workers comp

Protecting Montanans through Insurance and Securities regulation

MONTANA STATE AUDITOR

John Morrison

Montana State Auditor’s Office

Role of Montana Insurance Commissioner in Regulation of

Worker’s Comp

John MorrisonMontana State Auditor

2007 Governor’s Conference on Worker’s CompOctober 4, 2007



John Morrison

Three different options for private employers to attain Work Comp Insurance:

1. State Fund (60-65% of the market)

2. Private Carriers (30-35% of the market)

3. Self-Insure A. (Sub-set—usually paired w/private insurer)

Employers may also reinsure a portion of their Work Comp coverage through a Captive program.



John Morrison

SAO regulates private insurers only in the following ways:

Rates—MT is a “File and Use” State– May deviate from NCCI data; our actuary determines if

and how much those rates can vary—rate variation has to do with expenses carriers have (on top of claims paid)

– NCCI files every year—carriers file only upon the Commissioner’s request, or if a change is made.

Form filing – Done by NCCI on behalf of carriers

Continued



John Morrison

SAO regulates private insurers only in the following ways:

Collects Premium Tax Issues Certificates of Authority Monitors Solvency Conducts Financial Examinations Conducts Insolvency Proceedings



John Morrison

Calendar-Accident Year Combined Ratio

Why is the Calendar-Accident Year Combined Ratio an important financial indicator?

Because it measures the adequacy of premiums to cover both the benefit costs and operating expenses of the benefit system, not taking into account investment returns.



John Morrison

Derivation of the Calendar-Accident Year Combined Ratio

The Calendar-Accident Year Combined Ratio is the sum of accident year losses, the calendar year expenses and the calendar year dividends divided by premium:

(Losses + Expenses + Dividends) / Premium

Losses include medical and indemnity payments and reserves (case and IBNR) on claims with accident dates beginning January 1 and ending December 31 of that year. That is, the losses are developed to ultimate.

Expenses includes all loss adjustment (attorney fees), commission, brokerage, taxes, licenses, fees, general and other expenses in a calendar year.

Premium is the net earned premium paid by the insured in a calendar year after application of adjustments such as retrospective rating, schedule rating and premium discounts but prior to reinsurance.

Investment income is not considered in the combined ratio.



John Morrison

What does the Calendar-Accident Year Combined Ratio indicate?

• A ratio of less than 100% indicates that the premium collected was adequate to pay losses, expenses and dividends. Therefore, a profit was realized for the year.

• A ratio of 100% indicates that the premium collected was equal to the losses, expenses and dividends paid.

• A ratio of more than 100% indicates that the premium was NOT adequate to pay losses, expenses and dividends. Therefore, a loss was realized for the year.

Investment income is not considered in the combined ratio.



John Morrison

Sample Calculation of a Calendar-Accident Year Combined Ratio less than 100%

Inputs Premium $100 Losses $50 Expenses $35 Dividends $5

Formula Calculation

Combined Ratio = ($50 + $35 + $5)/$100 = 90%

Result

Underwriting Result is a 10% profit -- Therefore, the insurer paid out 10% less than it collected in premium thereby realizing a 10% profit on the policies it wrote.



John Morrison

Sample Calculation of a Calendar-Accident Year Combined Ratio greater than 100%

Inputs Premium $100 Losses $70 Expenses $35 Dividends $5

Formula Calculation

Combined Ratio = ($70 + $35 + $5)/$100 = 110%

Result

Underwriting Result is a 10% loss. Therefore, the insurer paid out 10% more than it collected in premium thereby realizing a 10% loss on the policies it wrote.



John Morrison

169.5% 160.0%128.6% 119.4% 124.2%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

2001 2002 2003 2004 2005

Montana Calendar-Accident Year Combined Ratios

Calendar-Accident Year



John Morrison

133.5%

31.1%4.9%

123.3%

31.9%4.8%

100.6%

27.5%0.5%

84.1%

30.9%4.4%

87.1%

35.3%1.8%

0.0%20.0%40.0%60.0%80.0%100.0%

120.0%140.0%160.0%180.0%

2001 2002 2003 2004 2005

Losses Expenses (Private Carrier Only) Dividends (Private Carrier Only)


Montana Calendar-Accident Yr. Combined Ratios by Component



John Morrison

Montana versus 36 NCCI States Calendar-Accident Year Combined Ratios

169.5%160.0%

128.6%119.4% 124.2%

97.8%97.0%

118.9%107.2%

99.0%

0.0%

20.0%40.0%

60.0%

80.0%100.0%

120.0%

140.0%160.0%

180.0%

2001 2002 2003 2004 2005


Montana 36 NCCI States



John Morrison

70.9%83.9%

95.0% 95.5% 97.5% 102.7% 104.9% 107.8%120.3% 124.2% 126.5%

97.8%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

Hawai i Ar kansas Idaho Kansas T ennessee Utah Color ado Kentucky Or egon Montana South

