state of ohio bureau of workers’ compensation unpaid loss ... · 30, 2012 based on data evaluated...

State of Ohio Bureau of Workers’ Compensation

Unpaid Loss & LAE as of June 30, 2012 (Based on Data Evaluated as of June 30, 2012)

Volume I – Report and Summary Exhibits

August 24, 2012

Deloitte Consulting LLP

August 24, 2012 Mr. Christopher Carlson, FCAS, MAAA Chief Actuary Ohio Bureau of Workers’ Compensation 30 West Spring Street Columbus, Ohio 43266-0581 Dear Mr. Carlson: We are pleased to provide this Report, which analyzes the unpaid compensation, medical and compensation adjustment expense for the State of Ohio Bureau of Workers’ Compensation as of June 30, 2012 based on data evaluated as of June 30, 2012. This document was prepared to summarize our conclusions, observations, and methodologies. We note that our estimates are subject to the limitations inherent in estimating compensation, medical costs and compensation adjustment expenses, as described in this Report. We are members of the Casualty Actuarial Society and the American Academy of Actuaries and meet the qualification standards to issue this actuarial report. It has again been our pleasure to be of service to you in this regard. Sincerely, Robert S. Miccolis, FCAS, MAAA David E. Heppen, FCAS, MAAA Director Director William Van Dyke, ACAS, MAAA Specialist Leader

Deloitte Consulting LLP 1700 Market Street Philadelphia, PA 19103-3984 USA

Tel: (215) 299-4655 Fax: (215) 405-3027 www.deloitte.com

www.deloitte.com

Table of Contents Volume I – Report and Summary Exhibits

Introduction ..................................................................................................................................... 1 Purpose and Scope .............................................................................................................. 1 BWC Background ............................................................................................................... 1 Limitations .......................................................................................................................... 7 Distribution and Use ........................................................................................................... 8

Executive Summary ...................................................................................................................... 10 Summary of Findings ........................................................................................................ 10 Relevant Comments .......................................................................................................... 14

Executive Summary Exhibits ........................................................................................................ 25

Actuarial Analysis Overview ........................................................................................................ 51 Actuarial Procedures ......................................................................................................... 51 Actuarial Methodologies ................................................................................................... 62

Data ............................................................................................................................................... 65 Information and Data Provided ......................................................................................... 65 Adjustments to Data .......................................................................................................... 66

Loss Reserve Dislosures ............................................................................................................... 72

Detailed Analysis Exhibit Descriptions ........................................................................................ 73

Segment Summary Exhibits .......................................................................................................... 82

Volume II - Detailed Analysis Exhibits Private Employers ("PA") .................................................................................................. Section 1

Volume III - Detailed Analysis Exhibits Public Employers - Taxing Districts ("PEC") ................................................................... Section 2

Volume IV - Detailed Analysis Exhibits Public Employers - State Agencies ("PES") ...................................................................... Section 3

Volume V - Detailed Analysis Exhibits Disabled Workers Relief Fund ("DWRF") ........................................................................ Section 4 Self-Insuring Employers Guaranty Fund ("SIEGF")…………………….. ....................... Section 5 Public Work-Relief Employees' Compensation Fund ("PWRE") ..................................... Section 6 Marine Industry Fund ("MIF") .......................................................................................... Section 7

Volume VI - Detailed Analysis Exhibits Coal-Workers Pneumoconiosis Fund ("CWPF") ............................................................... Section 8

BWC-Actuarial Report June 30, 2012

1

Introduction Purpose and Scope Deloitte Consulting LLP (“Deloitte Consulting”) has been retained by the Ohio Bureau of Workers’ Compensation (“BWC”) to provide an actuarial central estimate of the unpaid compensation (indemnity), medical and compensation adjustment expense as of June 30, 2012 on claims incurred by the State Insurance Fund and other Funds using data as of June 30, 2012. Deloitte Consulting determined actuarial central estimates on both a nominal (undiscounted) and discounted basis. This Report presents our findings with respect to this analysis.

Deloitte Consulting estimated the unpaid compensation, medical and compensation adjustment expenses for the following Funds administered by the BWC:

• State Insurance Fund (“SIF”): o Private Employers (“PA”); o Public Employers – Taxing Districts (“PEC”); o Public Employers – State Agencies (“PES”); o Self-Insured Surplus (“SIS”); and o Health Partnership Program Administration Expense (“HPP”).

• Disabled Workers’ Relief Fund (“DWRF”); • Self-Insuring Employers Guaranty Fund (“SIEGF”); • Public Work-Relief Employees’ Compensation Fund (“PWRE”); • Marine Industry Fund (“MIF”); • Coal-Workers Pneumoconiosis Fund (“CWPF”); and • Administrative Cost Fund (“ACF”).

We note that our estimates are subject to the reliances and limitations inherent in estimating compensation, medical and compensation adjustment expenses, as described in the subsequent sections of this Report. For the remainder of this Report and the Exhibits, the term “loss” includes both compensation and medical unless otherwise noted. Further, the term compensation adjustment expense is sometimes referred to as “loss adjustment expense” or “LAE”, and the term “compensation” is sometimes referred to as “indemnity” and means the cost of benefits for lost wages.

In this Report, the term “unpaid loss” is sometimes referred to as “unpaid claims”, and “reserves”. The amount booked by the BWC in its financial statements for unpaid loss and loss adjustment expense is referred to as “recorded reserves”.

BWC Background History The Bureau of Workers’ Compensation was created in 1912 to protect the health and well-being of Ohio workers, while providing insurance coverage for their employers. As a state-operated insurance fund, the agency provides comprehensive workers’ compensation services for employers and their injured employees. The State Insurance Fund covers medical expenses and lost wages for approximately two-thirds of the State’s work force. The remaining one-third receives workers’ compensation coverage directly through their employers who are part of the self-insurance program guided by strict qualification standards set by the BWC.


2

As an agency of the State of Ohio, the BWC is responsible for the administration, establishment of premium rate, and funding of all workers’ compensation insurance programs in Ohio. The BWC is one of the largest workers’ compensation insurance enterprises in the country while annually serving approximately 255,000 employers and 1.1 million injured workers. The BWC has annual premiums and assessments of approximately $1.9 billion. The BWC is the largest exclusive state fund in the nation.

Workers Compensation Legislative Changes In 1986, Senate Bill 307 created the Surety Bond Fund to provide security to cover the cost of claims from self-insureds in the event of default. It was replaced in 1993 by the SIEGF in House Bill 107 for claims with injury dates after 1986. The BWC shall maintain a minimum balance of funds in the self-insuring employers’ guaranty fund of one and a quarter times the prior year’s payments from the fund as determined at the end of each calendar year to ensure sufficient monies to guarantee the payment of any claims against the fund. When the BWC determines that there are insufficient funds in the guaranty fund and an assessment is necessary to ensure the minimum balance in the fund, the BWC shall assess all self-insuring employers an annual contribution as determined by the administrator. Annual contributions may not be assessed to all self-insuring employers when the BWC determines that the fund exceeds the minimum amount necessary to guarantee the payment of any claims against the fund.

On August 22, 1986, Chapter 4123.3.31 was included under Ohio’s workers compensation Code to establish the DWRF. Injured workers who are receiving compensation for permanent and total disability which, when combined with social security disability benefits, is less than the DWRF qualifying figure are eligible to receive additional compensation through the DWRF.

In March 2006, significant Ohio workers’ compensation reform legislation was passed by the General Assembly in Amended Substitute Senate Bill 7, which included:

• Allowing employers to pay the first $5,000 of a medical only claim (up from $1,000 and currently $15,000 per House Bill 100 effective August 10, 2007);

• Permits the BWC to require electronic funds transfer for payment of all benefits, thereby speeding up payments;

• Increases Ohio’s state minimum wage to the same rate as the federal minimum wage; • Limits the recalculation of the average weekly wage for permanent total awards; • Shortens the waiting period from 40 weeks to 26 weeks for filing permanent partial disability

applications; • Reduces the total amount of weeks of wage loss compensation by counting rehabilitation wage loss

compensation as part of the overall 200 week limit for payment of working wage loss; • Reduces the non-working wage loss from 200 to 52 weeks, but raises the total possible weeks of wage

loss compensation to 226 by providing that 26 weeks of non-working wage compensation do not count against the 200 week limit for wage loss compensation; and

• Reduces the amount of permanent total paid in some situations by providing that the permanent total amount is based on the average weekly wage at the time of the injury or occupational disease.

In September 2008, Senate Bill 334 went into effect providing coverage under Ohio’s workers compensation law for an out-of-state employee temporarily performing work in Ohio, if the law of the state where the employee is a resident does not contain a provision similar to Ohio law which exempts out-of-state employees who temporarily perform work in Ohio from coverage.

Effective January 1, 2009, House Bill 562 prohibits individuals covered under the Federal Longshore and Harbor Workers' Compensation Act (“LHWCA”) from applying for and receiving benefits under Ohio's Workers' Compensation Law. This changes the past practice of insuring these individuals under both the State Insurance


3

Fund and the LHWCA. As a result of HB 562, longshoremen and harbor workers can only apply for and receive benefits from the Marine Insurance Fund.

Additional information relating to certain legislative changes is described under Compensation Types section below.

