State of the Workers Compensation Market

(1)

Presented by:

Tony DiDonato, FCAS, MAAA

Director & Senior Actuary, NCCI

CASE Spring Meeting

March 27, 2013

Nashville, TN

State of the

Workers Compensation Market

and

(2)

Workers Compensation

Countrywide Premium

(3)

Countrywide Workers Compensation

Premium—First Increase in Years

Net Written Premium

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

32.2 31.0 31.3

29.8 30.5 29.1

26.3

28.4

27.0

25.9 _25.0

28.6

32.1

37.7

42.3

46.5

47.8

46.5

44.3

39.3 34.6 33.8

36.3

0

10

20

30

40

50 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

State Funds ($ B)

Private Carriers ($ B)

$ Billions

Calendar Year

Source: 1990–2010 Private Carriers, Annual Statement Data; 2011, NCCI

1996–2011 State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

(4)

Countrywide Average Approved

Bureau Rates/Loss Costs

History of Average Workers Compensation Bureau Rate/Loss Cost Level Changes

* Preliminary

Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating

organization relative to the previously filed rates

12.1

7.4

10.0

2.9 -6.4

-3.2

-6.0

-8.0

-5.4

-2.6

3.5

1.2

4.9

6.6 -6.0

-5.1

-5.7

-6.6

-3.1

-2.0

-0.7

0.4

7.8 -10

-5

0

5

10

15 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Percent

Calendar Year

Cumulative

1990–1993

+36.3%

Cumulative 2000–2003

+17.1%

Cumulative 2004–2011

–25.6%

Cumulative 1994–1999

–27.8%

(5)

Countrywide Average Approved

Bureau Rates/Loss Costs

All States vs. NCCI States

-5.1

-5.7

-6.6

-3.1

-2.0

-0.7

0.4

7.8 -0.2

-0.3

-3.1

_-3.6

-5.3

-2.5

-1.2

2.5 -8

-6

-4

-2

0

2

4

6

8

10 2005

2006

2007

2008

2009

2010

2011

2012*

All States

NCCI States

Calendar Year

Percent

Cumulative 2005–2012:

–14.7% All States

–13.1% NCCI States

* Preliminary

Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating

organization relative to the previously filed rates

(6)

Status of NCCI Filing Activity

Voluntary Market Filings

28

21

10

0

1

0

8

16

27

25

0

5

10

15

20

25

30 2009/2010 Season

2010/2011 Season

2011/2012 Season

2012/2013 Season

Number of States

(7)

Current NCCI Voluntary Market Rate/Loss

Cost Level Changes

Excludes Law-Only Filings

Reflects the most recent experience filing in each jurisdiction

-9.1

-7.9

-5.7

-4.1

-3.8

-3.6

-2.4

-1.8

-1.6

-0.5

-0.3

0.0

0.3

0.4

0.6

1.7

2.1

2.3

2.5

2.6

3.8

3.9

4.0

4.1

4.3

4.8

5.1

5.2

6.1

7.1

7.9 -3.8

1.1

5.4

8.0 -25

-20

-15

-10

-5

0

5

10

15 WV KY VA AR IL TX AK GA ME UT NC SD MT NE DC OK NH SC ORMO KS TN LA NV MD ID AZ MS IN AL NMCO HI VT FL CT IA RI

Approved

Pending

(8)

Countrywide Impact of Discounting on

Workers Compensation Premium

NCCI States—Private Carriers

p Preliminary

Dividend ratios are based on calendar year statistics

NCCI benchmark level does not include an underwriting contingency provision

Based on data through 12/31/2011 for the states where NCCI provides ratemaking services

-7.1 -7.4 -7.1

-8.5

-10.5

-14.6

-17.7

-22.6 -23.2

-19.2

-14.3

-4.0 -1.7

2.1 _0.7

-2.2

-4.7

-7.4 -8.3 -8.7 -8.0

-30

-25

-20

-15

-10

-5

0

5

10 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011p

Rate/Loss Cost Departure

Schedule Rating

Dividends

Policy Year

(9)

