim costs. this difference emphasizes how, despite generating the majority of overall claims, medical only claims generate only a very small percentage of overall workers compensation costs.

2 All states have a “waiting period” for wage replacement benefits that generally range from 3 to 7 lost workdays. Wage replacement benefits are paid only if the disability exceeds the waiting period. the employee is retroactively reimbursed for wages lost during the waiting period only if the disability exceeds a specified duration defined as the “retroactive period.”

3 Connecticut has a 5 day waiting period and a 21 day retroactive period. therefore, claims with 5 or less lost workdays are, by definition, medical only claims, as no wage replacement benefits will have been paid.

4 the policy year of experience represents, very roughly, the period during which the claims generating the data occurred. Specifically, the policy year of experience represents claims covered by insurance policies incepting during a specified calendar period, which varies by state. For example, policy year 2008 could represent claims covered by insurance policies beginning during calendar year 2008. It is apparent that since most policies provide coverage for a single year, half the claims in this example occurred in calendar year 2008, and half the claims occurred in calendar year 2009. this is easily seen by considering a policy beginning on July 1, 2008. this policy provides coverage for the last six months of 2008 and the first six months of 2009.

5 Policy year 2008 represents the most recently available data. this is because the nCCI must collect, compile, and examine data generated by every insured workers compensation claim in Connecticut. this multi-year lag between collection and publication is common and expected in the insurance industry.

6 the average lost time claim cost is the cost of all lost time claims divided by the number of all lost time claims. the average medical only claim cost is the cost of all medical only claims divided by the number of all medical only claims. the average total claim cost is the cost of all lost time And medical only claims divided by the number of all lost time claims And medical only claims.

AvErAgE WorkErS CoMPEnSAtIon CLAIM CoStS ConnECtICut

Policy yeAr lost time ($) medicAl only ($) combined totAl ($)

2001 31,553 592 9,516

2002 36,203 657 11,152

2003 35,629 750 11,323

2004 38,220 813 11,965

2005 43,040 881 13,057

2006 45,783 920 14,110

2007 51,985 959 15,598

2008 52,989 1,057 16,502

(5)

the graphs below show that trends to claim costs have been relatively stable over time, and are approximately 8.0%. Specifically, measured annual trends and claim cost forecasts for 2012 are in the table to the right.

clAim tyPe AnnuAl trend 2012 forecAst ($)

Lost time 7.8% 72,520

Medical only 8.2% 1,475

Combined total 7.8% 22,267

AvErAgE WorkErS CoMPEnSAtIon CLAIM CoStS ConnECtICut

80,000

60,000

40,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 POLICY YEAR OF CLAIM EXPERIENCE

0 20,000

AVERAGE LOST TIME CLAIM COST ($)

1,600

1,200

800

0 400

AVERAGE MEDICAL ONLY CLAIM COSTS ($)

25,000 20,000

10,000 15,000

0 5,000

AVERAGE TOTAL CLAIM COSTS ($)

Trend line

Policy year forecasts Available policy year data

(6)

2.3. BEnCHMArkIng

Average lost time claim costs as well as average medical only claim costs in Connecticut have been

consistently in the highest third of all jurisdictions, when benchmarked against other states. this is illustrated by the first two charts below. However, average combined total claim costs in Connecticut have generally been in the top 10 states, illustrated in the third chart below.