Fund Descriptions State Insurance Fund The State Insurance Fund provides two-thirds of Ohio's employers with workers' compensation coverage. The employer types insured by the BWC through the SIF include:

• Private Employers; • Public Employers – Taxing Districts; and • Public Employers – State Agencies.

The SIF also includes the Self-Insured Surplus and managed care expenses through Health Partnership Programs. The following discusses each component of the SIF in more detail.

State Insurance Fund – Private Employers Private employers include domestic households, sole proprietors, partnerships, corporations, limited liability companies, family farm corporations, individuals incorporated as a corporation with no employees, and professional employer organizations.

State Insurance Fund – Public Employers: Taxing Districts Public employers are governing units that provide service to the public. The services provided are paid for by public monies collected from levies on property and other services that the public taxing districts provide.

Examples of public employers include:

• Counties; • Townships; • Villages; • Cities; • Public school districts; • Libraries; and • Some hospitals, cemeteries, and fire departments.

State Insurance Fund – Public Employers: State Agencies The State Insurance Fund insuring Public Employers – State Agencies provides coverage for all workers employed by any state government run agency or government entity providing state-supported services.

State Insurance Fund – Self-Insured Surplus Every employee in Ohio must be provided with workers' compensation coverage either through the SIF or by an employer who has been granted the privilege of self-insurance. A self-insuring employer agrees to abide by BWC and the Industrial Commission of Ohio rules and regulations. The self-insuring employer agrees to provide accurate and timely payments of compensation and benefits subject to the provisions of those rules.

The SIS included in the SIF provides for claims occurring prior to 1987 associated with bankrupt self-insureds, disallowed claim reimbursements and rehabilitation claims. Offsetting these liabilities is a potential recovery


4

from remaining surety bonds issued prior to 1993 when the Self-Insured Guarantee Fund was established. The SIS is funded on a pay-as-you-go basis through assessments to self-insured employers.

State Insurance Fund - Health Partnership Program Administration Expense The Health Partnership Program has been the BWC’s system for providing managed care services since its implementation in March 1997. The SIF is required to reimburse managed care organizations (“MCO”) for administration of the Health Partnership Program. The BWC’s Medical Services Division coordinates health-care services through a network of provider and managed care organizations.

The BWC determines compensability and pays indemnity benefits. However, it contracts with MCOs to manage the medical component of workers’ compensation claims. MCOs educate employers and injured workers on the HPP and process first report of an injury, occupational disease, or fatality (“FROI forms”). They also help employers establish transitional/early return-to-work programs. In addition, MCOs process medical bills and make provider payments.

The BWC publishes a HPP Outcomes & Savings Report, and as required by law presents this Report to the Governor, the Speaker of the House of Representatives, and the President of the Senate. This Report also includes information on the BWC’s monitoring of individual MCOs performance. For example, the BWC measures the effectiveness of the MCOs’ return-to-work efforts using the Degree of Disability Management (“DoDM”) model. The agency also measures their FROI timing and FROI data accuracy. In addition, it publishes most of these measures in an annual MCO Report Card.

Disabled Workers’ Relief Fund The Disabled Workers’ Relief Fund is a separate supplemental fund established to provide supplementary payments for cost of living adjustments to injured workers who are receiving a combined permanent total disability plus social security disability benefits that are lower than the DWRF entitlement amount (“threshold”). The number of claims eligible for DWRF benefits as well as the amount of the benefit increase over time as the threshold is adjusted upward based on the consumer price index.

Prior to 1987, DWRF premium assessment rates were capped by law at $0.10 per $100 of payroll and any shortfalls between the capped rate premiums and actual loss payments were borrowed from the SIF. The total outstanding loan amount owed to the SIF was $218 million in 1987.

In 1987, Senate Bill 307 established new DWRF II premium rate rules for injuries occurring after 1986. The new DWRF II premium assessment rates changed to a percentage of the SIF premiums, instead of payroll, and there is no cap on rates. Senate Bill 307 also forgave the $218 million loan from the SIF and provided that any additional shortfalls in DWRF would be paid from interest income earned in the SIF. DWRF I is defined as a supplemental cost of living adjustment benefit on claims that occurred prior to 1987 while the DWRF II is defined as a supplemental cost of living adjustment benefit on claims that have occurred after 1986.

The DWRF I began providing coverage on August 1, 1959 and is operated on a terminal funding or pay-as-you-go basis in which the premiums collected in each fiscal year are to equal the payments made in the same fiscal year without regard to the accident/injury year.

DWRF II did not operate on a “pay-as-you-go” basis from 1987 to 1993 during which time approximately $430 - $450 million of DWRF II premiums were collected in order to fund DWRF benefits from claims occurring in those years. In 1993 the Ohio Attorney General provided a formal opinion that DWRF II premiums should be determined on a “pay-as-you go” basis similar to DWRF I. The DWRF II rate of 0.1% of SIF premium (“lowest reasonable rate”) generated less than $2 million in DWRF premium income each year since 1993. The BWC has set this rate at the lowest reasonable rate in order to comply with Ohio law, reflecting the Attorney General’s opinion, and because the DWRF has significant cash and investments still remaining from the period when premiums were based on full funding.


5

Self-Insuring Employers Guaranty Fund The Self-Insuring Employers Guaranty Fund provides for medical and compensation benefits for injured workers of bankrupt self-insureds for injuries occurring in 1987 and subsequent. All self-insuring employers in Ohio must participate in the SIEGF. For claims with occurrences prior to 1987, self-insured employers provided security in the form of letters of credit or bonds to cover the cost of claims in the event of bankruptcy or default.

Public Work-Relief Employees’ Compensation Fund The Public Work-Relief Employees’ Compensation Fund provides medical and compensation benefits for workers who are engaged in any public relief employment and receiving “work-relief” in the form of public funds or goods in exchange for any service or labor rendered in connection with any public relief employment. Employers are public employer taxing districts or public employer state agencies. Injured workers covered under the PWRE are entitled to the same benefits as other injured workers without any exceptions.

PWRE rates are calculated at the same time and in the same manner as the Public Employer Taxing Districts and are segregated by a manual classification which has its own base rate.

The PWRE began providing coverage on October 1, 1953.

Marine Industry Fund The Marine Industry Fund provides voluntary coverage to employers who have employees who work on or about navigable waters, as required by the United States Longshoremen and Harbor Workers’ Act (“USL&H”). Employers may purchase coverage from the BWC through the MIF, from a private insurer or self-insure. The USL&H Act requires federal workers’ compensation coverage for any non-public Ohio employer with employees engaged in maritime-related work, such as ship building or repair, and other maritime operations, unless the U.S. Department of Labor has specifically authorized the employer to self-insure. The Marine Industry Fund began providing coverage effective July 1, 1980.

A Marine Fund claim is filed with both the Department of Labor and the BWC. The Federal Government determines the claimant’s eligibility for benefits and sets the benefit level. An injured worker may only receive lost time benefits from the federal claim or the BWC claim, but not from both for the same period. Medical benefits may be paid from either the federal claim or the BWC claim as long as duplicate payments do not occur. Injured workers covered under the MIF are entitled to the same benefits as other injured workers except for the following:

• Living Maintenance and Living Maintenance Wage Loss benefits; • Lump Sum Advancements; and • Rehabilitation Services only as ordered by the Department of Labor.

Coal-Workers Pneumoconiosis Fund The Coal-Workers Pneumoconiosis Fund began providing benefits prescribed under the “Federal Black Lung” program on June 27, 1974. The CWPF provides benefits for injured workers under the Federal Coal Mine Health and Safety Act of 1969 to employers who have employee exposure to coal dust, as required by federal law. Coal mine operators may choose to purchase insurance from the BWC, self insure, or purchase insurance from a private carrier certified by the Federal Department of Labor.

The CWPF provides permanent and total disability benefits and medical payments to employees who have contracted pneumoconiosis (also known as black lung disease) in the course of employment as well as death benefits for surviving spouses and dependents. The federal government sets benefit levels and determines claim eligibility for benefits. This coverage is in addition to the employer’s regular Ohio workers compensation insurance.


6

Administrative Cost Fund The Administrative Cost Fund provides for administrative expenses for the BWC and Industrial Commission. The ACF also includes the portion of premiums paid by employers earmarked for the safety and loss prevention activities performed by the Safety and Hygiene Division. Loss adjustment expenses are those expenses functionally associated with settling claims, except for the claim payment itself. The ACF operates on a pay-as-you-go basis and assessments are charged to employers to support BWC operations for only the next 12 months. There are no amounts included to fund the costs associated with the settlement of claims or other operational activities of the BWC related to open claims or IBNR for time periods beyond the next 12 months.