Workers Compensation Premium

Rate Ranking

Premium Rate Index per $100 of Payroll

1.01

3.01

0.0

1.0

2.0

3.0

ND IN AR VA DC NV UT MA CO MS KS WV OR TX AZ MO HI MD NE MI WY DE FL OH GA NM NC IA SD KY AL RI TN ID MN SC LA VT WA PA WI ME NH MT NJ OK NY IL CA CT AK

Source: 2012 Oregon Workers’ Compensation Premium Rate Ranking Summary

Indexes based on rates in effect on January 1, 2012

(10)

Countrywide Average Rates by

Industry Group

1.92

3.70

7.46

0.42

3.02

5.79

0

1

2

3

4

5

6

7

8 All Classes Manufacturing Contracting

Office &

Clerical

Goods &

Services

Miscellaneous

Pure Loss Cost—All Classes

(11)

Countrywide Distribution of

Payroll and Premium by Industry Group

Manufact

8.3%

Contracting

6.4%

Office &

Clerical

61.0%

Goods &

Services

19.0%

Misc

5.3%

Manufact

16.0%

Contracting

24.6%

Office &

Clerical

13.4%

Goods &

Services

29.9%

Misc

16.1%

Payroll

Premium

(12)

Countrywide Policy Size Comparison

by Policy Count and Premium

55.8%

17.8%

10.1%

8.4%

5.7%

2.2%

Policy Count

$0

‐

$1,999

$2,000

‐

$4,999

$5,000

‐

$9,999

$10,000

‐

$24,999

$25,000

‐

$99,999

$100,000

and

greater

2.5% 4.0%

5.0%

9.2%

19.4%

59.9%

Premium

(13)

Estimated Ultimate Premium

All Pools Combined

1.2

2.1

2.6

2.8

3.5

4.0

4.4

4.8

4.1

3.1

1.9

1.0

0.6 0.3 0.3 0.4

0.6

1.1

1.4 1.5 1.4

1.2

0.9

0.7 0.5 0.5 0.5

0.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0 1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Billions

Policy Year

Traumatic Only

PY

Est.

Ult.

Premium

2010

=

$454M

2011

=

$509M

2012

=

$805M

(14)

Workers Compensation

Combined Ratios

(15)

Countrywide Workers Compensation

Calendar Year Combined Ratio Remains High

Private Carriers

Source: 1990–2011, Annual Statement Data

117 123 121

109

102

97 100 101

107

115

118

122 111 110

₁₀₇

103

93 101 101

110 115 115

0

20

40

60

80

100

120

140 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Dividends

Underwriting Expense

LAE

Loss

Percent

(16)

Countrywide Workers Compensation

Calendar Year Net Combined Ratios

Private Carriers and State Funds

100

101

107

115

118

122

111 ₁₁₀

107

103

93

101

110

115

112

119

143

147

144

115 ₁₁₄

116

118

104

106

108

110

122

136

127

121

131

142

145

137

117 ₁₁₆

103 ₁₀₂

102

106

115

121

129

138

133

80

90

100

110

120

130

140

150 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Private Carriers

NCCI-Affiliated State Funds

State Funds

Percent

Calendar Year

Source: 1996–2011 Private Carriers, Annual Statement Data

1996–2011 NCCI-Affiliated State Funds: AZ, CO, HI, ID, KY, LA, MO, MT, NM, OK, OR, RI, UT Annual Statements

1996–2011 State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

(17)

111

110

107

103

93

101

110

115 ₁₁₅

106

97

88

87 ₈₆

98

104

109

116

114

80

90

100

110

120

130 2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Calendar Year

Accident Year

Countrywide Accident Year

Net Combined Ratio

Workers Compensation Calendar Year vs.