AvErAgE LoSt tIME CLAIM CoSt toP 10 StAtES By PoLICy yEAr

Py 2008 Py 2007 Py 2006 Py 2005 Py 2004

dE 83,013 dE 78,726 dE 79,595 dE 74,173 dE 66,315

LA 77,231 ny 66,501 LA 62,015 LA 58,660 ny 54,007

ny 73,055 LA 65,657 nC 60,748 nC 58,356 nC 53,776

Mt 64,773 Mt 63,021 ny 60,124 ny 56,424 LA 50,980

nC 63,234 nC 61,963 Mt 55,405 Mt 54,646 SC 48,141

gA 61,821 vA 57,737 vA 54,142 vA 49,766 gA 47,059

AL 59,905 gA 56,925 gA 52,525 gA 49,623 Mt 45,829

IL 59,190 IL 55,438 SC 52,376 IL 47,960 IL 44,228

PA 57,492 AL 55,281 IL 50,643 SC 46,734 vA 44,178

… … … … …

CT 52,989 CT 51,985 CT 45,783 CT 43,040 CT 38,220

AvErAgE MEdICAL onLy CLAIM CoSt toP 10 StAtES By PoLICy yEAr

Py 2008 Py 2007 Py 2006 Py 2005 Py 2004

LA 1,709 LA 1,607 LA 1,501 LA 1,424 LA 1,402

Ak 1,510 nJ 1,486 nJ 1,410 nJ 1,290 nJ 1,248

nJ 1,509 dE 1,391 dE 1,296 Ak 1,280 Ak 1,199

nH 1,401 Ak 1,367 Ak 1,285 IL 1,160 dE 1,141

dE 1,323 nH 1,323 nH 1,209 dE 1,153 IL 1,085

IL 1,307 IL 1,215 IL 1,197 nH 1,108 nH 1,030

vA 1,243 vA 1,160 vA 1,067 vA 1,000 tn 989

In 1,200 In 1,097 Mo 1,025 FL 949 vA 931

AL 1,178 Mo 1,094 AL 1,023 dC 946 AZ 918

WI 1,164 AL 1,081 In 1,000 Mo 940 nM 907

… … … … …

CT 1,057 CT 959 CT 920 CT 881 CT 813

(7)

AvErAgE CoMBInEd totAL CLAIM CoSt toP 10 StAtES By PoLICy yEAr

Py 2008 Py 2007 Py 2006 Py 2005 Py 2004

ny 27,652 ny 24,431 dE 24,262 dE 22,162 ny 19,771

dE 24,802 dE 23,445 ny 21,939 ny 20,686 dE 19,527

LA 22,060 LA 18,895 LA 17,145 LA 16,875 CA 16,510

IL 19,805 IL 18,381 IL 16,556 IL 15,432 LA 14,630

ok 18,159 ok 16,134 dC 15,983 Mt 13,946 IL 14,429

CA 17,433 nJ 16,100 Ak 15,471 CA 13,686 Ak 14,153

Mt 16,791 Ak 15,985 nJ 15,263 nJ 13,682 dC 14,007

dC 16,780 Mt 15,889 SC 14,776 nC 13,549 nJ 13,613

CT 16,502 CT 15,598 ok 14,337 ok 13,351 SC 13,582

SC 15,532 CA 15,265 CT 14,110 SC 13,185 ok 12,796

… … … CT 13,057 CT 11,965

… … … … …

the question that immediately comes to mind is why would the combined (lost time plus medical only) total average claim costs fall within the top 10 states if the individual component claim costs, when measured separately, are both well below the top ten states. the answer is the relative incidence of lost time cases in Connecticut. on a countrywide average basis, lost time claims represent approximately 25% of all claims, while generating in excess of 95% of all costs. In Connecticut, however, lost time claims have consistently represented approximately 30% of all claims. this is illustrated in the chart below:

LoSt tIME CLAIMS AS A PErCEntAgE oF totAL CLAIMS ConnECtICut

Policy yeAr

lost time frequency

medicAl only frequency

totAl frequency

lost time PercentAge

2001 1,565 3,863 5,428 28.8%

2002 1,484 3,543 5,027 29.5%

2003 1,725 3,849 5,574 30.9%

2004 1,586 3,733 5,319 29.8%

2005 1,503 3,702 5,205 28.9%

2006 1,471 3,533 5,004 29.4%

2007 1,418 3,525 4,943 28.7%

2008 1,384 3,269 4,653 29.7%

Note: Frequency is measured as claims filed per 100,000 employees

given the chart above, in Connecticut, there is a materially greater percentage of claims that are high cost lost time cases as compared to the countrywide average.

(8)

3. CLAIM FrEquEnCy

the graph below displays the frequency of medical only claims and lost time claims per $10 MM payroll adjusted to a constant cost level. note that there is an inherent increase to payroll over time due to inflation.

In order to accurately measure historical claim frequencies, payroll must be adjusted to a constant cost level.

Without this adjustment, historical claim frequencies would be overstated, all else being equal.

