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CALIFORNIA WORKERS COMPENSATION

CALIFORNIA WORKERS COMPENSATION. A System Under Siege. Presented by: Bill Miller, FCAS, MAAA Tillinghast–Towers Perrin (949) 253-5242 millerw@towers.com. September 2001. Pre-Open Rating Period 1993 to 1994. Heavily Regulated Pricing No Pricing Deviations

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CALIFORNIA WORKERS COMPENSATION

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  1. CALIFORNIA WORKERS COMPENSATION A System Under Siege Presented by: Bill Miller, FCAS, MAAA Tillinghast–Towers Perrin (949) 253-5242 millerw@towers.com September 2001

  2. Pre-Open Rating Period 1993 to 1994 • Heavily Regulated Pricing • No Pricing Deviations • Only Pricing Competition through Dividends • Profitable Results • Strong Reserves • Declining Frequency

  3. Pre-Open Rating Period 1993 to 1994 • Insurance Market • Non-Concentrated Market • Strong California Domestic Market • Heavy Capitalization (Premium/Surplus < 1.0) • Healthcare Companies Moving into Market

  4. First Years Of Open Rating 1995 to 1996 • Great Pricing Flexibility • Heavy Price Competition

  5. Rate Level Index

  6. First Years Of Open Rating 1995 to 1996 • Great Pricing Flexibility • Heavy Price Competition • Premium Decline

  7. $5.9 $5.7 1995 1996 Written Premium

  8. First Years Of Open Rating 1995 to 1996 • Great Pricing Flexibility • Heavy Price Competition • Premium Decline • Continued Declining Frequency • Calendar Year and Accident Year Results Deteriorating • Reserve Deficiencies

  9. First Years Of Open Rating 1995 to 1996 • Insurance Market • Shifts through Withdrawals/Acquisitions/Expansions • HMO’s Move Out of Market • Still Heavy Capitalization (Premium/Net Worth = .6) • Favorable Investment Returns

  10. Open Rating 1997 to 2000 • Continued Heavy Price Competition

  11. 1/1/89 1/1/90 1/1/91 1/1/92 1/1/93 1/1/94 10/1/94 1995 Avg. 1996 Avg. 1997 Avg. 1998 Avg. 1999 Avg. 2000 Avg. California Workers Compensation Rate Level Index (January 1989 Rate Level = 100%) as of 12/31/2000

  12. Open Rating 1997 to 2000 • Continued Heavy Price Competition • Premium Growth with Expanding Economy • Continued Declines in Frequency

  13. % Change Estimated Percentage Change In Indemnity Claim Frequency As of 12/31/2000

  14. Open Rating 1997 to 2000 • Continued Heavy Price Competition • Premium Growth with Expanding Economy • Continued Declines in Frequency • Sharp Severity Increases

  15. Loss Severity Estimated Ultimate Total Loss Per Indemnity Claim As of 12/31/2000

  16. Open Rating 1997 to 2000 • Continued Heavy Price Competition • Premium Growth with Expanding Economy • Continued Declines in Frequency • Sharp Severity Increases • Inadequate Pure Premium Rates

  17. Estimated InadequacyOf Approved Pure Premium Rates

  18. Reported as of Age in Months Trended — Selected 3/97 3/98 3/99 3/00 3/01 27/15 39/29 51/39 1.598 1.187 1.086 1.659 1.207 1.093 1.748 1.221 1.111 1.804 1.242 1.128 1.875 1.271 1.136 1.954 1.288 1.153 California Paid Medical Loss Development Factors Source: WCIRB of California.

  19. Observations About Growth in Loss Development • Occurring across all types of indemnity claims, industries, and natures of injury • Average permanent disability rating has increased markedly • Frequency of stipulated awards has been increasing • Settlements of “future medical” driving up severity • Claims with attorney involvement have higher development • Settlement “premium” increasing on permanent disability awards

  20. Open Rating 1997 to 2000 • Continued Heavy Price Competition • Premium Growth with Expanding Economy • Continued Declines in Frequency • Sharp Severity Increases • Inadequate Pure Premium Rates • Rapidly Deteriorating Industry Results

  21. 161% 161% 147% 144% 137% 125% 114% 106% 96% 93% 94% 81% Percentage of Earned Premium California Workers Compensation Accident Year Combined Loss And Expense Ratiosas of 12/31/2000

  22. Open Rating 1997 to 2000 • Continued Heavy Price Competition • Premium Growth with Expanding Economy • Continued Declines in Frequency • Sharp Severity Increases • Inadequate Pure Premium Rates • Rapidly Deteriorating Industry Results • Growing Reserve Deficiencies

  23. Losses ( in billions) Difference Between Estimated Ultimate Losses And Reported Losses As of 12/31/2000

  24. Open Rating 1997 to 2000 • Insurance Market • Shifts through Withdrawals/Acquisitions/Insolvencies • HMOs Leaving Market • Very Low Reinsurance Rates • High Capitalization & Investment Returns

  25. Market Concentration Ratios

  26. Market Share By Type Of Insurer Note: “California Specialty Insurers” are defined as private insurers who write at least 80% of their Workers Compensation business in California.

  27. Future Outlook • 1999 — Record Combined Ratio -7% Loss of Equity • 2000 — Rates Up Almost 20%, Premium Up 30% • Sharply Increasing Severity/Prior Year Loss Dev. • Relatively Little Improvement Expected in 2000 • 2001 — Loss Cost Rates Up 10% • Continued Reserve Inadequacies • Likelihood of Large Benefit Increases

  28. Future Outlook • Potential Employer Backlash • Insurance Market • Continued Shift through Acquisitions/Regulatory Action • Little Cheap Reinsurance/HMO’s out of WC • High Capitalization • Potentially Reduced Investment Returns

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