WORKERS COMPENSATION - CURRENT ISSUES - (SESSION WCP-22) Robert Blanco- NCCI Nancy Treitel- Liberty Mutual Dee Dee Mays, Moderator- NCCI Casualty Actuarial Society 2000 Seminar on Ratemaking March 9-10, 2000

© 2000 National Council on Compensation Insurance, Inc. Line of Business Personal Auto Homeowners Workers Compensation Commercial Multiple Peril Other Liability Commercial Auto Fire & Allied Lines Total All Lines 1998 $117.3B $281.6B HOW DOES WC COMPARE? PREMIUM VOLUME BY LINE 1999p $120.3B $288.0B Change 2.6% % Source for lines other than Workers Compensation: Best's Aggregates & Averages, Property/Casualty, 1999 Edition and Best’s Review Preview, Property/Casualty, January 2000 © A. M. Best Company—used with permission p Preliminary

© 2000 National Council on Compensation Insurance, Inc. HOW DOES WC COMPARE? COMBINED RATIOS BY LINE Line of Business Personal Auto Homeowners Workers Compensation Commercial Multiple Peril Other Liability Commercial Auto Fire & Allied Lines Total All Lines % % % % 1999p 103% % p Preliminary Source for lines other than Workers Compensation: Best's Aggregates & Averages, Property/Casualty, 1999 Edition and Best’s Review Preview, Property/Casualty, January 2000 © A. M. Best Company—used with permission

© 2000 National Council on Compensation Insurance, Inc. HOW DOES WC COMPARE? PRETAX OPERATING GAIN/LOSS BY LINE Line of Business Personal Auto Homeowners Workers Compensation Commercial Multiple Peril Other Liability Commercial Auto Fire & Allied Lines Total All Lines % % % % 1999p 3% % p Preliminary Source for lines other than Workers Compensation: Best's Aggregates & Averages, Property/Casualty, 1999 Edition and Best’s Review Preview, Property/Casualty, January 2000 © A. M. Best Company—used with permission

© 2000 National Council on Compensation Insurance, Inc. Source: Value-Line

© 2000 National Council on Compensation Insurance, Inc. WC NET WRITTEN PREMIUM Private Carriers p Preliminary

© 2000 National Council on Compensation Insurance, Inc. WC PREMIUMS & PREMIUM EQUIVALENTS * Preliminary

© 2000 National Council on Compensation Insurance, Inc. WC LOSS RATIO Countrywide - Net - Private Carriers p Preliminary

WORKERS COMPENSATION LOSS RATIOS First Large DollarDeductible Loss$ 75 $ 15 Expense$ 25 $ 23 Premium$100 $ 38 Loss Ratio 75% 40%

© 2000 National Council on Compensation Insurance, Inc. LAE RATIO TO PREMIUM

© 2000 National Council on Compensation Insurance, Inc. LAE RATIO TO LOSSES

© 2000 National Council on Compensation Insurance, Inc. UNDERWRITING EXPENSE RATIO

© 2000 National Council on Compensation Insurance, Inc. POLICYHOLDER DIVIDENDS RATIO

© 2000 National Council on Compensation Insurance, Inc. CALENDAR YEAR COMBINED RATIO p Preliminary

© 2000 National Council on Compensation Insurance, Inc. COMBINED RATIO Calendar Year vs. Ultimate Accident Year Countrywide - Private Carrier p Preliminary Includes dividends to policyholders Accident year is developed to ultimate

© 2000 National Council on Compensation Insurance, Inc. PRIOR YEAR RESERVE ADJUSTMENTS Countrywide - Net - Private Carriers Loss and LAE reserves

© 2000 National Council on Compensation Insurance, Inc. ACCIDENT YEAR LOSS RATIOS INCLUDING LOSS ADJUSTMENT EXPENSE Reserve releases

© 2000 National Council on Compensation Insurance, Inc. INVESTMENT GAIN AND OTHER INCOME RATIO - DECLINING A BIT p Preliminary * Adjusted to include realized capital gains to be consistent with 1992 and after.