CLAIM FrEquEnCy PEr $10 MM PAyroLL At ConStAnt CoSt LEvEL ConnECtICut

6

4 3

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 POLICY YEAR OF CLAIM EXPERIENCE

0 8 7

5

2 1

CLAIM INCIDENCE PER $10 MM PAYROLL AT CONSTANT COST LEVEL

Medical only claim frequency

Lost time claim frequency

It is apparent from this graph that there has been a long term decrease to the incidence of both medical only and lost time claims, which continues in the short term as illustrated in the table below:

clAim tyPe long term AnnuAl trend short term AnnuAl trend

Lost time -2.4% -3.3%

Medical only -3.3% -3.1%

Long term annual trend is measured as the average annual decline across all available data. Short term annual trend is measured as the average annual decline across the most recently available 5 policy years of data – 2004 through 2008 as of the writing of this paper.

(9)

AbouT The AuThors

Scott J. Lefkowitz is a director of the Actuarial Consulting Practice of oliver Wyman and Leader of the Melville, new york office. Scott is a Fellow of the Casualty Actuarial Society, a member of the American Academy of Actuaries, and a Fellow of the Conference of Consulting Actuaries. Scott has twenty five years of actuarial experience in the insurance and risk management industry, and has provided consulting services to a wide variety of clients on all aspects of property/casualty risk exposure. Scott is regarded as an expert the area of workers compensation and has provided consulting services to public and private firms, governments, and regulatory agencies. Scott’s experience includes ratemaking, and reserving, rate of return analysis, occupational disease, and the design and implementation of experience rating programs. Most recently, Scott has spent the past several years studying new york workers compensation costs, as well as the impact of the statutory changes that were implemented in new york in 2007.

Scott can be contact directly at (631) 577-0548 or scott.lefkowitz@oliverwyman.com.

Eric J. Hornick is a a Principal of the Actuarial Consulting Practice of oliver Wyman and is based in the Melville, new york office. Eric is a Fellow of the Casualty Actuarial Society, a member of the American Academy of Actuaries, and a Fellow of the Conference of Consulting Actuaries. Eric has nearly twenty five years of actuarial experience in the insurance and risk management industry, with previous experience at a rating organization, reinsurance/insurance company and reinsurance broker, and has provided consulting services to a wide variety of clients on all aspects of property/casualty risk exposure. In recent years, Eric’s client base has included self-insureds throughout new England, new york and other areas, with a primary emphasis on workers compensation. Professionally and civically active, Eric serves in leadership roles for both the Casualty Actuarial Society as well as local civic groups.

Eric can be contacted directly at (631) 577-0537 or eric.hornick@oliverwyman.com.

(10)

www.oliverwyman.com

the Actuarial Consulting Practice of oliver Wyman specializes in property, casualty, life and health insurance risks. We provide independent, objective advice combining a wide range of expertise with specialized knowledge of specific risks. With more than 70 credentialed actuaries it is one of the largest actuarial practices in north America. oliver Wyman currently has actuarial consulting offices in Atlanta, gA; Charlotte, nC; Chicago, IL; Columbus, oH; Houston, tX; Los Angeles, CA; Melville, ny; Milwaukee, WI;

new york, ny; Philadelphia, PA; Princeton, nJ; San Francisco, CA; St. Michael, Barbados, and toronto, on, Canada.

For more information, contact:

scott J. Lefkowitz FCAS, MAAA, FCA 631-577-0548

scott.lefkowitz@oliverwyman.com

eric J. hornick FCAS, MAAA, FCA 631-577-0537

eric.hornick@oliverwyman.com

Copyright © 2012 oliver Wyman. the Actuarial Consulting Practice of oliver Wyman provides a wide range of consulting expertise to the banking, insurance, and other related industries. the casualty actuarial practice specializes in evaluating the long-term financial consequences of property and casualty insurance risks.

the information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy. It should be understood to be general risk management and insurance information only. oliver Wyman makes no representations or warranties, expressed or implied, concerning the financial condition, solvency, or application of policy wordings of insurers or reinsurers. the information contained in this publication provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation, and should not be relied upon as such. Statements concerning tax and/or legal matters should be understood to be general observations based solely on our experience as risk consultants and insurance brokers and should not be relied upon as tax and/or legal advice, which we are not authorized to provide. Insureds should consult their own qualified insurance, tax and/or legal advisors regarding specific risk management and insurance coverage issues.

this document or any portion of the information it contains may not be copied or reproduced in any form without the permission of oliver Wyman, except that clients of any of the companies of Marsh and McLennan Companies need not obtain such permission when using this report for their internal purposes, as long as this report is reproduced in its entirety, and this page is included with all such copies or reproductions.

oliver Wyman Actuarial Consulting, Inc.

48 South Service road, Suite 310 Melville, ny 11747