PEO Industry - Loss Experience

(1)

2013 Annual Issues Symposium

Don’t Just Speculate,

Investigate!

The Story Behind the PEO Study

Harry Shuford

(2)

The Story Behind the PEO Study

• What Are They Saying About PEOs?

Much of It Is Speculation

• Why No Prior Investigation?

It Would Be Really Difficult

• Initial Findings?

Speculation Upended

• External Push Back?

More Investigation

• Our Own Push Back?

(3)

What Are PEOs?

Why Are There Concerns?

Typical PEO Services

• Payroll

• Workers compensation

• Risk management

• Employee benefits

• Recruiting

• Training and development

“Employer of record” for the leased workers from a

PEO client company

3

(4)

What Are PEOs?

Why Are There Concerns?

(5)

The Story Behind the PEO Study

• What Are They Saying About PEOs?

Much of It Is Speculation

• Why No Prior Investigation?

It Would Be Really Difficult

• Initial Findings?

Speculation Upended

• External Push Back?

More Investigation

• Our Own Push Back?

Work in Progress

(6)

What Are PEOs?

Why Are There Concerns?

• Regulatory Concerns and PEOs:

• Worker abuse/lax workplace safety

• Inadequate OSHA reporting

• Compliance with state WC proof of coverage

• Speculation about PEO Behavior and Ratemaking:

• Under-report or misclassify payroll

• Under-report workplace injuries

(7)

The Story Behind the PEO Study

• What Are They Saying About PEOs?

Much of It Is Speculation

• Why No Prior Investigation?

It Would Be Really Difficult

• Initial Findings?

Speculation Upended

• External Push Back?

More Investigation

• Our Own Push Back?

Work in Progress

(8)

Linking Policy and Unit Reporting Systems

• Started With Unit Data

• Proof of Coverage (POC)

• NCCI’s PEO team in Regulatory Services Division

• Linked Policy and Unit Reporting Systems

(9)

Understanding the Data

• Multiple Policy Types in POC Data:

• Master policies

• Multiple Coordinated Client policies

• Multiple PEO policies

• PEO Direct Employee policies

• Changing Regulatory Environment:

• State regulations affect PEO market shares by

PEO policy models over time

• Worked again with NCCI’s PEO team

(10)

Understanding PEOs and Issues

in Experience Rating and Residual Market

• Experience Rating Concerns and PEOs

• NCCI’s Experience Rating Team

• Residual Market Issues and PEOs

(11)

Ratemaking Data Issues and PEOs

AES Class Ratemaking Team

• Data Validation Issues and PEOs

• Creating Industry Group Level Data

(12)

Insolvencies and PEOs

• Working With Annual Statement Data

• Estimating Loss Reserve Adequacy

(13)

Obtaining External Information

• NAPEO Member List

• Linked to WC data for market share and size

analysis

• Google Search

• Obtaining names of insolvent companies

• Linked to WC data for PEO share and loss experience

analysis

• For background; no plans to publish individual company data

• Linked to Annual Statement data for reserve analysis

(14)

The Story Behind the PEO Study

• What Are They Saying About PEOs?

Much of It Is Speculation

• Why No Prior Investigation?

It Would Be Really Difficult

• Initial Findings?

Speculation Upended

• External Push Back?

More Investigation

(15)

2013 Annual Issues Symposium

(16)

PEO Clients Appear to Be Small Businesses

9.7

6.7

9.2

0.0

5.0

10.0

15.0

20.0

25.0 Client–Master PEO Policy

Client–MCP PEO Policies

Client–Multiple PEO Policies

Employer–Non-PEO Policy

Number of Workers per Employer/Client

(17)

PEO Clients Appear to Be Small Businesses

9.7

6.7

9.2

19.4

0.0

5.0

10.0

15.0

20.0

25.0 Client–Master PEO Policy

Client–MCP PEO Policies

Client–Multiple PEO Policies

Employer–Non-PEO Policy

Number of Workers per Employer/Client

17

(18)

