The Florida Workers’ Compensation Marketplace

1. The Florida Workers’ Compensation Marketplace Presented by: John Burkholder , Director , Risk Management Broward County Board of County Commissioners Tony Abella, Jr., Area Senior Vice President Arthur J. Gallagher & Company

2. What are these guys smoking?

3. Where have we been? • Where are we now? • Where are we headed? • Cost drivers • Primary market • Excess workers comp market • Long term trends to watch

4. Where have we been ? • 1935 Florida’s workman’s compensation legislation was adopted • Remained virtually unchanged until 1978 • 70’s • Premiums ranged from $200m - $900m • Insurance Company market share 90% - 70% • Plaintiffs lawyers get involved in “Self-Executing” system • 80’s • Premiums ranged from $877m - $2.5b • Insurance Company market share 69% - 60% • self insurance (greater acceptance) • Insurer assessments for assigned risk (RML’s) climbing rapidly

5. Where have we been ? • 90’s • Premiums ranging from $2.3b to $2.5b • Insurers down to 30% market share • JUA created, RML’s left, “actuarially sound” rates • 37 SIF’s to 4, Special Disability Trust Fund Dissolved • 00’s • Florida Assigned risk self supporting manner • Medical component exceeds 50% for the first time • 2003 reforms leads to 2008 “Emma Murray” ruling • 2009 – reform language – reform now can stand • Insurer investment income drastically reduced • Premiums down over 60%, Combined Ratios up

6. Florida Historical Written W/C Premiums In Millions

7. Direct Premiums Written: Worker’s CompPercent Change by State, 2006-2011 Sources: SNL Financial LC.; Insurance Information Institute.

8. Florida Historical Rate Changes: 1999 -2013 Cumulative Rate increase Jan 99 -Apr.03 20.8% Sources: SNL Financial LC.; Insurance Information Institute.

9. Insurer Surplus Year Endin billions Sources: SNL Financial LC.; Insurance Information Institute.

10. Percent of Civilian, Noninstitutional Population that Receive SS Disability Income 1995 - 2011 The Share of the Population Receiving SSDI Benefits has increased just under 70% Since 1995 Source NCCI Annual Issues Symposium Presentation by Robert Hartwig Sources: SNL Financial LC.; Insurance Information Institute.

11. 2004 15%

13. Insurer Investment Yields – As a % of Policy Holder Surplus Sources: SNL Financial LC.; Insurance Information Institute.

14. Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line* Based on 2008 Invested Assets and Earned Premiums **US domestic reinsurance only Source: A.M. Best; Insurance Information Institute.

15. Florida Policy Year Combined Ratios

16. Increase in Medical Cost % of Total 2012 2009 Indemnity 41% 59% 1999 42% Medical 58% 1989 48% 52% 53% 47%

17. Medical Costs Bigger Driver in Florida Florida Countrywide Indemnity Indemnity 32% 41% 59% 68% Medical Medical

18. W/C Claims Medical Cost Drivers NCCI study shows that Florida Hosp. costs are 5.5% higher than national average

19. Drug costs as % of Total W/C Claims 2012 15.7% 2%

20. First 20 Years Post Injury 20 to 30 Years Post Injury

21. What is Driving Pharmacy Trends ? • Opioids – Morphine equivalent pain relievers • Originally meant to be prescribed after major surgeries or major trauma • Intended for short-term use or end-of-life cancer pain. (Not long term chronic pain) • Long term use often results in poly-pharmacy. • Anxiety drugs / Sleep aids / Anti Nausea • Physician Dispensing – often involves repackaging or mixing commonly prescribed drugs, resulting in a new National Drug Code (NDC) an/or Average Wholesale Price (AWP) • Results in pricing 200% to 400% higher than if the drug were purchased in pharmacies • Eliminates the benefits of using a Pharmacy Benefit Manager • In some states such as CA and FL, Physician Dispensing costs represent almost 50% of total WC pharmacy costs Source: Midwest Employers Casualty Company

23. Latest Development on Drug Costs • SB 662 went into effect on July 1, 2013 • Physician dispensed drug prices capped • Repackaged - 112.5% AWP + $8 fee • Non- repackaged – AWP + $4.18 fee

24. Where are we now? • Reforms still in place • Continuing Legal Challenges to 2003 reforms • Claims frequencies seem to have finally bottomed out • Lost Time Claims rates at low point • Investment income still at all time lows • Rate increases last 2 years in a row • Medical inflation continues to outplace CPI • Big increase in Pharmaceutical utilization • Pharmaceutical repackaging huge profit source for doctors