Ultimate Accident Year Private Carriers

Accident Year data is evaluated as of 12/31/2011 and developed to ultimate

Source: Calendar Years 2002–2011, Annual Statement Data;

Ultimate Accident Years 2001–2011, NCCI analysis based on Annual Statement Data

Includes dividends to policyholders

(18)

90

157

0

20

40

60

80

100

120

140

160

180 AR WV TX

AK

IN,

VA

DC,

HI,

NV

KY,

NE,

TN

MO

IL,

ME

KS OK,

SD

IA,

MS

GA,

ID

AL,

FL

NC NM

LA

VT

UT MD,

NH

CT

RI

AZ

CO OR

Results Vary From State to State

Accident Year 2011 Combined Ratios

(19)

(20)

Countrywide Workers Compensation

Lost-Time Claim Frequency

Declined in 2011

Lost-Time Claims

2011p: Preliminary based on data valued as of 12/31/2011

1991–2010: Based on data through 12/31/2010, developed to ultimate

Based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies

Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level

-4.2 -4.4

-9.2

0.3 -6.5

-4.5

0.5 -3.9

-2.3

-4.5

-6.9

-4.5 -4.1

-3.7

-6.6

-4.5

-2.2

-4.5

-5.9

10 -4

3 -12

-9

-6

-3

0

3

6

9

12 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011p

Indicated

Adjusted

Percent

Accident Year

Cumulative Change of –55.5%

(1991–2010 adjusted)

(21)

The Recession Impacted

Premium Audits

Final Premium vs. Estimated Premium by Policy Effective Quarter

Policy Quarter

NCCI’s Statistical Plan audited premium compared to policy-estimated premium

Based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies

and mid-term cancellations

Recession

7.1

6.1

5.1

5.6

5.1

4.5

3.0

1.0 -1.0

-3.0

-4.5

-4.0

-3.6

-2.0

0.5

1.4

3.2 Q1

'06

Q2

'06

Q3

'06

Q4

'06

Q1

'07

Q2

'07

Q3

'07

Q4

'07

Q1

'08

Q2

'08

Q3

'08

Q4

'08

Q1

'09

Q2

'09

Q3

'09

Q4

'09

Q1

'10

Q2

'10

-6

-4

-2

0

2

4

6

8 Percent

(22)

Adjustments to Indicated Change in

Lost-Time Claim Frequency

Accident Year 2010 & 2011

Estimated Adjustments to Frequency Change

2010

2011

Unadjusted Frequency Change

+10%

–4%

CY Premium Adjustment

–6%

+4%

Workweek and Industry Group Mix

–1%

(23)

Countrywide Distribution of Claims by

Injury Type

Temporary Total

Permanent Partial

Permanent Total/Fatal

Medical Only

76.8%

14.4%

8.5%

0.3%

Countrywide

(24)

(25)

Countrywide Workers Compensation

Indemnity Severity—

Modest Increase in 2011

Average Indemnity Cost per Lost-Time Claim

1.7

5.9

7.7

9.0

10.1

9.2

3.1

4.6

1.0

3.6

5.5

6.5

8.8

0.6 -2.8

2

3.6

4.2

5.2

5.6

4.7

6.3

2.3

1.1

2.7

4.3

3.5

4.7 _4.6

2.7

1.1

2.3

3 -4

-2

0

2

4

6

8

10

12 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010 2011p

Change in Indemnity Cost per Lost-Time Claim

Change in Average Weekly Wage

Year

p Preliminary

Based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies

Sources:Average Weekly Wage 1995–2008: Quarterly Census of Employment and Wages, Economy.com; 2009-2011p, NCCI

Accident year indemnity severity—NCCI states, NCCI

(26)

Countrywide Indemnity Loss Distribution by

Injury Type

Temporary Total

Permanent Partial

Permanent Total/Fatal

14.1%

69.9%

16.0%

Countrywide

(27)

(28)