© 2000 National Council on Compensation Insurance, Inc. WC PRETAX OPERATING GAIN/LOSS RATIO - BIG DECLINE IN 99? p Preliminary * Adjusted to reflect realized capital gains to be consistent with 1992 and after.

© 2000 National Council on Compensation Insurance, Inc. + Schedule carrier discounting (rate/loss cost departure, schedule rating, dividends) + Roll-off of reserve take-downs + Loss trends flattening/increasing + Medical inflation increasing RESULTS ARE DETERIORATING… BUT WHY???

© 2000 National Council on Compensation Insurance, Inc. HOW ARE FINAL WC PREMIUMS DETERMINED? BUREAU Advisory Loss Costs Assigned Risk Rates Experience Rating Values Experience Mods Rating Plans and Classifications INSURANCE COMPANY Final Rate Determination: –Expense Multiplier –Loss Cost Deviations Individual Risk Modifications: –Schedule Rating –Retrospective Rating

© 2000 National Council on Compensation Insurance, Inc. p Preliminary Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization. HISTORY OF AVERAGE BUREAU RATE/LOSS COST LEVEL CHANGES

© 2000 National Council on Compensation Insurance, Inc. CARRIER PRICE DISCOUNTING * Preliminary Based on data through 12/31/98 for the 37 states where NCCI provides ratemaking services. Dividend ratios are based on calendar year statistics

© 2000 National Council on Compensation Insurance, Inc. P Preliminary Values are relative to 1993 CHANGE IN FINAL PREMIUM CHARGED

WORKERS COMPENSATION PRICING Components of Price Loss Cost = f (customer, company, and/or industry losses, inflation, interest rate, med technology, economy, etc.) + Risk Charge + Expenses + Tax Premium

© 2000 National Council on Compensation Insurance, Inc. AVG INDEMNITY COST PER LOST TIME CLAIM - INCREASING Private Carriers Based on data through 12/31/1998, developed to ultimate. States included: AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, MD, MI, MS, MO, MT, NE, NH, NM, NC, OK, OR, RI, SC, SD, TN, UT, VT, VA, and WI. Excludes the effects of deductible policies : -0.5% annual change : +3.7% annual change

© 2000 National Council on Compensation Insurance, Inc. ANNUAL CHANGE IN CPS WAGE VS. CHANGE IN INDEMNITY COST PER LOST TIME CLAIM

© 2000 National Council on Compensation Insurance, Inc. AVG MEDICAL COST PER LOST TIME CLAIM-INCREASING MORE Private Carriers Based on data through 12/31/1998, developed to ultimate. States included: AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, MD, MI, MS, MO, MT, NE, NH, NM, NC, OK, OR, RI, SC, SD, TN, UT, VT, VA, and WI. Excludes the effects of deductible policies : +2.7% annual change : +5.7% annual change

© 2000 National Council on Compensation Insurance, Inc. CHANGE IN MEDICAL CPI VS. CHANGE IN MEDICAL COST PER LOST TIME CLAIM

WORKERS COMPENSATION PRICING Inflation Note: excess pricing even more sensitive

WORKERS COMPENSATION PRICING With medical technology, how big can a WC claim become? Consider a 25-year old making $450 per week whose injury results in quadriplegia requiring 24-hour attendant care. $ amounts are in millions.

© 2000 National Council on Compensation Insurance, Inc. ANNUAL CHANGE IN LOST TIME CLAIM FREQUENCY PER WORKER Private Carriers Based on data through 12/31/1998, developed to ultimate. States included: AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, MD, MI, MS, MO, MT, NE, NH, NM, NC, OK, OR, RI, SC, SD, TN, UT, VT, VA, and WI. Excludes the effects of deductible policies. Cumulative Decrease of 24% since 1990

© 2000 National Council on Compensation Insurance, Inc. ANNUAL CHANGE IN LOST TIME CLAIM COSTS PER WORKER Private Carriers Based on data through 12/31/1998, developed to ultimate. States included: AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, MD, MI, MS, MO, MT, NE, NH, NM, NC, OK, OR, RI, SC, SD, TN, UT, VT, VA, and WI. Excludes the effects of deductible policies.

