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

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

Accident Year Combined Loss and Expense Ratios as of 12/31/99 Source: WCIRB Final Summary of Year-End 1999 Experience 94% 105% 110% 98% 84% 92% 116% 128% 133% 142% 141%

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%

What’s Happening?

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

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

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

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

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

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

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

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

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

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?

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

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

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

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

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

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

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

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

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

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

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

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

Issues in California Workers Comp Overview of the Primary Market Trends in Primary Loss Costs Development of Primary Losses Legislative Initiatives 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

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

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

WCIRB Draft 2001 LER’s Additional 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

California WC Reinsurance Final 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