Countrywide Workers Compensation Medical

Severity—Moderate Increase in 2011

Average Medical Cost per Lost-Time Claim

5.1

7.4

10.1

8.3

10.6

7.3

13.5

8.8

7.7

5.4

8.5

5.9

6.3

6.1

4.2

1.3

4

4.5

3.5

2.8

3.2

3.5

4.1

4.6

4.7

4.0

4.4

4.2

4.0

4.4

3.7

3.2

3.4 ₃

0

2

4

6

8

10

12

14

16 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010 2011p

Change in Medical Cost per Lost-Time Claim

Change in Medical CPI

Year

p Preliminary

Based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies

Sources:Medical CPI—All states, Moody’s Economy.com; Accident year medical severity—NCCI states, NCCI

(29)

Countrywide Medical Loss Distribution by

Injury Type

Temporary Total

Permanent Partial

Permanent Total/Fatal

Medical Only

11.7%

16.6%

54.8%

16.9%

Countrywide

(30)

NCCI Experience Rating Plan:

Recent Changes to the

(31)

Experience Rating Plan

Experience Rating Formula

A

_p

+ (W x A

_e

) + (1 – W) x E

_e

+ B

___________________________________

E

_p

+ E

_e

+ B

Weight,

assigned by

expected loss

Actual primary

losses based on

insured’s experience

Actual primary losses: actual losses that have been capped at the split point

Actual excess losses: actual losses that are above the split point, subject to accident limit

Expected losses: calculated by multiplying insured’s payroll in 100’s by class ELR

Expected primary losses: calculated by multiplying expected losses by class D-ratio

Expected excess losses: Expected losses – expected primary losses

Actual excess

losses based

on insured’s

experience

Expected

excess losses

Expected primary

losses

Ballast,

assigned by

expected loss

(32)

Experience Rating Plan

Item E-1402



Effective 1/1/2013 and subsequent in NCCI

states



Increases the primary/excess split point



Indexes the split point, so future increases are

automatic



Revises the maximum modification formula/cap,

so the maximum mod is not less than 1.10



Experience rating changes will be

premium-neutral statewide

(33)



The split point separates losses into primary and excess

components. It had been $5,000.



If the split point is not indexed for claim cost “inflation,”

a greater proportion of losses fall into the excess

category as time goes on.



Since excess losses receive less weight than primary

losses in the experience rating formula, the plan

becomes less responsive.



Performance testing indicates that the split point needs

to be increased to $15,000. This is not surprising since

the average cost of a claim has tripled since the last

split point update (20 years ago).

Experience Rating Plan

Split Point Review

(34)

Quintile Analysis:

Prior $5,000 Split Point

PY 2006 Experience Under the ER Plan, Indexed for Severity Inflation

50%

100%

150%

0.36 to

0.89

0.89 to

0.93

0.93 to

0.95

0.95 to

1.05

1.05 to

3.67

0.36 to

0.89

0.89 to

0.93

0.93 to

0.95

0.95 to

1.05

1.05 to

3.67 Relative Pure Loss Ratio

Groups Based on Experience Rating Modification

5th Percentile

95th Percentile

25th Percentile

75th Percentile

Before Experience Rating

After Experience Rating

(35)

Quintile Analysis:

Indicated $15,000 Split Point

PY 2006 Experience Under the ER Plan, Indexed for Severity Inflation

50%

100%

150%

0.32 to

0.81

0.81 to

0.87

0.87 to

0.92

0.92 to

1.08

1.08 to

4.26

0.32 to

0.81

0.81 to

0.87

0.87 to

0.92

0.92 to

1.08

1.08 to

4.26 Relative Pure Loss Ratio

Groups Based on Experience Rating Modification

Before Experience Rating

After Experience Rating

5th Percentile

95th Percentile

25th Percentile

75th Percentile

(36)



The effective date coincides with the effective date

of the loss cost or rate filing



A transition program

*

is phasing in the split point

change:



Year 1, the split point is being increased to $10K



Year 2, the split point will be further increased to $13.5K



Year 3, the split point will be increased all the way to the

indicated split point of approximatel

y $17K (

$15K plus two

years of inflation adjustment rounded to the nearest $500

)