PEOs in WC Markets

Over PY 2004 Through PY 2010

• On Average Small Market Shares

• 1 to 2 percent payroll share in the voluntary market

• 2 to 6 percent of the residual market

• Great State Variation

• In PY 2009:

• Florida—6 percent in voluntary market

• Arizona—30 percent in residual market

Source: Workers Compensation Statistical Plan data and Workers Compensation Policy data reported to NCCI

(19)

2013 Annual Issues Symposium

(20)

PEO Loss Experience

Is Comparable to Non-PEO

• Frequencies are higher by number of workers

• Indicating that under-reporting claims is not

apparent in the data

• Severities are comparable

• Loss ratios by manual premium and modified

premium tend to be comparable, if not lower

• Indicating that under-reporting or misclassifying

payroll is not apparent in the data

• Also indicating that there is no major problem

with PEOs avoiding experience mods

(21)

Comparable or Lower Loss Experience

@2nd Report

21

0.33 0.32 0.33 0.36 0.39 0.41 0.25 0.27 0.29 0.34 0.39 0.46 0.20 0.25 0.30 0.35 0.40 0.45 0.50

2004

2005

2006

2007

2008

2009

Lost-Time Claims Loss Ratio by Modified Premium

Non-PEOs LDs

PEOs LDs

Voluntary Market: 37 NCCI ratemaking states; CA, DE, MA, MI, MN, NJ, NY, NC, ND, OH,PA, WA, WI, and WY are excluded Residual Market: 25 NCCI ratemaking states

(22)

Comparable or Lower Loss Experience

@2nd Report

0.33 0.32 0.33 0.36 0.39 0.41 0.25 0.27 0.29 0.34 0.39 0.46 0.20 0.25 0.30 0.35 0.40 0.45 0.50

2004

2005

2006

2007

2008

2009

Non-PEOs LDs

PEOs LDs

0.36 0.35 0.35 0.38 0.41 0.43 0.32 0.37 _0.36 0.31 0.38 0.48 0.20 0.25 0.30 0.35 0.40 0.45 0.50

2004

2005

2006

2007

2008

2009

Lost-Time Claims Loss Ratio by Modified

Premium

_{Non-PEO Oth}

PEOs Oth

(23)

Comparable or Lower Loss Experience

@2nd Report

23

0.33 0.32 0.33 0.36 0.39 0.41 0.25 0.27 0.29 0.34 0.39 0.46 0.20 0.25 0.30 0.35 0.40 0.45 0.50

2004

2005

2006

2007

2008

2009

Non-PEOs LDs

PEOs LDs

0.52 0.54 0.55 0.64 0.66 0.59 0.49 0.47 0.43 0.51 0.69 0.58 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70

2004

2005

2006

2007

2008

2009

Non-PEO RM

PEOs RM

0.36 0.35 0.35 0.38 0.41 0.43 0.32 0.37 _0.36 0.31 0.38 0.48 0.20 0.25 0.30 0.35 0.40 0.45 0.50

2004

2005

2006

2007

2008

2009

Lost-Time Claims Loss Ratio by Modified

Premium

_{Non-PEO Oth}

PEOs Oth

(24)

Is It Industry Mix?

• PEO industry mix by payroll is comparable to

non-PEO

• Loss ratio experience across industry groups is

comparable

• Exception: miscellaneous group shows adverse

loss experience for PEO clients

• Initial analysis indicates transportation industry

exposure in PEO clients may be a factor

(25)

2013 Annual Issues Symposium

(26)

The Story Behind the PEO Study

• What Are They Saying About PEOs?

Much of It Is Speculation

• Why No Prior Investigation?

It Would Be Really Difficult

• Initial Findings?

Speculation Upended

• External Push Back?

More Investigation

(27)

The Story Behind the PEO Study:

External Push Back

• Anecdotal data suggests that PEOs are problems

• Why no apparent material differences between PEO

and non-PEO lost ratios?