Compensation Types The BWC provides injured workers coverage for a variety of compensation types, which are described below:

• Temporary Total - Temporary total is generally the initial award for lost wages to an injured worker who is totally disabled on temporary basis;

• Scheduled Loss – Scheduled loss (“permanent total”) award provides for wage loss compensation associated with permanent residual damage as a result of a work-related injury, including amputations, loss of use, loss of vision and total loss of hearing. Senate Bill 307, in 1986, increased the maximum benefit from 50% of the statewide average weekly wage (“SAWW”) to 100% and increased the minimum benefit from 25% of the SAWW to 40%. House Bill 222 then subsequently removed the relationship between the benefit amount and the injured workers wage and instead set the weekly benefit equal to 100% of the SAWW;

• Percentage of Permanent Partial Award – Percent permanent partial awards provide compensation for residual impairment resulting from an allowed injury or occupational disease, including psychological or psychiatric as well as physical. For example, an injured worker who sustains a broken arm and is no longer able to fully extend that arm is eligible for percent permanent partial compensation;

• Permanent Total Disability – Permanent total disability compensates the injured worker for impairment of earning capacity associated with the workers inability to perform sustained remunerative employment. Permanent total disability is payable for life and is set based on the injured workers average weekly wage at the time of injury;

• Disabled Workers’ Relief Benefits – Provides a supplemental cost of living benefit for injured workers receiving a permanent total disability benefit when the injured worker’s permanent total award plus social security disability is less than the entitlement, which increases each year based on the consumer price index. This benefit is provided from the Disabled Workers’ Relief Fund;

• Change of Occupation – Change of occupation provides supplemental awards to workers have contracted silicosis, pneumoconiosis, or asbestosis and have been medically advised to change occupation to reduce further exposure. In addition, firefighters and police officers who have contracted a cardiovascular or pulmonary disease may also be entitled to a change of occupation award;

• Wage Loss – Wage loss compensation is paid to an injured worker who suffers a reduction in earnings as a result of restrictions from the workers injuries sustained on or after August 22, 1986. In order to be eligible for wage loss, the injured worker must meet two conditions: 1) a loss or decrease in wages exists and 2) the wage loss is a direct result of the restrictions from the workers injuries. This benefit was established by Senate Bill 307 in 1986 as a replacement for temporary partial awards, which set the maximum benefit at 200 weeks. An injured worker receiving wage loss is also eligible to receive a percent permanent partial benefit;

• Temporary Partial – Provided wage loss compensation to injured workers who suffered a reduction in earnings prior to August 22, 1986. Senate Bill 307 replaced this benefit with the wage loss;


7

• Living Maintenance Wage Loss – Living maintenance wage loss may be paid to injured workers who have completed a rehabilitation plan and continue to have physical restrictions and loss of wages upon returning to work. It was established in 1986 under Senate Bill 307;

• Living Maintenance – Living maintenance is provided to injured workers while they are actively participating in an approved rehabilitation plan in place of temporary total benefits. House Bill 222 transferred the authority for determining injured workers that benefit from rehabilitation from the Industrial Commission to the BWC;

• Death Claims – Provides death benefits to deceased’s spouse and dependents as a result of a work related injury or occupational disease, including those that are not instantaneous;

• Violation of Specific Safety Requirement – Also known as additional awards, a violation of specific safety requirement award allows an injured worker to receive compensation from their employer if evidence exists that the employer violated specific safety requirements that resulted in injuries to the worker. The BWC pays the award to the injured worker and seeks recovery from the employer;

• Lump Sum Settlements – The BWC and the injured worker are able to settle a claim in a lump sum for both future compensation and medical costs; and

• Lump Sum Advancements – A lump sum advance allows an injured worker, primarily those with permanent total awards, to request a lump sum payment for future compensation benefits without a full and final settlement for financial relief. Lump sum advancements have the effect of reducing future permanent total disability benefits.

Case Reserving Process In July 2008, the BWC activated a new claims reserving system, Micro Insurance Reserving Analysis II, (“MIRA II”), which replaced MIRA I. The reason for the change in the reserving system to MIRA II is to provide more accurate, individual claim reserves than MIRA I, and is intended to provide better transparency by allowing employers to see the cost drivers that impact their premiums. The BWC’s adoption of MIRA II is intended to help improve the performance and stability of Ohio’s workers’ compensation experience rating system. The following describes additional benefits which the MIRA developers believe result from the transition to MIRA II from MIRA I:

• MIRA II should be more responsive to changes in the claim management environment; • MIRA II models are built to assign a value to each case based on a per claim reserve accuracy instead of

the accuracy of total aggregate reserves; and • MIRA II models are based on a more robust approach to identifying trends in payment and cost pattern.

Case reserves for permanent total and death claims are discounted in the MIRA II system. During December 2009, the rate used to discount the MIRA II case reserves for permanent total and death claims was decreased from 5.0% to 4.5%, and again from 4.5% to 4.0% during December 2010.

Limitations The findings and conclusions set forth in this report are based on data and information provided to us by BWC management. The validity of the conclusions set forth in this report is dependent on the accuracy and completeness of the information provided. A specific audit to verify the accuracy of the data provided to us is beyond the scope of this project. We have relied without audit or verification on the data supplied and we assume that the data is both accurate and complete. If the underlying data or information provided is inaccurate or incomplete, the results of our analysis may likewise be inaccurate or incomplete.


8

Deloitte Consulting’s unpaid loss and loss adjustment expense estimates reflect that there is uncertainty inherent in estimating ultimate losses and is intended to represent actuarial central estimates given the BWC’s historical experience as of June 30, 2012. An actuarial central estimate is defined by actuarial literature as “an estimate that represents an expected value over the range of reasonably possible outcomes.”

In estimating unpaid loss and loss adjustment expense, it is necessary to project future compensation, medical and compensation adjustment expenses. It is certain that actual compensation, medical costs, and compensation adjustment expenses will not develop exactly as indicated and may, in fact, vary significantly from our estimates. No warranty is expressed or implied that such variance will not occur. Furthermore, Deloitte Consulting’s estimates make no provision for the broadening of coverage by legislative action or judicial interpretation or for extraordinary future emergence of new classes of losses or types of losses not sufficiently represented in the BWC’s historical database or which are not yet quantifiable, and which might affect the claim experience. Deloitte Consulting believes, however, that the actuarial techniques and assumptions used in this analysis are reasonable.

The methodologies and factors used in this report involve assumptions regarding future contingent events as estimated from historical experience. Although Deloitte Consulting has used common actuarial procedures and methodologies, it should be noted that actual future results might vary, perhaps significantly, from the estimates contained herein. In estimating future costs, we have assumed that historical trends will continue into the future. These trends include, but are not limited to: changes in inflation, interest rates, claims administration procedures, medical costs and delivery, future legislative action and judicial proceedings.

Unpaid loss and loss adjustment expense estimates stated in this Report have been discounted using a rate of 4.0% per annum, as provided to Deloitte Consulting by BWC management. The use of this rate does not imply that Deloitte Consulting is expressing an opinion on the appropriateness of this rate.

Deloitte Consulting has not examined the assets of the BWC, nor does Deloitte Consulting form an opinion on the value or validity of the assets. Deloitte Consulting’s analysis of the unpaid loss and loss adjustment expense rests upon the presumption that all reserves are backed by valid assets, which have suitable scheduled maturities and/or adequate liquidity to meet the cash flow requirements of the liabilities.

Distribution and Use This Report is prepared for the use of the BWC in its evaluation of loss and loss adjustment expense reserves as of June 30, 2012 based on data evaluated as of June 30, 2012. The Report may also be provided to other parties (“Recipient”), for the purposes of their review of the BWC unpaid claim liabilities provided the following conditions are met:

• This report is being provided to the Recipient solely for its information and cannot and shall not be relied upon by the Recipient. The Recipient agrees that access to the report is not a substitute for the Recipient undertaking appropriate inquires and procedures in relation to its assignment;

• The determination of the recorded reserves in the BWC’s financial statements is solely the responsibility of the Administrator of the BWC. The BWC is solely responsible for providing accurate and complete information requested by Deloitte Consulting and Deloitte Consulting has no responsibility for the accuracy or completeness of the information provided by, or on behalf of, the BWC, even if Deloitte Consulting had reason to know or should have known of such incompleteness;

• Deloitte Consulting has no responsibility to advise the Recipient of other services or procedures that might be performed and makes no representation as to the sufficiency or appropriateness of this report for the purposes of the Recipient;

• The BWC has participated in the preparation of this Report and the information, including, without limitation, by reviewing and commenting on prior drafts of this Report and the information, and such


9

participation has resulted in the addition, modification or deletion of information which might be considered material by the Recipient;

• The Recipient acknowledges that Deloitte Consulting is currently providing and may in the future provide professional services to the BWC, and the Recipient agrees that Deloitte Consulting and its personnel shall have no responsibility to the Recipient relating to such services nor any responsibility to use or disclose information that Deloitte Consulting possesses by reason of such services or otherwise, whether or not such information might be considered material by the Recipient;

• The Recipient acknowledges and agrees that the Recipient does not acquire any rights as a result of access to this report and Deloitte Consulting does not assume any duties or obligations as a result of access to this Report; and

• By retaining a copy of this Report the Recipient understands that such Recipient is deemed to have accepted these terms and conditions.

Deloitte Consulting shall have no liability, regardless of form, to any third parties (any entity other than the BWC) for any action taken or omitted to be taken by such parties in respect of this except for matters that are finally judicially determined to be caused by Deloitte Consulting’s own bad faith or willful misconduct. Third parties should recognize that the furnishing of this Report is not a substitute for their own due diligence and should place no reliance on this Report or data contained herein that would result in the creation of any duty or liability by Deloitte Consulting to the third party. Any release or distribution of this Report to any third party must include the Report in its entirety.

This Report has been prepared for use by individuals who have a degree of technical competence in insurance matters. This Report should be studied in its entirety before any judgments are made about the conclusions in the report. Deloitte Consulting personnel are available to discuss any questions or concerns regarding this Report.