25. Primary W/C Market • Still Competitive but certainly less so • Multiple options are disappearing • Class underwriting is taking place • Underwriting is becoming more critical • Aggressive deals are all but gone • Combined ratios deteriorating quickly • Tough accounts will be “consent to rated” • New split point is being phased in by NCCI

26. Excess W/C Market • Market space is shrinking • Few carrier writing this coverage • AIG Pulled out • Starr pulled out of the State for Public Entities • Rates continue firming, up 5%-10% on 2013 renewals • Continued pressure on increasing retentions

27. AIG’s Reported Adverse Development in the Excess Comp Line 2005 - $1 billion per 3/16/06 10K filing 2006 - $70 million per 3/01/07 10K filing 2009 - $925 million per 2/23/12 10K filing 2010 - $825 million per 2/23/12 10K filing • Total of $2.82 billion in adverse claims development over 5 years

28. Long Term Trends of Concern • Potential impact of increase in inflation rate

29. 100 Years of Inflation Rates in the US

30. Impact of Inflation on Claims Costs • 2.5% Average Annual Inflation Rate for the last 20 years • Even inflation so low, a $300,000 SIR in 1993 would now be just under $500,000 • If inflation rises to 3.2% Annual average - $650,000 • Medical inflation has run more than double • Medical has increased as a % of total claims costs

31. Long Term Trends of Concern • Potential impact of increase in inflation rate • Accelerated Medical Inflation

32. Medical Inflation • Core inflation is currently 2.1% • Medical inflation from 1995 to 2009 averaged 3.9% • Annual medical severity increases within the WC system from 1995 to 2009 averaged 7.6% • The cumulative increase in medical costs within the WC system from 1991 to 2010 is estimated at 238%3 • Consumer Price Index Data for June 2012 • NCCI data as compiled by the Insurance Information Institute • NCCI data

33. Long Term Trends of Concern • Potential impact of increase in inflation rate • Accelerated Medical Inflation • Advances in Medical Technology

34. Advances in Medical technology Used to be known as the Christopher Reeve impact.

35. The Only Questions are: When and How Much? Thursday, May 17, 2012 “While the Braingate system is still in its clinical trial period, its developers see it being available for purchase from the general public in the next 5 years. There has been no set price, but in an interview, the founder of Braingate said that it would cost tens of thousands of dollars. Hopefully most of this would be covered by insurance, just as any other type of treatment would be.” *source: 4/26/2009 article on Yahoo! Braingate2.org HELPING HAND: Cathy Hutchinson uses her thoughts to direct a robotic arm. Signals from her brain allow her to control the device. Researchers hope the technology can help restore function to paralyzed patients.

36. Long Term Trends of Concern • Potential impact of increase in inflation rate • Accelerated Medical Inflation • Advances in Medical Technology • Aging workforce

37. Impacts of Aging Workforce • Initial drop in claims frequency • Experience • Risk averse • Typically Performing Less Hazardous Work • Severity increases • Suffer from more pre-existing conditions • Take longer to recover • Staying on the job well past 65 • How will this impact frequency?

38. Long Term Trends of Concern • Potential impact of increase in inflation rate • Accelerated Medical Inflation • Advances in Medical Technology • Aging workforce • Obesity • Continuing Legal Challenges

39. Impacts of Obesity on W/C Claims • More than one-third of U.S. adults (35.7%) are obese. • The most obese workers file twice as many claims and incur 13 times as many lost work days as healthy workers • Medical costs are 7 times higher for the most obese workers • Indemnity costs are 11 times higher for the most obese workers • The cost gap widens even more when a back or neck injury is involved Source: Midwest Employers Casualty Company

40. Is it Legal? • It is facially unconstitutional & unfair. • see Padgett. Judge Jorge E. Cueto“I find that the Florida Workers’ Compensation Act, as amended effective October 1, 2003, does not provide a reasonable alternative remedy to the tort remedy it supplanted. It therefore cannot be the exclusive remedy. [F.S.] §440.11 is constitutionally infirm and invalid.” • It doesn’t pay the Plaintiff’s lawyer enough. • see Castellanos & Lane v. Workforce Business Services, Inc. The First District Court of Appeal upheld a fee award that works out to $1.53 an hour for a lawyer who secured benefits for an injured worker. The court is "bound by precedent to uphold the award, however inadequate it may be as a practical matter," Judge Robert Benton wrote. • It doesn’t pay long enough. • see Westphal The court concluded that section 440.15(2)(a), Florida Statutes (2009), is unconstitutional under article I, section 21, of the Florida Constitution. The court has reinstated the TTD payment limits to 260 weeks, the number of weeks allowed prior to the first reforms that declared the 104 week level.

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