Assertions

• PEOs may look OK at Second Report

• But reporting delays by PEOs likely result in worse

ultimate experience

• PEOs are responsible for the three most recent WC

insurer insolvencies

• More PEO data must be excluded from ratemaking

because of poor data quality

• PEOs serve as a “front” for “mod washing”

(28)

(29)

15 Largest PEO Companies Comprise Approximately Two-Thirds Market;

National PEOs Members Make Up Majority of PEO Industry

Policy Year 2009 Data

29 48.8%

8.5%

2.6%

Top 5

Next 5

Other

Source: Workers Compensation Statistical Plan data and Workers Compensation Policy data reported to NCCI National Association of Professional Employer Organizations (NAPEO) ©NAPEO 2012; Used with permission

PEO policy models—Master policy, MCP policies, Multiple PEO policies, and PEO direct employee policies are included National PEOs list was based on membership list at napeo.org in April 2012

(30)

15 Largest PEO Companies Comprise Approximately Two-Thirds Market;

National PEOs Members Make Up Majority of PEO Industry

Policy Year 2009 Data

48.8%

8.5%

2.6%

40.1%

Top 5

Next 5

Other

(31)

PEO Size

PY 2007 PEO Business Entities With Master Policies

31

0

10

20

30

40

50

60

70

80

90

100

1

101

201

301

401

501

601

701

801

901 1001

1101

1201

1301

1401

1501

1601

1701

1801

1901

2001

Cumulative Premium Share (%)

Number of PEO Business Entities: Ranked by Premium Size Left to Right

• Cumulative Premium Share

(32)

PEO Size

PY 2007 PEO Business Entities With Master Policies

15th largest PEO, 57%

0

10

20

30

40

50

60

70

80

90

100

1

101

201

301

401

501

601

701

801

901 1001

1101

1201

1301

1401

1501

1601

1701

1801

1901

2001

Cumulative Premium Share (%)

Number of PEO Business Entities: Ranked by Premium Size Left to Right

• Cumulative Premium Share

(33)

PEO Size

PY 2007 PEO Business Entities With Master Policies

33 15th largest PEO, 57%

20th largest PEO, 63%

0

10

20

30

40

50

60

70

80

90

100

1

101

201

301

401

501

601

701

801

901 1001

1101

1201

1301

1401

1501

1601

1701

1801

1901

2001

Cumulative Premium Share (%)

Number of PEO Business Entities: Ranked by Premium Size Left to Right

• Cumulative Premium Share

(34)

PEO Size

PY 2007 PEO Business Entities With Master Policies

15th largest PEO, 57%

20th largest PEO, 63%

0

10

20

30

40

50

60

70

80

90

100

1

101

201

301

401

501

601

701

801

901 1001

1101

1201

1301

1401

1501

1601

1701

1801

1901

2001

Cumulative Premium Share (%)

Number of PEO Business Entities: Ranked by Premium Size Left to Right

• Cumulative Premium Share

(35)

PEO Size

PY 2007 PEO Business Entities With

Master Policies

35 15th largest PEO, 57%

20th largest PEO, 63%

0

10

20

30

40

50

60

70

80

90

100

1

101

201

301

401

501

601

701

801

901 1001

1101

1201

1301

1401

1501

1601

1701

1801

1901

2001

Cumulative Premium Share (%)

Number of PEO Business Entities: Ranked by Premium Size Left to Right

• Cumulative Premium Share

(36)

PEO Size

PY 2007 PEO Business Entities With

Master Policies

15th largest PEO, 57%

20th largest PEO, 63%

0

10

20

30

40

50

60

70

80

90

100

1

101

201

301

401

501

601

701

801

901 1001

1101

1201

1301

1401

1501

1601

1701

1801

1901

2001

Cumulative Premium Share (%)

Number of PEO Business Entities: Ranked by Premium Size Left to Right

• Cumulative Premium Share

(37)

PEO Size

PY 2007 PEO Business Entities With Master Policies

37 15th largest PEO, 57%

20th largest PEO, 63%

0

10

20

30

40

50

60

70

80

90

100

1

101

201

301

401

501

601

701

801

901 1001

1101

1201

1301

1401

1501

1601

1701

1801

1901

2001

Cumulative Premium Share (%)

Number of PEO Business Entities: Ranked by Premium Size Left to Right

• Cumulative Premium Share

Master PEO Policy 77.2%

(38)

What Is the Survival Rate of PEOs?