10

Executive Summary Summary of Findings Deloitte Consulting has been retained by the BWC to determine a discounted estimate of unpaid loss and loss adjustment expense as of June 30, 2012 for the State Insurance Fund and other Funds using data as of June 30, 2012. The following table displays Deloitte Consulting’s estimates of nominal (undiscounted) and discounted unpaid loss and loss adjustment expense as of June 30, 2012. All amounts are displayed in millions of dollars.

As observed in the table above, the June 30, 2012 nominal and discounted estimates of unpaid loss and LAE based on data evaluated as of June 30, 2012 are approximately $32,309 million and $19,744 million, respectively. This estimate reflects an adjustment of approximately $3.7 million to remove overstated hospital medical payments made during 2011 and 2012 that have not yet been recovered as of June 30, 2012. The Deloitte Consulting discounted unpaid loss and LAE estimate shown in the table above is based on a 4.0% discount rate.

The BWC’s recorded reserves on a discounted basis are only sufficient to cover unpaid claims when combined with expected future income generated from invested funds or collected in future premium assessments for unfunded liabilities. The undiscounted estimate of unpaid loss and LAE is approximately $32,309 million and, therefore, there is approximately $12,565 million of future income that will be required to satisfy the total unpaid loss and LAE liabilities of the funds. Such income is expected to be generated from two sources: (1) investment earnings on the invested assets of the funds and (2) future premium assessments to be billed to employers in future years for those liabilities which are unfunded according to state law. The discounted unpaid loss and LAE estimate was calculated using a 4.0% discount rate. The amount of the discount must be realized through future investment earnings from invested assets held by the funds or collected from future assessments on employers in order to provide sufficient funds to make all claim payments associated with injuries occurring on or before June 30, 2012. This discount amount represents approximately 38.9% of the nominal (undiscounted) unpaid loss and LAE estimate.

There are substantial uncertainties in estimating the loss and loss adjustment expenses for unpaid claims. Examples of these uncertainties include but are not limited to the rate of inflation of future medical and compensation payments, the projected development for losses as they age beyond the observable development periods (for example, beyond 35 years to 60 years or more), changes in lump sum settlement practices, changes in frequency of claims, the deviation of future investment yields from those anticipated in the discount factor, payroll projections for calendar year 2012, and the inherent variability in losses over time.

Unpaid Loss and LAE as of June 30, 2012 ($ Millions)

Nominal Discounted Amount of Discount /Unpaid Unpaid Discount Nominal

State Insurance Fund 24,644 15,644 9,000 36.5%Disabled Workers Relief Fund 3,424 1,976 1,448 42.3%Coal-Workers Pneumoconiosis Fund 495 150 346 69.8%Self-Insuring Employers Guaranty Fund 2,031 904 1,126 55.5%Public Work-Relief Employees’ Compensation Fund 5 3 2 37.9%Marine Industry Fund 3 2 1 36.1%Administrative Cost Fund 1,707 1,065 642 37.6%

Total - All Funds 32,309 19,744 12,565 38.9%


11

Unbilled Premium Receivable Certain unpaid claim obligations of the SIF, DWRF, SIEGF, and ACF are funded on a pay-as-you-go basis and do not have cash funds or invested assets supporting a large portion of the recorded reserves for those funds. For those unfunded obligations, the BWC records an unbilled premium receivable as the recorded reserves, less the BWC’s portion of the unbilled premium receivable and any funded amounts (contra account balances). Please note that the BWC, as required by Statute, does not record an unbilled premium receivable for loss adjustment expense in the ACF, except for the portion of the loss adjustment expenses that are associated with claims accounted for on an unfunded basis, such as PES and SIEGF. The following table displays the Deloitte Consulting estimate of the unbilled premium receivable as of June 30, 2012. These unbilled premiums are recorded on a discounted basis. All figures are displayed in millions of dollars.

Fiscal Year 2012 Change in Unpaid Loss and ALAE The following table displays the change between Deloitte Consulting’s June 30, 2011 and June 30, 2012 unpaid loss and LAE estimates of discounted unpaid loss and LAE separately by Fund. All figures are displayed in millions of dollars.

The Deloitte Consulting discounted estimate of unpaid loss and LAE as of June 30, 2012 of $19,744 million is $206 million lower than the June 30, 2011 unpaid loss and LAE estimate of $19,950 million. The change includes $1,784 million associated with injuring occurring between July 1, 2011 and June 30, 2012 on a

Estimate of Unbilled Premium Receivable as of June 30, 2012 ($ Millions)

Discounted BWC PortionUnpaid ^ Account of Unbilled Receivable

State Insurance Fund 723 0 9 714Disabled Workers Relief Fund 1,976 256 1 1,719Coal-Workers Pneumoconiosis Fund 0 0 0 0Self-Insuring Employers Guaranty Fund 904 47 0 857Public Work-Relief Employees’ Comp. Fund 0 0 0 0Marine Industry Fund 0 0 0 0Administrative Cost Fund 92 0 1 91

Total - All Funds 3,695 303 11 3,381

̂Applicable to unbilled premium receivable

Deloitte Unbilled PremiumContra

FY 2012 Change in Unpaid Loss and LAE ($ Millions)

6/30/2011 FY 2012 FY 2012 Prior Year FY 2012 FY 2012 6/30/2012Unpaid Ultimate Interest Loss & LAE Loss & LAE Total Unpaid

Loss & LAE Loss & LAE Accretion Change Payments Change Loss & LAE

State Insurance Fund 15,846 1,515 574 (462) (1,830) (203) 15,644Disabled Workers Relief Fund 2,006 34 80 (25) (120) (30) 1,976Coal-Workers Pneum. Fund 75 2 3 71 (1) 75 150Self-Insuring Empl. Guar. Fund 912 41 36 (46) (40) (8) 904Public Work-Relief Comp. Fund 3 0 0 (0) (0) (0) 3Marine Industry Fund 2 0 0 (0) (0) 0 2Administrative Cost Fund 1,106 191 44 (68) (208) (41) 1,065

Total - All Funds 19,950 1,784 738 (530) (2,199) (206) 19,744


12

discounted basis, $738 million of interest accretion to unwind the discount from June 30, 2011 to June 30, 2012 (based on a 4% discount rate), a reduction of $530 million associated with injuries occurring on June 30, 2011 and prior, and a reduction of $2,199 million for loss and LAE payments, which are adjusted for $3.7 million in expected hospital over payments.

Alternative Discount Rates

If the BWC elected to incorporate a discount rate of 3.0% instead of 4.0% the discounted unpaid loss and LAE liabilities would increase by approximately $2.0 billion from $19,744 million to $21,694 million. This change would equate to an increase of 10%. On the other hand, if the BWC elected to increase the discount from 4.0% to 5.0% the discounted unpaid loss and LAE liabilities would decrease by approximately $1.6 billion from $19,744 million to $18,151 million. This change would equate to a decrease of 8%.

Unpaid Loss and LAE Forecast as of June 30, 2013 Deloitte Consulting’s forecast of the BWC’s unpaid loss and LAE liabilities as of June 30, 2013 is displayed in the table below separately for each Fund compared to the current June 30, 2012 estimates. All figures are on a nominal (undiscounted) and discounted basis using a 4.0% discount rate and are displayed in millions of dollars.

Based on data evaluated as of June 30, 2012, Deloitte Consulting forecasts an increase in the discounted unpaid loss and LAE liabilities of approximately $222 million from June 30, 2012 to June 30, 2013, which is driven by the PA, PEC, and PES business within the SIF of $202 million as displayed in the table below.

The $202 million increase in the discounted unpaid loss and LAE estimate for PA, PEC and PES combined from June 30, 2012 to June 30, 2013 consists of $2,116 million in undiscounted ultimate losses for injuries occurring during fiscal year ending 2013, less $692 million for the amount of discount associated with the $2,116 million of

Forecast of Unpaid Loss and LAE as of June 30, 2013 ($ Millions)

Forecast as of 6/30/2013 Forecast as of 6/30/2012 Forecasted ChangeUnpaid Loss & LAE Unpaid Loss & LAE Unpaid Loss & LAE

Nominal Discounted Nominal Discounted Nominal DiscountedUnpaid Unpaid Unpaid Unpaid Unpaid Unpaid

State Insurance Fund 24,937 15,852 24,644 15,644 293 208Disabled Workers Relief Fund 3,390 1,949 3,424 1,976 (34) (27)Coal-Workers Pneumoconiosis Fund 495 150 495 150 0 0Self-Insuring Employers Guaranty Fund 2,095 930 2,031 904 64 26Public Work-Relief Employees’ Comp. Fund 5 3 5 3 0 0Marine Industry Fund 3 2 3 2 0 0Administrative Cost Fund 1,728 1,080 1,707 1,065 21 14

Total - All Funds 32,653 19,966 32,309 19,744 344 222

Change in SIF Unpaid Loss and LAE from June 30, 2012 to June 30, 2013 ($ Millions)

Discounted 6/12 - 6/13 6/12 - 6/13 6/12 - 6/13 6/12 - 6/13 Discounted ChangeUnpaid Additional Additional Interest Expected Unpaid 6/30/12 -

at 6/30/2012 Ultimate Discount Accretion Payments at 6/30/2013 6/30/13

Private Employers 12,183 1,722 (560) 497 (1,503) 12,339 156Public Employers - Taxing Districts 1,969 293 (100) 85 (246) 2,000 31Public Employers - State Agencies 587 101 (32) 26 (82) 601 14

Total SIF Excluding SIS & HPP 14,738 2,116 (692) 608 (1,830) 14,939 202


13

additional ultimate losses, plus $608 million of interest accretion (unwinding of the discount from June 30, 2012 to June 30, 2013 for all accident/injury years), less expected fiscal year ending 2013 payments of $1,830 million for all accident/injury years.

