california workers compensation
DESCRIPTION
CALIFORNIA WORKERS COMPENSATION. A System Under Siege. Presented by: Bill Miller, FCAS, MAAA Tillinghast–Towers Perrin (949) 253-5242 [email protected]. September 2001. Pre-Open Rating Period 1993 to 1994. Heavily Regulated Pricing No Pricing Deviations - PowerPoint PPT PresentationTRANSCRIPT
CALIFORNIA WORKERS COMPENSATIONCALIFORNIA WORKERS COMPENSATION
September 2001
A System Under SiegeA System Under Siege
Presented by:Presented by:
Bill Miller, FCAS, MAAABill Miller, FCAS, MAAATillinghast–Towers PerrinTillinghast–Towers Perrin
(949) 253-5242(949) [email protected]@towers.com
CLRS0901.PPT/crf/Irvine 2
Pre-Open Rating Period 1993 to 1994
Heavily Regulated Pricing
No Pricing Deviations
Only Pricing Competition through Dividends
Profitable Results
Strong Reserves
Declining Frequency
CLRS0901.PPT/crf/Irvine 3
Pre-Open Rating Period 1993 to 1994
Insurance Market
Non-Concentrated Market
Strong California Domestic Market
Heavy Capitalization (Premium/Surplus < 1.0)
Healthcare Companies Moving into Market
CLRS0901.PPT/crf/Irvine 4
First Years Of Open Rating 1995 to 1996
Great Pricing Flexibility
Heavy Price Competition
CLRS0901.PPT/crf/Irvine 5
100
179202
283
341317
277232
194 197
Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jul-93 Jan-94 Oct-94 1995Avg.
1996Avg.
Rate Level Index
CLRS0901.PPT/crf/Irvine 6
First Years Of Open Rating 1995 to 1996
Great Pricing Flexibility
Heavy Price Competition
Premium Decline
CLRS0901.PPT/crf/Irvine 7
$7.8 $8.4 $8.4 $8.5 $8.9$7.7
$4
$6
$8
$10
Wri
tte
n P
rem
ium
(in
bill
ion
s)
1989 1990 1991 1992 1993 1994
Calendar Year
$5.7
1995
$5.9
1996
Written Premium
CLRS0901.PPT/crf/Irvine 8
First Years Of Open Rating 1995 to 1996
Great Pricing Flexibility
Heavy Price Competition
Premium Decline
Continued Declining Frequency
Calendar Year and Accident Year Results Deteriorating
Reserve Deficiencies
CLRS0901.PPT/crf/Irvine 9
First Years Of Open Rating 1995 to 1996
Insurance Market
Shifts through Withdrawals/Acquisitions/Expansions
HMO’s Move Out of Market
Still Heavy Capitalization (Premium/Net Worth = .6)
Favorable Investment Returns
CLRS0901.PPT/crf/Irvine 10
Open Rating 1997 to 2000
Continued Heavy Price Competition
CLRS0901.PPT/crf/Irvine 11
100%105%
112%113%
122%
99%
83%
69% 70%66%
63% 62%
78%
40%
80%
120%
Ra
te L
ev
el I
nd
ex
(1
/1/8
9 =
10
0%
)
1/1/89 1/1/90 1/1/91 1/1/92 1/1/93 1/1/94 10/1/94 1995Avg.
1996Avg.
1997Avg.
1998Avg.
1999Avg.
2000Avg.
California Workers Compensation Rate Level Index
(January 1989 Rate Level = 100%) as of 12/31/2000
CLRS0901.PPT/crf/Irvine 12
Open Rating 1997 to 2000
Continued Heavy Price Competition
Premium Growth with Expanding Economy
Continued Declines in Frequency
CLRS0901.PPT/crf/Irvine 13
-5.7% -5.9%-6.2%
12.0%10.2%
-13.1%
-19.7%
-3.9% -2.1% -0.3%
-7.4%
-25%
0%
25%
89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00
Accident Year
% C
han
ge
As of 12/31/2000
Estimated Percentage Change In Indemnity Claim Frequency
CLRS0901.PPT/crf/Irvine 14
Open Rating 1997 to 2000
Continued Heavy Price Competition
Premium Growth with Expanding Economy
Continued Declines in Frequency
Sharp Severity Increases
CLRS0901.PPT/crf/Irvine 15
$10,000
$20,000
$30,000
$40,000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Accident Year
Lo
ss S
ever
ity
As of 12/31/2000
Estimated Ultimate Total Loss Per Indemnity Claim
CLRS0901.PPT/crf/Irvine 16
Open Rating 1997 to 2000
Continued Heavy Price Competition
Premium Growth with Expanding Economy
Continued Declines in Frequency
Sharp Severity Increases
Inadequate Pure Premium Rates
CLRS0901.PPT/crf/Irvine 17
30.1%
21.8%
3.1%
11.2%
27.5%
0%
10%
20%
30%
1995 1996 1997 1998 1999
Policy Year
% In
adeq
uacy
Estimated InadequacyOf Approved Pure Premium Rates
CLRS0901.PPT/crf/Irvine 18
California Paid Medical Loss Development Factors
Source: WCIRB of California.
