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Workers Compensation Loss Reserving in California

Workers Compensation Loss Reserving in California . Michele P. Bernal. General Challenges in CA WC. 99.8% loss ratio projected for AY98 (source WCIRB 6/99 projection). CA Direct Loss Ratios. General Challenges in CA WC. 99.8% loss ratio projected for AY98

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Workers Compensation Loss Reserving in California

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  1. Workers Compensation Loss Reserving in California Michele P. Bernal

  2. General Challenges in CA WC • 99.8% loss ratio projected for AY98 (source WCIRB 6/99 projection)

  3. CA Direct Loss Ratios

  4. General Challenges in CA WC • 99.8% loss ratio projected for AY98 • WCIRB projects $3 billion reserve shortage on a direct basis

  5. General Challenges in CA WC • 99.8% loss ratio projected for AY98 • WCIRB projects $3 billion reserve shortage on a direct basis • 146% Combined Ratio Projection for AY98

  6. Projected Industry-wide Direct Combined Ratio 146% Combined Ratio Projection for AY98 Loss Ratio (1/00 filing) 100% LAE Ratio (1/00 filing) 24% Other Expense (CY98) 22% Direct Combined Ratio146% Source:WCIRB

  7. General Challenges in CA WC • 99.8% loss ratio projected for AY98 • WCIRB projects $3 billion reserve shortage on a direct basis • 146% Combined Ratio Projection for AY98 • Pricing Continuing to deteriorate through 1999 (Fully loaded rates are 92% of Advisory Pure Premium) (source WCIRB)

  8. General Challenges in CA WC • 99.8% loss ratio projected for AY98 • 146% Combined Ratio Projection for AY98 • Pricing Continuing to deteriorate through 1999 (Fully loaded rates are 92% of Advisory Pure Premium) • Costs are increasing

  9. On-Level Loss Ratios Indemnity + MedicalSource: WCIRB (1/00 Filing)

  10. Reserving Challenges in California Workers Comp • 1/1/94 Reforms • 1/1/95 Open Rating • 4/1/97 Change in PD Rating Schedule • 1/1/98 Change in ALAE Definition • 9/18/96 Minniear’s Decision • Medical Management • 1/1/99 New Medical Fee Schedule • Buy-down Reinsurance Programs

  11. 1/1/94 California Reforms • Reduced # of stress cases • Anti-fraud measures • Vocational Rehab Cap of $16,000 • Advancing of PD benefits • Increased penalties for late payments • Large part of the improvement was seen prior to the reforms

  12. On-Level Loss Ratios Indemnity + MedicalSource: WCIRB (1/00 Filing)

  13. Reserving Challenges in California Workers Comp • 1/1/94 Reforms • 1/1/95 Open Rating • 4/1/97 Change in PD Rating Schedule • 1/1/98 Change in ALAE Definition • 9/18/96 Minniear’s Decision • Medical Management, etc • 1/1/99 New Medical Fee Schedule • Buy-down Reinsurance Programs

  14. CA Direct Loss Ratios

  15. On-Level Loss Ratios Indemnity + MedicalSource: WCIRB (1/00 Filing)

  16. Reserving Challenges in California Workers Comp • 1/1/94 Reforms • 1/1/95 Open Rating • 4/1/97 Change in PD Rating Schedule • 9/18/96 Minniear’s Decision • 1/1/98 Change in ALAE Definition • Medical Management, etc • 1/1/99 New Medical Fee Schedule • Buy-down Reinsurance Programs

  17. Other Changes Impacting Reserves • 9/18/96 Minniear’s Decision • Presumption of the Correctness of the Treating Physician • ALAE Definition Change 1/1/98 • Different from NCCI Definition • Medical Management expenses are Medical Loss, not ALAE • Some Fraud expenses are ALAE, not ULAE

  18. Other Changes Impacting Reserves • Medical Management/Early Intervention/Provider Networks • Reduced Cost? • Return to Work? • Accelerated claims closure?

  19. Other Changes Impacting Reserves • 1/1/99 New Medical Fee Schedules • WCIRB projects 2.0% increase in medical costs • Lots of uncertainty • Hot/Cold pack treatments may be replaced with more expensive modalities • Inpatient Hospital Fee Schedule varies charges by individual facility • Expanded ability for physicians to charge for chart information & other reports

  20. Other Changes Impacting Reserves • Buy-Down Reinsurance • Quick payout of net losses • Substantial uncertainty as to timing of payouts unless your data systems have the ability to restate historical development at new limit (indexed) • Use caution when using industry LER’s

  21. Coming Up... SB320 Benefit Increases • Initially $3.2 billion (30%) effective 1/1/00 approved by senate • In Assembly • 6/30 revision: Phase in over 3 years • 9/7 revision: $2 billion phased in over 5 years • 9/9 revision: $2 billion phased in over 6 years • Governor’s Plan (9/4) $0.5 - 1.0 billion

  22. SB320 Benefit Increases • Only cost increases; no reform provisions • Increase in maximum weekly benefits • Increase in maximum & duration of permanent partial disability payments • Increase in death benefits • Additional administrative costs • Treating physician retains presumption of correctness only if pre-designated

  23. General Notes • Very important to communicate with claims and underwriting departments • Look for trends that are explainable based on that communication • Can’t assume long term averages are accurate

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