There are two primary reasons for the expected increase in the discounted unpaid loss and LAE liabilities as of fiscal year ending 2013 over fiscal year ending 2012. First, 2012 and 2013 calendar year payroll for PA are expected to increase 3% annually over 2011 payroll. Increased payroll leads to increased losses from additional exposure, which in turn will increase the unpaid loss estimates. Second, the losses increase over time from medical and wage inflationary pressures.

Comparison of Unpaid Loss and LAE as of June 30, 2012 between June 30, 2012 and June 30, 2011 Evaluations The following table compares the Deloitte Consulting estimated nominal and discounted unpaid loss and LAE liabilities as of June 30, 2012 based on data evaluated as of June 30, 2012 and June 30, 2011 separately by Fund. All figures are displayed in millions of dollars and all discounted estimates are based on a 4.0% discount rate.

The June 30, 2012 nominal and discounted estimates of unpaid loss and LAE liabilities based on data evaluated as of June 30, 2012 are approximately $634 million and $528 million below those estimated based on data evaluated as of June 30, 2011 for all Funds combined, respectively.

Comparison of Unpaid Loss and LAE as of June 30, 2012 between June 30, 2012 and March 31, 2012 Evaluations The following table compares the Deloitte Consulting estimated nominal and discounted unpaid loss and LAE liabilities as of June 30, 2012 based on data evaluated as of June 30, 2012 and March 31, 2012 separately by Fund. All figures are displayed in millions of dollars and all discounted estimates are based on a 4.0% discount rate.


Nominal Unpaid as of 6/30/12 Discounted Unpaid as of 6/30/12

Evaluated Evaluated Dollar Percent Evaluated Evaluated Dollar Percent@ 6/12 @ 6/11 Change Change @ 6/12 @ 6/11 Change Change

State Insurance Fund 24,644 25,397 (754) -3.0% 15,644 16,133 (489) -3.0%Disabled Workers Relief Fund 3,424 3,481 (57) -1.6% 1,976 1,990 (14) -0.7%Coal-Workers Pneumoconiosis Fund 495 197 298 151.6% 150 75 75 99.9%Self-Insuring Employers Guaranty Fund 2,031 2,059 (28) -1.4% 904 944 (39) -4.2%Public Work-Relief Employees’ Comp. Fund 5 5 (0) -8.2% 3 3 0 2.9%Marine Industry Fund 3 3 0 4.4% 2 2 0 14.7%Administrative Cost Fund 1,707 1,800 (93) -5.2% 1,065 1,126 (60) -5.4%

Total - All Funds 32,309 32,943 (634) -1.9% 19,744 20,272 (528) -2.6%


14

The June 30, 2012 nominal and discounted estimates of unpaid loss and LAE liabilities based on data evaluated as of June 30, 2012 are approximately $118 million and $125 million below those estimated based on data evaluated as of March 31, 2012 for all Funds combined, respectively.

Relevant Comments & Observations State Insurance Fund The following table compares the Deloitte Consulting estimated nominal and discounted unpaid loss and LAE liabilities for the SIF as of June 30, 2012 based on data evaluated as of June 30, 2012 and June 30, 2011. All figures are displayed in millions of dollars.

The Deloitte Consulting June 30, 2012 SIF nominal estimate of unpaid loss and LAE liabilities based on data evaluated as of June 30, 2012 of $24,644 million is approximately $754 million lower than the prior June 30, 2011 estimate of $25,397 million. On a discounted basis, the Deloitte Consulting June 30, 2012 SIF discounted estimate of unpaid loss and LAE based on data evaluated as of June 30, 2012 of $15,644 million is approximately $489 million lower than the prior June 30, 2011 estimate of $16,133 million. The decrease in the June 30, 2012 discounted estimate of unpaid loss liabilities for PA, PEC and PES combined from the June 30, 2011 analysis is $471 million.



Evaluated Evaluated Dollar Percent Evaluated Evaluated Dollar Percent@ 6/12 @ 3/12 Change Change @ 6/12 @ 3/12 Change Change

State Insurance Fund 24,644 24,717 (74) -0.3% 15,644 15,737 (93) -0.6%Disabled Workers Relief Fund 3,424 3,431 (7) -0.2% 1,976 1,976 (1) 0.0%Coal-Workers Pneumoconiosis Fund 495 495 (0) -0.1% 150 150 (0) -0.1%Self-Insuring Employers Guaranty Fund 2,031 2,050 (19) -0.9% 904 919 (15) -1.6%Public Work-Relief Employees’ Comp. Fund 5 5 (0) -1.1% 3 3 (0) -1.2%Marine Industry Fund 3 3 (0) -1.0% 2 2 (0) -1.1%Administrative Cost Fund 1,707 1,725 (18) -1.0% 1,065 1,080 (15) -1.4%

Total - All Funds 32,309 32,427 (118) -0.4% 19,744 19,868 (125) -0.6%

Comparison of SIF Unpaid Loss and LAE as of June 30, 2012Between 6/30/2011 and 6/30/2012 Evaluations ($ Millions)


4.0% Rate 4.0% RateEvaluated Evaluated Dollar Percent Evaluated Evaluated Dollar Percent

@ 6/12 @ 6/11 Change Change @ 6/12 @ 6/11 Change Change

Private Employers 19,195 19,774 (578) -2.9% 12,183 12,550 (368) -2.9%Public Employers - Taxing Districts 3,104 3,209 (105) -3.3% 1,969 2,040 (72) -3.5%Public Employers - State Agencies 918 967 (49) -5.1% 587 619 (32) -5.2%Self Insured 168 163 5 2.9% 107 107 (0) -0.1%HPP 1,259 1,286 (27) -2.1% 799 816 (17) -2.1%

SIF Total 24,644 25,397 (754) -3.0% 15,644 16,133 (489) -3.0%


15

The following table compares the Deloitte Consulting estimated nominal and discounted unpaid loss and LAE liabilities for the SIF as of June 30, 2012 based on data evaluated as of June 30, 2012 and March 31, 2012. All figures are displayed in millions of dollars.

The Deloitte Consulting June 30, 2012 SIF nominal estimate of unpaid loss and LAE liabilities based on data evaluated as of June 30, 2012 of $24,644 million is approximately $74 million lower than the prior March 31, 2012 estimate of $24,717 million. On a discounted basis, the Deloitte Consulting June 30, 2012 SIF discounted estimate of unpaid loss and LAE liabilities based on data evaluated as of June 30, 2012 of $15,644 million is approximately $93 million lower than the prior March 31, 2012 estimate of $15,737 million. The decrease in the June 30, 2012 discounted estimate of unpaid loss liabilities for PA, PEC and PES combined from the March 31, 2012 analysis is $95 million.

The methodologies utilized by Deloitte Consulting to determine unpaid loss estimates for PA, PEC, and PES in the current June 30, 2012 analysis are consistent with those in the prior June 30, 2011 and March 31, 2012 analyses. Specifically, Deloitte Consulting utilized common accident year actuarial methodologies that incorporate cumulative paid loss data and inflation directly within the historical loss development factors. For medical, these methods assume future inflation will occur similar to historical rates experienced by the BWC. However, we did modify the age to which the unpaid loss liabilities are discounted from 654 months of age to 750 months of age. This modification better aligns the discounting process with the expected payment pattern. All other parameters and assumptions incorporated within our methodologies were assessed and adjusted, if necessary, as part of our June 30, 2012 analysis.

State Insurance Fund – PA, PEC, and PES Drivers of Change The following two tables display the drivers of change in Deloitte Consulting’s unpaid loss estimates for fiscal year 2012. Please note that the actual versus expected payment amounts shown in the first table are based on expected fiscal year 2012 payments determined using our prior June 30, 2011 analysis, which is consistent with the actual versus expected payment amounts shown in the first table on Page 17. The actual versus expected payment amounts shown in the second table below are based on expected 4th quarter fiscal year 2012 payments determined using our March 31, 2012 analysis while the actual versus expected payment amounts shown in the second table on Page 17 are based on expected 4th quarter fiscal year 2012 payments determined using our prior June 30, 2011 analysis.