Single-State PEO Risks Do Not Fare Well

0

2

4

6

8

10

0.

0

0 .2

0.

4

0 .6

0.

8

1 .0

Kaplan-Meier Curves

for Continuous Active Coverage of Risks in PY 2005

Tracked Between PY 2001 and PY 2010

Time (years)

S

u

rv

iv

al

P

robabi

lit

y

(

%

)

Type of Risk

PEO Client Risk

PEO Risk

Standard Risk

(39)

39 What Is the Survival Rate of PEOs?

Two- to Three-State PEO Risks Fare a Bit Better

0

2

4

6

8

10

0.

0

0 .2

0.

4

0 .6

0.

8

1 .0

Kaplan-Meier Curves

for Continuous Active Coverage of Risks in PY 2005

Tracked Between PY 2001 and PY 2010

Time (years)

S

u

rv

iv

al

P

robabi

lit

y

(

%

)

Type of Risk

PEO Client Risk

PEO Risk

Standard Risk

Source: Workers Compensation Statistical Plan data and Workers Compensation Policy data reported to NCCI NCCI 36 ratemaking states with WV excluded

(40)

What Is the Survival Rate of PEOs?

Large Multi-State PEO Risks Outperform the Market

0

2

4

6

8

10

0.

0

0 .2

0.

4

0 .6

0.

8

1 .0

Kaplan-Meier Curves

for Continuous Active Coverage of Risks in PY 2005

Tracked Between PY 2001 and PY 2010

Time (years)

S

u

rv

iv

al

P

robabi

lit

y

(

%

)

Type of Risk

PEO Client Risk

PEO Risk

Standard Risk

(41)

PEO Loss Development

(42)

PEO Claim Development Versus

Non-PEO Claim Development

1.020

1.025

1.018

1.040

1.021

1.019

1.000

1.025

1.050 Voluntary Large Deductible

Voluntary Non-Large Deductible

Residual Market

Mean 2004–2006

1:5 Claim Development

1:5 Report Claim Development

Lost-Time Claims

PEO

_PEO

Std

_Std

(43)

PEO Loss Development Versus

Non-PEO Loss Development

43

1.278

1.241

1.271

1.410

1.285

1.242

1.000

1.250

1.500 Voluntary Large Deductible

Voluntary Non-Large Deductible

Residual Market

Mean 2004–2006

1:5 Loss Development

1:5 Report Loss Development

Lost-Time Claims

PEO

Std

_Std

(44)

Recent Three Insolvencies and PEO

An Issue Raised in Florida—

(45)

PEOs and Recent Three Insurer Insolvencies

2009 Through 2011

• Great Recession: Client Base Shrank

• Small businesses are PEO clients

• In the US, more than 200,000 small businesses

vanished between early 2008 and 2010

• Insurer Business Models Are a Factor

• In the year prior to insolvency, virtually all of the

premium for each of the three carriers was produced

by PEO workers compensation insurance policies

• Park Avenue established in 1986

• Pegasus in 1980

• Southern Eagle (2005) was a captive insurance

company

45

(46)

PEOs and Recent Three Insurer Insolvencies

Using Annual Statement data:

• Loss reserve analysis

(47)

Premium Declined for All Three

Insolvencies During Recession

0

2

4

6

8

10

12

14

16

18

20 '04 '05 '06 '07 '08 '09 '10

'04 '05 '06 '07 '08 '09 '10

Southern Eagle

Insurance Co.

Park Avenue

P&C Insurance Co.

Pegasus

Insurance Co.

