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Issues in California Workers Compensation

Issues in California Workers Compensation. Michele Bernal, FCAS VP & Actuary, American Re 6/15/00. 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 Compensation

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  1. Issues in CaliforniaWorkers Compensation Michele Bernal, FCAS VP & Actuary, American Re 6/15/00

  2. Issues in California Workers Comp • Overview of the Primary Market • Trends in Primary Loss Costs • Development of Primary Losses • Legislative Initiatives • Reinsurance Pricing

  3. Issues in California Workers Comp • Overview of the Primary Market • Trends in Primary Loss Costs • Development of Primary Losses • Legislative Initiatives • Reinsurance Pricing

  4. 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

  5. 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 WCIRB’s projection of 100% • For AY98, carriers initially reported 75% at 12/98, increasing to 91% at 12/99, but still short of the WCIRB’s estimate of 101%

  6. What’s Happening?

  7. California Primary PricingRelative to 1991 Charged Rates 1/1/95 Open Rating Source: WCIRB Final Summary of Year-End 1999 Experience

  8. California Primary PricingRelative to Advisory Pure Premium 1/1/95 Open Rating Source: WCIRB Final Summary of Year-End 1999 Experience

  9. Issues in California Workers Comp • Overview of the Primary Market • Trends in Primary Loss Costs • Development of Primary Losses • Legislative Initiatives • Reinsurance Pricing

  10. Trend in California Loss Costs Source: WCIRB Final Summary of Year-End 1999 Experience

  11. Trend in Loss Costs Sources: WCIRB Final Summary of Year-End 1999 Experience NCCI Annual Issues Symposium

  12. Trend in Indemnity Claim Frequency Sources: WCIRB Final Summary of Year-End 1999 Experience NCCI Annual Issues Symposium

  13. Trend in Per Indemnity Claim Average Medical Sources: WCIRB Final Summary of Year-End 1999 Experience NCCI Annual Issues Symposium

  14. Cost Drivers - Medical • 9/18/96 Minniear’s 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

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

  16. 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?

  17. Issues in California Workers Comp • Overview of the Primary Market • Trends in Primary Loss Costs • Development of Primary Losses • Legislative Initiatives • Reinsurance Pricing

  18. Loss Development Factors Incurred Indemnity Development Year Age in Months Source: WCIRB Actuarial Committee Agenda - 5/31/00

  19. Loss Development Factors Paid Indemnity Development Year Age in Months Source: WCIRB Actuarial Committee Agenda - 5/31/00

  20. Loss Development Factors Incurred Medical Development Year Age in Months Source: WCIRB Actuarial Committee Agenda - 5/31/00

  21. Loss Development Factors Paid Medical Development Year Age in Months Source: WCIRB Actuarial Committee Agenda - 5/31/00

  22. 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

  23. 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

  24. Issues in California Workers Comp • Overview of the Primary Market • Trends in Primary Loss Costs • Development of Primary Losses • Legislative Initiatives • Reinsurance Pricing

  25. Legislative Initiatives • Benefit Increase (SB 996) • Privacy (AB 435) • Reinsurance Notification (SB 1959)

  26. 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

  27. Legislative Initiatives • Privacy (AB435 - effective 10/99) • Limits amount and type of medical information insurers and TPA’s may share with injured workers’employers • 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

  28. 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 company’s IRIS test #5 investment yield • If reinsurer fails to post bond, ceding company may not claim reinsurance for reserve credit

  29. Issues in California Workers Comp • Overview of the Primary Market • Trends in Primary Loss Costs • Development of Primary Losses • Legislative Initiatives • Reinsurance Pricing

  30. 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 LER’s • Will be filed with 1/1/01 pure premiums • New Table M and Table L in 2002

  31. 2001 LER’s • Significant Changes since 1997 • Stochastic claim development • Increased claim development • Increased inflation • Update data to Policy Year 1993 & 1994

  32. WCIRB Draft 2001 LER’s Loss Limit Source: WCIRB Actuarial Committee Agenda 5/31/00

  33. WCIRB Draft 2001 LER’sAdditional Thoughts • Now more consistent with LER’s 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

  34. California WC ReinsuranceFinal Thoughts • Monitor primary pricing • Pure premium changes aren’t 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 • Don’t rely exclusively on 1997 LER’s

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