Comparison of SIF Unpaid Loss and LAE as of June 30, 2012Between 3/31/2012 and 6/30/2012 Evaluations ($ Millions)


4.0% Rate 4.0% RateEvaluated Evaluated Dollar Percent Evaluated Evaluated Dollar Percent

@ 6/12 @ 3/12 Change Change @ 6/12 @ 3/12 Change Change

Private Employers 19,195 19,264 (69) -0.4% 12,183 12,262 (79) -0.6%Public Employers - Taxing Districts 3,104 3,118 (14) -0.4% 1,969 1,983 (15) -0.7%Public Employers - State Agencies 918 918 (1) -0.1% 587 588 (2) -0.3%Self Insured 168 155 13 8.7% 107 100 6 6.5%HPP 1,259 1,262 (3) -0.3% 799 804 (4) -0.6%

SIF Total 24,644 24,717 (74) -0.3% 15,644 15,737 (93) -0.6%


16

The decrease in our June 30, 2012 discounted unpaid loss estimate of $471 million from our June 30, 2011 analysis for PA, PEC and PES combined consists of a reduction in our ultimate loss estimate of $954 million partially offset for changes in fiscal year 2013 expected loss payments of $219 million and amount of discount of $264 million. The $264 million change in amount of discount is associated with the reduction in ultimate losses and the modification of the age to which the unpaid loss liabilities are discounted from 654 months of age to 750 months of age. The reduction in our ultimate loss estimate of $954 million consists of a $229 million decrease associated with changes in loss data and a $737 million decrease from updates to parameters/assumptions partially offset by an increase of $7 million for higher than expected payroll and $5 million for accidents/injuries occurring prior to 1977. The $229 million reduction for changes in loss data is directly correlated to the lower than expected loss payments of $219 million, discussed below. The updates to our parameters/assumptions are based on observed experience from June 30, 2011 to June 30, 2012.

State Insurance Fund – Actual vs. Expected The following two tables display actual loss payments and incurred losses for accident/injury years 1977 and subsequent through the 4th quarter of fiscal year ending 2012 and during the 4th quarter of fiscal year ending 2012 compared to those expected based on Deloitte Consulting’s June 30, 2011 analysis for PA, PEC, and PES business within the SIF. Please note that the actual versus expected payment amounts shown in the first table are based on expected fiscal year 2012 payments determined using our prior June 30, 2011 analysis, which is consistent with the actual versus expected payment amounts shown in the table on Page 15. The actual versus expected payment amounts shown in the second table below are based on expected 4th quarter fiscal year 2012

Drivers of Change - FY 2012 to Date ($ Millions)PA, PEC

PA PEC PES PES Total6/30/2011 Analysis - Discounted Unpaid 12,550 2,040 619 15,209 Drivers of Change

Change in Ultimate (Nominal) (763) (132) (59) (954) Change in Payroll 20 (10) (3) 7 Change in Losses 77 & Subs. (198) (23) (7) (229) 76 & Prior Change 5 0 0 5 Parameter Updates (589) (99) (49) (737)

Actual vs Expected Payments 184 25 10 219 Change in Discount from Change in Estimate 212 36 17 264 Total Change (368) (72) (32) (471)

6/30/2012 Analysis - Discounted Unpaid 12,183 1,969 587 14,738

Drivers of Change - FY 2012 4th Quarter ($ Millions)PA, PEC

PA PEC PES PES Total3/31/2012 Analysis - Discounted Unpaid 12,262 1,983 588 14,833 Drivers of Change

Change in Ultimate (Nominal) (113) (20) (2) (135) Change in Payroll (16) (19) 0 (34) Change in Losses 77 & Subs. (54) (6) 0 (60) 76 & Prior Change (3) (0) 0 (3) Parameter Updates (41) 6 (2) (37)

Actual vs Expected Payments 45 6 1 51 Change in Discount from Change in Estimate (10) (1) (1) (12) Total Change (79) (15) (2) (95)

6/30/2012 Analysis - Discounted Unpaid 12,183 1,969 587 14,738


17

payments determined using our prior June 30, 2011 analysis while the actual versus expected payment amounts shown in the table above are based on expected 4th quarter fiscal year 2012 determined using our March 31, 2012 analysis. Also, actual and expected payments include all accident/injury years while actual and expected incurred losses only include accident/injury years 1977 and subsequent.

Through the 4th quarter of fiscal year ending 2012, actual loss payments for all accident/injury years from July 1, 2011 through June 30, 2012 have emerged $219 million or 12% lower than expected, of which $68 million occurred during the 4th quarter of fiscal year ending 2012. The lower than expected development was primarily driven by medical and lump sum settlements for PA, which can be seen on Page 20.

Incurred losses have also emerged lower than expected. Through the 4th quarter of fiscal year ending 2012, actual incurred loss for accident/injury years 1977 and subsequent emerged $713 million or 34% lower than expected, of which $218 million occurred during the 4th quarter of fiscal year 2012. Approximately $424 million of the lower than expected incurred development during the fiscal year to date is associated with medical, while the remaining $289 million is split between permanent total disability, death, temporary total, and lump sum settlements.

State Insurance Fund – Change in Ultimate Loss The following table displays the change in the PA, PEC, and PES ultimate losses for fiscal year 2012 through June 30, 2012, as well as during the 4th quarter of fiscal year 2012.

SIF Actual Loss Emergence Versus Deloitte Expected from 6/30/2011 to 6/30/2012($ Millions)

Deloitte DeloitteExpected Actual Variance Expected Actual Variance

Private Employers 1,535 1,352 (184) 1,719 1,131 (588)Public Employers - Taxing Districts 253 228 (25) 300 210 (91)Public Employers - State Agencies 85 75 (10) 104 70 (34)

Total SIF Excluding SIS & HPP 1,873 1,654 (219) 2,123 1,411 (713)

Paid Loss from 6/30/2011 to 6/30/2012

Incurred Loss from 6/30/2011 to 6/30/2012

SIF Actual Loss Emergence Versus Deloitte Expected from 3/31/2012 to 6/30/2012($ Millions)

Deloitte DeloitteExpected Actual Variance Expected Actual Variance

Private Employers 396 336 (60) 443 276 (167)Public Employers - Taxing Districts 63 57 (6) 96 49 (48)Public Employers - State Agencies 22 20 (2) 20 17 (3)

Total SIF Excluding SIS & HPP 481 413 (68) 560 342 (218)

Paid Loss from 3/31/2012 to 6/30/2012

Incurred Loss from 3/31/2012 to 6/30/2012


18

The Deloitte Consulting ultimate loss for PA, PEC, and PES business within the SIF decreased by approximately $1,086 million for accident/injury years 2012 and prior from our June 30, 2011 analysis, and by approximately $165 million from our prior March 31, 2012 analysis. For claims occurring on or before June 30, 2012 (“Earned”), our ultimate loss estimates decreased by approximately $954 million from our June 30, 2011 analysis. The remaining $132 million decrease from our June 30, 2011 analysis is associated with claims occurring in 2012 but subsequent to fiscal year 2012 ending as of June 30, 2012 (“Unearned”).

The decrease in the PA, PEC and PES ultimate losses of $1,086 million from our June 30, 2011 analysis consists of a $480 million reduction for medical and a $606 million reduction for indemnity. The reduction for medical is predominately in accidents/injury years 2009 through 2012, which is driven by fewer than expected new lost time claims with payment and lower than expected changes in the average costs per claim. The following chart displays average ultimate medical costs per lost time claim based on the paid loss development methodology.

As observed in the chart above, the average cost per claim has leveled off in accident/injury years 2009 through 2012 when compared to prior years, which has led to better than expected results.

The decrease in ultimate losses for indemnity of $606 million includes a shift from lump sum settlements to other compensation types. Specifically, our ultimate loss estimate for lump sum settlements decreased $651 million while other compensation types increased $45 million driven by temporary total and lump sum advancements.

SIF Change in Ultimate Loss ($ Millions)

Earned Unearned Earned UnearnedTotal at 6/30/12 at 6/30/12 Total at 6/30/12 at 6/30/12

Private Employers (860) (763) (98) (135) (113) (21)Public Employers - Taxing Districts (157) (132) (25) (27) (20) (7)Public Employers - State Agencies (69) (59) (10) (3) (2) (2)

Total SIF Excluding SIS & HPP (1,086) (954) (132) (165) (135) (30)

Change in Ultimate Loss from 6/30/2011 to 6/30/2012 Analyses

Change in Ultimate Loss from 3/31/2012 to 6/30/2012 Analyses

-

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Ulti

mat

e Lo

ss P

er C

laim

s ($0

00's

)

Accident Year

PA Medical on Lost Time Claims - Severity(Based on Paid Development Method)


19

During 2006, the BWC increased its emphasis on closing claims through lump sum settlements (“LSS”), which continued through 2008. The BWC’s emphasis on LSS led to an increase in LSS payments and a possible decrease in other compensation types. Subsequently, the BWC significantly slowed the settling of claims through lump sum settlements, which may have the opposite effect where other compensation types may see additional increases in future development. Recently, LSS activity has increased as the BWC has been more active in clearing out the backlog of settlement requests and responding more promptly to requests to settle claims. These changes in the responses for LSS by the BWC has led to greater uncertainty in the unpaid loss estimate as the historical development may not be indicative of future development for types of loss affected by the changes in responses and requests for LSS. Further, more uncertainty is introduced through the discount as the timing of the payments becomes less certain.

In selecting ultimate loss estimates, Deloitte Consulting relies on actuarial methodologies derived from paid losses, and not incurred losses. This is due to the inconsistency in the historical patterns of case reserve levels over time, and the impact on incurred losses (paid losses plus case reserves), which is highlighted by the volatility in actual incurred losses activity relative to expected losses described above.

State Insurance Fund – Changes by Type of Loss The following tables display actual and expected payments for all accident/injury years from July 1, 2011 through June 30, 2012 separately by loss type for PA, PEC, and PES combined as well as the change in our ultimate loss estimates. All figures are displayed in millions of dollars.