Net W

ritten Premium

(Dollars in Millions)

47

(48)

Southern Eagle Reserve Adequacy

ASB Development

Paid

Method

Paid+Case

Method

(Dollars in Thousands)

2005

$ (933.32) $ (268.80)

$ (8,281.84)

2006

$ (1,429.03) $ (642.64)

2007

$ (1,012.29) $ (213.03)

2008

$ (2,438.56) $ (1,080.88)

2009

$ (3,675.99) $ (1,461.34)

2010

$ (2,441.25) $ (966.54)

(Dollars in Thousands)

2010

Surplus

$ 8,763.00

Southern Eagle Development w/ASB Tail

Paid

Method

Paid+Case

Method

(Dollars in Thousands)

2005 $ (933.32) $ (268.80)

$ (1,686.31)

2006 $ (1,228.88) $ (492.16)

2007 $ (653.88) $ (43.01)

2008 $ (523.01) $ (62.89)

2009 $ 162.90 $ 851.36

2010 $ (484.43) $ 303.51

(49)

The Story Behind the PEO Study

• What Are They Saying About PEOs?

Much of It Is Speculation

• Why No Prior Investigation?

It Would Be Really Difficult

• Initial Findings?

Speculation Upended

• External Push Back?

More Investigation

• Our Own Push Back?

Work in Progress

(50)

Assertion:

(51)

Why More Litigation for PEOs?

Assertions

• Prompt Handling of Claims Is Important:

• Geographical separation between PEO and client

and injured worker

• Inconsistent Policy Data:

• Claims class codes may not line up with policy

exposure class codes

• Large number of client class codes and churning

of PEO clients

(52)

Attorney Involvement and ALAE

• Allocated Loss Adjustment Expense (ALAE)

• Accumulation of expenses incurred in

investigating and settling claims, assignable to

specific claims

• Examples: legal fees, adjusting fees, court costs, medical

costs containment expenses, services required by law or

insurance regulation

• NCCI data:

(53)

PEO Claims ALAE Costs Are Slightly Higher

Relative to Losses

Reporting Period Paid ALAE/IND+MED @2nd Report

53 14.0%

11.1%

11.2%

12.9%

14.2%

15.0%

9.1%

9.4%

9.7%

10.1%

10.4%

10.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2004

2005

2006

2007

2008

2009

Percentage of Paid

ALAE

to

Paid Losses

for Lost-T

ime Claims

Policy Year

PEO

non-PEO

(54)

Assertion:

(55)

55 0.065%

1.303%

0.154%

2.463%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Portion of Excluded Policies

Portion of Excluded Premium

Portion of Excluded Data 2009

PEO

non-PEO

2009 Data

PEOs Have a Lower Portion of Excluded

Data Versus Non-PEOs

(56)

0.065%

0.154%

1.303%

2.463%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Portion of Excluded Policies

Portion of Excluded Premium

Portion of Excluded Data 2009

PEO

non-PEO

2009 Data

PEOs Have a Lower Portion of Excluded

Data Versus Non-PEOs

(57)

PEO and WC Experience Rating System

A “Front” for “Mod Washing”?

(58)

PEO and WC Experience Rating System

(59)

59 Only a Tiny Fraction of All Risks

Disappear for Two to Three Years, Then Return

All Other

1-Year Data Gap

2-Year Data Gap

3+ Years Data Gap

P

o

rt

ion of

R

is

k

s

0 .0

0 .2

0 .4

0 .6

0 .8

1 .0

0.9774

(60)

Only a Tiny Fraction of All Risks

Disappear for Two to Three Years, Then Return

All Other

1-Year Data Gap

2-Year Data Gap

3+ Years Data Gap

P

o

rt

ion of

R

is

k

s

0 .0

0 .2

0 .4

0 .6

0 .8

1 .0

0.9774

(61)

Takeaway

Investigate Rather Than Just Speculate

• It Typically Will Be a Challenge

• If it were easy, it likely would have been done

• Expect Resistance to Initial Results

• Especially if the findings differ materially from the

ex ante speculation

• Be Your Own Greatest Skeptic

• Challenge your findings—you should know more

about the subject than anyone else