© 2000 National Council on Compensation Insurance, Inc. n Cost containment initiatives - saturation point LOSS TRENDS - WHY ARE THEY STARTING TO INCREASE??? POTENTIAL REASONS: n Medical inflation starting to rise n Managed care backlash n Frequency no longer declining n Economy

© 2000 National Council on Compensation Insurance, Inc. Past * rate/loss cost departure, schedule rating, dividends 1998Future -22% Schedule Carrier Discounting * Loss Experience NCCI Rate/Loss Costs ? CAN A STABLE LOSS COST ENVIRONMENT BE MAINTAINED?

© 2000 National Council on Compensation Insurance, Inc. * Excludes Maine Residual Market Pool ** Projected to ultimate RESIDUAL MARKET PREMIUMS - HOW LOW CAN YOU GO? as of 9/30/1999

© 2000 National Council on Compensation Insurance, Inc. RESIDUAL MARKET SHARES (Plan Premium as a Percentage of Direct Written Premium) p Preliminary

© 2000 National Council on Compensation Insurance, Inc. * Excludes Maine Residual Market Pool RESIDUAL MARKET COMBINED RATIOS as of 9/30/1999

© 2000 National Council on Compensation Insurance, Inc. * Excluding Maine ** Excluding Maine and New Mexico # Excluding New Mexico RESIDUAL MARKET UNDERWRITING GAIN/LOSS as of 9/30/1999

© 2000 National Council on Compensation Insurance, Inc. CHANGING DEVELOPMENT PATTERNS 1st to 2nd Development - Indemnity Accident Year Development. First is at 12 months. Source: NCCI's Loss Development Exhibits

© 2000 National Council on Compensation Insurance, Inc. CHANGING DEVELOPMENT PATTERNS 1st to 2nd Development - Medical Accident Year Development. First is at 12 months. Source: NCCI's Loss Development Exhibits

© 2000 National Council on Compensation Insurance, Inc. SO WHAT ARE THE NEW HOT ISSUES AFFECTING WORKERS COMP? + Consumer Reports Article + Federal issues: –Black Lung compensability –Ergonomic standards –Privacy issues –Beryllium + Unicover impact

Reinsurance Pool Structure wc insurer Pool Manager Pool members Retrocessionaries wc insurer Reinsurance Underwriting Manager cede prems & losses get ceding commission fee for pool admin; fee for placing reinsurance assume prems and losses cedes prems and losses gets ceding commission assume prems and losses

UNICOVER POOL What Is It? Why All the Fuss? Growth and volume much higher than expected. Over $900 million of quota share reinsurance passed through Unicover in its last year. Management fees of 7.5% of EP paid. Rules permitted ceding commissions as high as 30%. Business appears to have been significantly underpriced. Losses likely to be $2 billion or more. Some insurers are commuting contracts. Law suits abound. Sources: articles in Business Insurance, Moody’s, and Alliance Bulletins

© 2000 National Council on Compensation Insurance, Inc. LEGISLATIVE UPDATE - PROPOSALS AK, FL, GABENEFIT INCREASES IN, ME, TN KENTUCKYUNDOING REFORMS ILLINOISPREMIUM BASIS CHALLENGE KANSASEXCLUSIVE REMEDY CHALLENGE OKLAHOMANEW REFORMS

© 2000 National Council on Compensation Insurance, Inc. Changing Landscape Comp Economics Have Changed WC Predominating Industry Average

WORKERS COMPENSATION Late 1980s vs 1999/2000

© 2000 National Council on Compensation Insurance, Inc. WORKERS COMP - FUTURE TRENDS? n Calendar year 1999 vs. Accident year 1999 n Overall adequacy of reserves n Impact of over-capacity in industry n Future price competition n Potential threat of reform rollback n Future medical inflation n Potential changes in the economy n Future investment gains