SIF Actual Vs. Expected Payments and Change in Ultimate Loss Estimates (Fiscal Year 2012 to Date)PA, PEC and PES Combined ($ Millions)

135

748

251

84

322

100

204

26 4

103

629

248

78

327

90 146

29 4 0

100

200

300

400

500

600

700

800

MedicalOnly

Medical LT PTD Death TT & Other % PP & PP LSS LSA AA

Actual vs Expected Payments in Fiscal Year 2012 through June 30, 2012 ($Millions)

Expected Actual

(32)(118)

(3) (6)

4

(10)(58)

4

(0)(61)

(419)

(24) (33)

68

(42)

(651)

79

(3)

(700)(600)(500)(400)(300)(200)(100)

0100200

MedicalOnly

Medical LT PTD Death TT & Other % PP & PP LSS LSA AA

Actual Minus Expected Payments and Change in Ultimate in FY 2012 to Date($Millions)

Actual - Expected Change in Ult.


20

Please note that the changes in ultimate in the table above result primarily from parameter (assumption) updates in addition to the amounts of actual versus expected loss emergence. This is illustrated in the Drivers of Change table on Page 15.

The following tables display actual and expected payments for all accident/injury years from April 1, 2012 through June 30, 2012 separately by loss type for PA, PEC, and PES combined as well as the change in our ultimate loss estimates. All figures are displayed in millions of dollars.

State Insurance Fund – Medical Inflation Sensitivity To understand the sensitivity of the medical inflation on the unpaid loss estimates, Deloitte Consulting estimated the potential impact from an increase of 1% and 2% in medical inflation above historical inflation included in the BWC’s historical development. If future medical inflation is 1% higher annually than historical for all future calendar years combined, future medical payments discounted to June 30, 2012 would be approximately $951 million higher for PA, PEC, and PES combined, which equates to an increase of 16% and 6% over the Deloitte Consulting discounted unpaid medical loss and unpaid total loss, respectively. If future medical inflation is 2% higher annually than historical for all future calendar years combined, future medical payments discounted to June 30, 2012 would be approximately $2,163 million higher for PA, PEC, and PES combined, which equates to an increase of 37% and 15% over the Deloitte Consulting discounted unpaid medical loss and unpaid total loss, respectively. In addition, if future medical inflation is 1% lower annually than historical for all future calendar years combined, future medical payments discounted to June 30, 2012 would be approximately $756 million

SIF Actual vs. Expected Payments and Change in Ultimate Loss Estimates (3/31/2012 - 6/30/2012)PA, PEC and PES Combined ($ Millions)

35

194

62

21

84

25

51

7 1 25

159

58

18

76

22

48

6 1 0

50

100

150

200

250

Medical Only Medical LT PTD Death TT & Other % PP & PP LSS LSA AA

Actual vs Expected Payments in the 4th Quarter of Fiscal Year 2012 ($Millions)

Expected Actual

(10)

(34)

(5) (3)(9)

(3) (4) (1) (0)(7)

(66)

(26)(33)

(19)

(5) (6) (4)

0

(70)

(60)

(50)

(40)

(30)

(20)

(10)

0

10

Medical Only Medical LT PTD Death TT & Other % PP & PP LSS LSA AA

Actual Minus Expected Payments and Change in Ultimate ($Millions)

Actual - Expected Change in Ult.


21

lower for PA, PEC, and PES combined, which equates to a decrease of 13% and 5% over the Deloitte Consulting discounted unpaid medical loss and unpaid total loss, respectively. Consequently, there is considerable sensitivity in the estimates of discounted unpaid losses for small but sustained changes in the rate of future medical cost inflation.

State Insurance Fund – Payroll The PA payroll for 2011 was decreased in our current June 30, 2012 analysis by approximately $675 million or 1.0% from the estimate incorporated in our March 31, 2012 analysis. This is the result of lower than expected payroll adjustments during the 4th quarter of fiscal year 2012 from our March 31, 2012 analysis. The 2011 payroll in our current June 30, 2012 analysis increased by $188 million compared to the initial payroll estimate in our June 30, 2011 analysis.

We have assumed the 2012 payroll will be $92.7 billion, which is 3% higher than the 2011 payroll of $90.0 billion. This assumes no change in the Ohio unemployment rate and a 3% increase for wage inflation. For 2013, we have also assumed an increase of 3% over the 2012 projection for wage inflation and no change in employment levels. The 3% wage inflation was selected based on a review of historical Ohio changes in the average weekly wage as published by the Bureau of Labor Statistics. Given the current economic environment additional, uncertainty exists in forecasting the payroll for 2012 and 2013 and in turn unpaid losses.

As of March 31, 2012 only a small portion of the 2011 PEC payroll had been reported and, therefore, we had assumed the 2011 payroll would be 1% higher than the 2010 payroll based on a review of Bureau of Labor Statistics data for Ohio local governments. For our current June 30, 2012 analysis, the 2011 PEC payroll is now 100% reported and is approximately $0.9 billion or 5% lower than the 2011 projected payroll in our March 31, 2012 and June 30, 2011 analyses and approximately $0.7 billion or 4% lower than 2010 payroll. We understand that $0.44 billion of the $0.7 billion decrease is the result of certain policyholders becoming self-insured entities. For 2012 and 2013, we have assumed PEC payroll will increase annually at 2% and 3%, respectively, based on a review of Ohio Bureau of Labor Statistics for local governments.

The 2011 PES payroll reported as of June 30, 2012 represents an increase of approximately 1.5% over the 2010 payroll, which is driven by increases in hospitals and universities. The 2011 payroll for all other state agencies is similar to the 2010 payroll. The 2011 PES payroll is consistent with the payroll in our March 31, 2012 analysis and is approximately 1.5% lower than the amount incorporated within the June 30, 2011 analysis. For 2012, we are projecting an increase of 2.0% over the 2011 PES payroll, which consists of a 2% increase in payroll for hospitals/universities and a 1.8% increase for other state agencies. The 1.8% increase for other state agencies accounts for the ending of required furlough days on July 1, 2011, consistent headcount, and no wage increases due to a 3-year salary freeze. For 2013, we are projecting an increase of 1.2% over 2012, which consists of a 2% increase in payroll for hospitals/universities and a 0% increase for other state agencies.

State Insurance Fund – Claim Count Information The reported claim count data incorporated within our June 30, 2012 and prior March 31, 2012 analyses include reported claim counts associated with each specific reviewed business segment (medical only, medical lost time, permanent total disability, death, temporary total disability, permanent partial disability, etc.). In our prior June 30, 2011 analysis, all business segments incorporated lost time claim counts except permanent total disability and death claims, which used their own specific counts. We note the following information with regard to the change in claim count data:

• Reported claim counts exclude claims with no payment and are evaluated using first warrant date (date of first payment). This is similar to prior analyses;

• Reported claim counts incorporated within medical lost time include salary continuation claims. This is a change from prior analyses where the lost time claim counts excluded salary continuation claims for all business segments. This is an appropriate change as the BWC does provide medical benefits to claimants


22

on salary continuation. Please note that the reported claim counts for total compensation continue to exclude salary continuation;

• The reported claim counts are not mutually exclusive between each reviewed business segment and as such are not additive to total compensation, total medical and total medical and compensation;

• We understand that the underlying data source(s) and extraction approaches vary between the current claim counts and those incorporated in prior analysis. As such, we compared total lost time, permanent total disability, and death reported claim counts between the two data sources. Though the differences were not material, however they do impact portions of our analysis. For example, the actual versus expected claim count emergence is affected by the change in data source for the claim counts. This causes changes in ultimate claim count selection for various injury types, across multiple accident years.

State Insurance Fund – SIS The Deloitte Consulting estimate of the June 30, 2012 SIS discounted unpaid loss estimate of $106.7 million based on data evaluated as of June 30, 2012 is approximately $6.5 million or 6.5% higher than the prior estimate of $100.2 million based on data as of March 31, 2012, and is consistent with the estimate of $106.8 million based on data as of June 30, 2011. Please note that Deloitte Consulting is using a consistent methodology with the prior March 31, 2012 and June 30, 2011 analyses.

State Insurance Fund – HPP The Deloitte Consulting estimate of the June 30, 2012 HPP discounted unpaid LAE estimate of $799.1 million based on data evaluated as of June 30, 2012 is approximately $4.5 million or 0.6% lower than the prior estimate of $803.6 million based on data as of March 31, 2012, and approximately $17.3 million or 2.1% lower than the estimate of $816.5 million based on data as of June 30, 2011. Please note that Deloitte Consulting is using consistent methodology with the prior March 31, 2012 and June 30, 2011 analyses. The reduction in the HPP discounted unpaid LAE estimate is driven by lower PA, PEC and PES unpaid loss estimates.

DWRF Deloitte Consulting’s estimate of the June 30, 2012 discounted unpaid loss and LAE of $1,976 million based on data evaluated as of June 30, 2012 is similar to the prior estimate of $1,976 million based on data evaluated as of March 31, 2012, and approximately $14.3 million or 0.7% lower than the estimate of $1,990 million based on data as of June 30, 2011. Please note that Deloitte Consulting is using consistent methodology with the prior March 31, 2012 and June 30, 2011 analyses.