Dakota

36 NCCI

States

2005 Calendar-Accident Year Combined Ratio as of December 31, 2005 for the Study States



John Morrison

2005 Calendar-Accident Year Combined Ratios as of December 31, 2005 for 36 NCCI States

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

HA T X DC AR IN FL NM AK VT MO MI NE ID CT KS AL MD LA T N ME NV VA IL NH UT IA CO OK KY GA RI NC OR AZ MT SD



John Morrison

0.0%

20.0%40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

HA

15

TX

17

DC

16

AR

48

IN

50

FL

6

NM

27

AK

1

VT

7

MO

24

MI

31

NE

33

ID

32

CT

14

KS

43

AL

9

MD

40

LA

11

TN

26

ME

8

NV

30

VA

49

IL

20

NH

19

UT

38

IA

45

CO

29

OK

13

KY

4

GA

41

RI

22

NC

37

OR

42

AZ

46

MT

5

SD

44

State and 2006 Oregon Rate Rankingas of December 31, 2005

2005 Calendar-Accident Year Combined Ratiofor 36 NCCI states and 2006 Oregon Rate Ranking



John Morrison

Pre Tax Rate of Return

Why is the pre tax rate of return an important financial indicator to an insurer?

Because it indicates whether or not the insurer is earning a profit or loss prior to taxes taking into account both underwriting and investment returns.



John Morrison

Derivation of the Pre Tax Rate of Return

The Pre Tax Rate of Return is the pre tax operating income or loss divided by net earned premium.

A positive pre tax rate of return indicates that a profit has been realized.

A negative pre tax rate of return indicates that a loss has been realized.



John Morrison

4.2%

-3.8%-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Liberty Northwest Insurance Corporation Montana State Fund

Liberty Northwest Insurance Corporation Montana State Fund

Five Year Average (2001-2005) Pre Tax Rate of Return forLiberty Northwest Insurance Corporation and Montana State Fund

Data From A.M. Best



John Morrison

2005 Calendar Year Pre Tax Rate of Return from A. M. Best for the State Funds in the Study States

9.4% 9.9%12.1% 12.8%

17.7%

29.0%

34.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Montana(68.0%) Kentucky(28.9%) Utah(59.2%) Idaho(68.2%) Colorado(61.4%) Oregon(58.5%) Hawaii(24.3%)

State Fund and Market Share



John Morrison

Five Calendar Year Average (2001-2005) Pre Tax Rate of Return from A. M. Best for the State Funds in the Study States

-3.8%

2.6% 3.0%

6.7%

9.5%

14.2%

19.1%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Montana(68.0%) Idaho(68.2%) Oregon(58.5%) Kentucky(28.9%) Utah(59.2%) Colorado(61.4%) Hawaii(24.3%)

State Fund & Market Share



John Morrison

Observations

While the experience over the last few years has improved, there is still much room for improvement.

The frequency of workplace injuries has declined but medical costs continue to rise.



John Morrison

Medical Costs—what is behind them (components) and comparison of general health vs. work comp:

– Aging population (general healthcare)– More advanced medicine (general healthcare)– Prescription Drugs –more costly, brand name

drugs (general healthcare)– More disability management (work comp)

More and longer visits More paperwork—higher administrative costs

Rising Medical Costs:Contributing Factor to Work Comp Rates



John Morrison

– Utilization for Work comp is higher– Reimbursement rates (fee schedules)

Most work comp systems pay 100% of price of service (this is a contrast to Medicaid, Medicare, and private health insurers.

– Work Comp Disparity % difference (Kaiser Permanente) Study of physician work requirements found (on

average—national) work is 28% higher Study of practice expense found (on average--

national) expenses are 33% higher

Rising Medical Costs:Contributing Factor to Work Comp Rates



John Morrison

Rising Trend Needs to be Reversed – Key: Decreasing Medical Costs

– Health Information Technology– Medical procedures should be managed the

same as non-occ care– Integration, risk sharing, an shared standards

and utilization– Measure quality– Cover the Uninsured in health insurance

market—will lead to less cost-shifting overall



John Morrison

Additional Methods to Reduce Worker’s Comp Rates

Companies can Self-Insure Companies can form a “Captive”

– What is a Captive? A captive insurance company primarily insures the risks of its owners and sometimes related or affiliated firms. It serves the insurance needs of the owners and related parties without the uncertainties of commercial availability and cost. Captives provide an insurance alternative for businesses and organizations, which is particularly important in today’s difficult insurance market when companies are looking for options.



John Morrison

Captives in Montana

The law requires Montana-based captives to locate their books and records here and hold an annual board meeting here. Because captives do not interact with consumers in the same fashion as traditional multi-line companies, the State Auditor’s Office has been able to create a streamlined regulatory environment for them.

Captives are a multi-billion dollar industry nationwide.

Currently, there are 27 captive insurance companies formed in Montana to insure rural hospitals, nursing homes, fuel stations, commercial trucking firms, an investment firm, a medical professional firms, construction companies, and attorneys.

Long-term benefits to Montana include the potential for new jobs, an expanded tax base and increased economic activity.



John Morrison

Captives in Montana -- Uses

The captive can be used to fund a large deductible plan from an admitted insurer.

An employer can utilize a captive to reinsure coverage written by an admitted insurer.

An employer can utilize a captive to provide an excess layer of coverage above the statutory minimum written by an admitted carrier or an approved self insured plan.



John Morrison

Questions and Answers

workers comp

Economy & Finance