Subsequent annual filings will increase the split

point as indicated

* A 4-year transition was approved in MO

Experience Rating Plan

Item E-1402

(37)

•

The 2013 split point change is not occurring in

isolation

•

The regular annual update of the NCCI ER values

is also occurring



This can change mods by several percent

•

Employer experience is also updated annually



This is typically the biggest driver of changes in

mods, especially for large mod changes

•

Changes in the split point will become part of the

regular annual update of the experience rating

values

Typical Annual Mod Changes

(38)

Typical Annual Mod Changes

Under No Change in Split Point

Distribution of Differences Between 2010 and 2011 Mod Values for Selected States

*

% Change in Mod

% of

Risks

Average Mod

2010

*

2011

*

Change <-15%

4.5%

1.22

0.96 -15%<Change<-10%

3.4%

1.11

0.98 -10%<Change<-5%

5.1%

1.05

0.98 -5%<Change<0%

20.6%

1.00

0.97 No Change

22.5%

0.93

0.93 0%<Change<5%

31.6%

0.93

0.95 5%<Change<10%

4.3%

0.95

1.02 10%<Change<15%

2.9%

0.95

1.06 15%<Change<20%

2.0%

0.95

1.11 20%<Change

3.1%

0.95

1.22

(39)



Experience rating (ER) values using a $10,000 split

point were filed on a state-by-state basis for loss

cost and rate filings effective 1-1-13 and

subsequent



When a loss cost filing was pending, preliminary

mods were issued by NCCI



Preliminary mods use approved ER values and

were issued under a $5K split point until the rate

(loss cost) filing was approved



Final mods that use the revised split point were

issued once the rate (loss cost) filing was approved

(40)

Preliminary Mods and Final Mods



In 2012, Preliminary mods were computed using:

- 3-years of updated actual losses for employers

- Prior approved split point ($5,000)

- Prior approved Expected Loss Rates (ELR)

- Prior approved D-ratio, Weights, & Ballasts



Upon approval, Final mods were computed using:

- 3-years of updated actual losses for employers

- New split point ($10,000)

- New ELR

- New D-ratio, New Weights, & New Ballasts



NCCI is analyzing the comparison of preliminary and

final mod results as states are approved

(41)

Comparisons of Preliminary Mods to Final Mods

Initial Snapshot of Mod Results from Recently Approved States*

* Based upon a sample of 75,007 intrastate risks from the following 26 states:

MO, AZ, IN, OR, IL, NM, MD, OK, ID, HI, KS, FL, NH, TN, IA, ME, CO, AL, NE,

CT, GA, MS, LA, AK, VA, NV

%

Change

in

Prelim_Mod to

Final_Mod

%

of

Risks

Average

Mod

Preliminary

SP

=

$5K

Final

SP

=

$10K

Change

<

‐

15%

_0.07%

_1.68

_1.31

‐

15%<Change

<

‐

10%

_0.43%

_0.81

_0.72

‐

10%<Change

<

‐

5%

_11.45%

_0.85

_0.79

‐

5%<

Change

<

0%

_61.64%

_0.93

_0.90

No

Change

_4.48%

_0.99

0%<

Change

<5%

_9.97%

_1.08

_1.11

5%<

Change

<10%

_8.04%

_1.20

_1.29

10%<

Change

<15%

_3.23%

_1.30

_1.46

15%<Change

_0.68%

_1.44

_1.70

(42)

Conclusions



NCCI is currently tracking the change in split point by

doing comparisons of preliminary to final mod values for a

large sample of risks



The results are very similar to NCCI’s previous

countrywide split point research. That is:

- The majority of risks receive credits

- Credits and debits are larger under $10K split point



This comparison differs slightly from NCCI’s countrywide

research, which isolated the split point change across a

full year’s risks in all NCCI states



The initial snapshot of results from the split point change

is consistent with NCCI’s previous countrywide research

(43)