The DWRF pays benefits on permanent total disability claims for annual cost of living adjustments for claims that fall below a certain threshold. The number of claims eligible for DWRF benefits as well as the amount of the benefit increase over time as the threshold is adjusted upward based on the consumer price index. Therefore, the unpaid claim obligations of the DWRF and the future assessments needed to pay the DWRF benefits are subject to significant risk and uncertainty due to a potentially highly leveraged effect of future inflation.

SIEGF Deloitte Consulting’s estimate of the June 30, 2012 discounted unpaid loss and LAE of $904 million based on data evaluated as of June 30, 2012 is approximately $15 million or 1.6% lower than the prior estimate of $919 million based on data evaluated as of March 31, 2012, and approximately $39 million or 4.2% lower than the estimate of $944 million based on data as of June 30, 2011.

The 4th quarter change includes an increase of $4 million for known defaults, a decrease of $7 million for future defaults and a decrease of $12 million for DWRF benefits. These changes are driven by changes in loss experience during the 4th quarter and modifications to development assumptions. The additional reduction in our estimate from June 30, 2011 is primarily driven by a reduction the number of defaults in 2011 from 12 in the June 30, 2011 analysis to 5 in the current June 30, 2012 analysis. No additional defaults are expected in 2011 than those that have already occurred. Additionally, the estimated number of defaults in 2012 and 2013 were


23

decreased from 12 in 2012 and 11 in 2013 to 10 in both years. The previous estimates were selected above the long term annual average of 10 based on historical defaults in years surrounding recessions. However, given the number of defaults in recent years have been lower we reverted back to the mean estimate for 2012 and 2013. Please note that Deloitte Consulting is using a consistent methodology with the prior March 31, 2012 and June 30, 2011 analyses.

CWPF The following table displays the Deloitte Consulting CWPF point estimate and reasonable range of unpaid loss and LAE as of June 30, 2012 on both a nominal and discounted basis:

The Deloitte Consulting point estimate of the June 30, 2012 CWPF discounted unpaid loss and LAE of $149.7 million is similar to our prior March 31, 2012 estimate of $149.8 million and $74.8 million higher than our June 30, 2011 estimate of $74.9 million. The June 30, 2012 estimate is based on the same methodology as used for our March 31, 2012 estimate. The June 30, 2012 estimate reflects projected payments on awarded claims and other expected changes to the unpaid losses due to mortality, medical inflation and unwinding of the discounted unpaid losses through June 30, 2012. The CWPF unpaid losses and LAE has not been re-estimated from the annual review to reflect the interim actual payments, newly awarded claims, or other components of the projected unpaid losses. However, those interim components are monitored for indications of possible significant changes for future estimates.

The increase from June 30, 2011 is driven by a number of changes incorporated in during our March 30, 2012 analysis based on a new detailed coal worker data collection effort. This new data now allows the analyses to better reflect the employment characteristics of the coal miner workforce who could be eligible to receive the federal benefits covered by this fund. Also, the basis for the liability valuation was changed to accrue 100% of the potential future benefits from active miners, rather than the previous valuations that used an accrual of a portion of the liability based on assumptions regarding years of service. Please note that Deloitte Consulting has modified the methodology and the basis for the liability for this review which is a change from the prior analyses.

The rationale for this change in valuation basis is to recognize that all active miners who are covered by the CWPF for Federal Black Lung (FBL) benefits would be eligible to receive such benefits. We considered the characteristics of the coal miners and the coal mine employers in Ohio and other coal mining states. We evaluated the potential liabilities for CWPF under the assumption that such employees (miners) would continue working in an Ohio coal mine, and be eligible to receive FBL benefits from the CWPF until they cease employment as a coal miner. In other coal mining states employers can choose to purchase coverage for FBL from many different insurers. The liability of such insurers for FBL benefits for a particular miner is based on whether they insured the employer during the period when the date of last coal mine exposure occurred for that

CWPF Unpaid Loss and LAE Estimates as of June 30, 2012 ($ Millions)

Low Point High

NominalLoss 296.7 462.1 627.4LAE 33.1 33.1 33.1Loss & LAE 329.9 495.2 660.5

DiscountedLoss 92.2 139.7 187.1LAE 10.0 10.0 10.0Loss & LAE 102.2 149.7 197.1


24

miner. In Ohio, all coal miners are covered by the CWPF except for the very few employers who are self-insured for FBL. There are no private insurers who have been willing to insure only the FBL coverage for Ohio coal operators. Consequently, the liabilities of CWPF should reflect the very low likelihood of active coal miners in Ohio (except those employed by self-insured coal mines) receiving FBL benefits from a source other than CWPF.

Using the rationale explained above, the methodology to estimate the liability for the Coal Workers Pneumoconiosis Fund was changed significantly from prior studies. The new methodology uses new data sources, particularly the Department of Labor (DOL) claim data for FBL benefits and the employee survey data collected by the BWC from employers who apply to BWC for FBL coverage from the CWPF. Our compilation and analysis of this data has allowed us to make a more refined estimate of the number of projected future claims and the FBL benefit costs associated with those claims. The details of the revised methodology are described below in the Actuarial Analysis Overview section.

ACF Deloitte Consulting’s estimate of the June 30, 2012 discounted unpaid LAE estimate of $1,065 million based on data evaluated as of June 30, 2012 is approximately $15.0 million or 1.4% lower than the prior estimate of $1,080 million based on data evaluated as of March 31, 2012, and is approximately $60.5 million or 5.4% lower than the estimate of $1,126 million based on data as of June 30, 2011. The decrease is primarily driven by a decrease in our unpaid SIF loss & ALAE estimates since March 30, 2012 and June 30, 2012 as well as a modification to the selected paid to paid ratio. Specifically, the paid to paid ratio decreased from 12.8% in our June 30, 2011 analysis to 12.5% in our current June 30, 2012 analysis. Please note that Deloitte Consulting is using a consistent methodology with the prior March 31, 2012 and June 30, 2011 analyses.

Please refer to the Actuarial Procedures section of this Report for more information on the methodologies used for each Fund.


25

Executive Summary Exhibits This Section shows the following Executive Summary Exhibits:

Summary 1, Exhibit 1: Summary of Unpaid Loss and LAE This exhibit displays Deloitte Consulting’s nominal and discounted unpaid loss and LAE estimates separately for each Fund and each business segment within the SIF.

Summary 1, Exhibit 2: Unbilled Premium Receivable This exhibit displays Deloitte Consulting’s estimate of the BWC’s unbilled premium receivable by Fund, including offsets for the contra account balance and BWC’s portion of the unbilled premium receivable.

Summary 1, Exhibit 3: State Agency Summary of Unpaid Loss and LAE This exhibit displays Deloitte Consulting’s nominal and discounted unpaid estimates for state agencies separately by Fund and component (loss, LAE, HPP).

Summary 1, Exhibit 4: Estimate of Unpaid Loss Adjustment Expense – Excluding HPP This exhibit displays the calculation of Deloitte Consulting’s estimate of the BWC’s loss adjustment expense, excluding HPP, for each Fund. Sheet 2 shows the selection of the paid LAE to paid loss ratios applied in Sheet 1 to determine the unpaid LAE estimates.

Summary 1, Exhibit 5: Calculation of Unpaid HPP Expense This exhibit displays the calculation of Deloitte Consulting’s estimate of the loss adjustment expense associated with HPP for each Fund. Sheet 2 shows the selection of the paid LAE to paid loss ratios applied in Sheet 1 to determine the unpaid HPP LAE estimates.

Summary 2, Exhibit 1: Summary of Unpaid Loss and LAE This exhibit includes two sheets. Sheet 1 displays a comparison of Deloitte Consulting’s nominal and discounted unpaid loss of June 30, 2012 based on data as of June 30, 2012 with Deloitte Consulting’s nominal and discounted unpaid loss estimates as of June 30, 2011, based on data as of June 30, 2011. Sheet 2 displays a comparison of Deloitte Consulting’s June 30, 2012 nominal and discounted unpaid loss based on data as of June 30, 2012 and March 31, 2012. The comparison is shown separately for medical and compensation within PA, PEC, and PES business of the SIF.

Summary 2, Exhibit 2: Actual versus Expected This exhibit includes two sheets. Sheet 1 displays a comparison of actual and expected loss payments and incurred losses from July 1, 2011 through June 30, 2012. Sheet 2 displays a comparison of actual and expected loss payments and incurred losses from April 1, 2012 through June 30, 2012. The comparison is shown separately for medical and compensation within PA, PEC, and PES business of the SIF. The exhibit also displays the change in Deloitte Consulting’s estimated ultimate losses, reported claim counts, and ultimate claim counts.

Summary 2, Exhibit 3: Retrospective Comparison of Unpaid Loss This exhibit displays a retrospective comparison of unpaid loss as of June 30, 2011 between Deloitte Consulting’s current analysis based on data evaluated as of June 30, 2012 and Deloitte Consulting’s prior fiscal year-end analysis based on data evaluated as of June 30, 2011.

Summary 3, Exhibits 1-3 These exhibits are identical to Summary 2 Exhibits 1-3 except all figures are displayed by type of loss within medical and compensation.

Summary 4, Exhibits 1-6: Fiscal Year-end 2013 Forecast This exhibit displays Deloitte Consulting’s estimate of the BWC’s nominal and discounted unpaid loss

state of ohio bureau of workers’ compensation unpaid loss ... · 30, 2012 based on data evaluated...

Documents