Age in Months 3/97 3/98 3/99 3/00 3/01
Trended —Selected
Reported as of
27/15
39/29
51/39
1.598
1.187
1.086
1.659
1.207
1.093
1.748
1.221
1.111
1.804
1.242
1.128
1.875
1.271
1.136
1.954
1.288
1.153
CLRS0901.PPT/crf/Irvine 19
Observations About Growth in Loss Development
Occurring across all types of indemnity claims, industries, and natures of injury
Average permanent disability rating has increased markedly
Frequency of stipulated awards has been increasing
Settlements of “future medical” driving up severity
Claims with attorney involvement have higher development
Settlement “premium” increasing on permanent disability awards
CLRS0901.PPT/crf/Irvine 20
Open Rating 1997 to 2000
Continued Heavy Price Competition
Premium Growth with Expanding Economy
Continued Declines in Frequency
Sharp Severity Increases
Inadequate Pure Premium Rates
Rapidly Deteriorating Industry Results
CLRS0901.PPT/crf/Irvine 21
68%
11%15%
78%
12%
16%
83%
15%
16%
66%
14%16%
54%
12%15%
60%
15%
18%
84%
21%
20%
95%
22%
20%
102%
24%
21%
113%
26%
22%
116%
24%
21%
101%
22%
21%
0%
50%
100%
150%
200%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Accident Year
Losses LAE Other Expenses
Per
cen
tag
e o
f E
arn
ed
Pre
miu
m
94%106%
114%
96%81%
93%
125%137%
147%161% 161%
144%
California Workers Compensation Accident Year
Combined Loss And Expense Ratiosas of 12/31/2000
CLRS0901.PPT/crf/Irvine 22
Open Rating 1997 to 2000
Continued Heavy Price Competition
Premium Growth with Expanding Economy
Continued Declines in Frequency
Sharp Severity Increases
Inadequate Pure Premium Rates
Rapidly Deteriorating Industry Results
Growing Reserve Deficiencies
CLRS0901.PPT/crf/Irvine 23
$1.5
$0.7$0.4$0.2
$0.1
$0.7$0.6
$0.1
$2.8
$0.0
$1.0
$2.0
$3.0
$4.0
1970-1979
1980-1989
1990-1994
1995 1996 1997 1998 1999 2000
Accident Year
Lo
sse
s (
in b
illio
ns
)
As of 12/31/2000
Difference Between Estimated Ultimate Losses And Reported Losses
CLRS0901.PPT/crf/Irvine 24
Open Rating 1997 to 2000
Insurance Market
Shifts through Withdrawals/Acquisitions/Insolvencies
HMOs Leaving Market
Very Low Reinsurance Rates
High Capitalization & Investment Returns
CLRS0901.PPT/crf/Irvine 25
43%
17%
19%
47%
20%
20%
0%
30%
60%
90%
% M
ark
et
Sh
are
1994 1999
Calendar Year
Top 5 Insurers Top 6th to 10th Insurers Top 11th to 20th Insurers
Market Concentration Ratios
CLRS0901.PPT/crf/Irvine 26
45%
36%
19%
73%
9%18%
0%
25%
50%
75%
100%
% M
ark
et
Sh
are
1994 1999
Calendar Year
Other Insurers California Specialty Insurers State Fund
Note: “California Specialty Insurers” are defined as private insurers who write at least 80% of their Workers Compensation business in California.
Market Share By Type Of Insurer
CLRS0901.PPT/crf/Irvine 27
Future Outlook
1999 — Record Combined Ratio -7% Loss of Equity
2000 — Rates Up Almost 20%, Premium Up 30%
Sharply Increasing Severity/Prior Year Loss Dev.
Relatively Little Improvement Expected in 2000
2001 — Loss Cost Rates Up 10%
Continued Reserve Inadequacies
Likelihood of Large Benefit Increases
CLRS0901.PPT/crf/Irvine 28
Future Outlook
Potential Employer Backlash
Insurance Market
Continued Shift through Acquisitions/Regulatory Action
Little Cheap Reinsurance/HMO’s out of WC
High Capitalization
Potentially Reduced Investment Returns