Maximizing Your State of the Line Experience

Transcription

1 Maximizing Your State of the Line Experience

2 P/C INDUSTRY NET WRITTEN PREMIUM SLIDE 4 The net written premium in this slide provides a measure of the size of each major line of business in the property/casualty (P/C) insurance industry. Every major line of business in the industry grew in net written premium volume from Calendar Year 2013 to Calendar Year 2014 Partially due to the soft reinsurance market, the fire and allied lines had only half a percentage point increase in net written premium Driven largely by the increase in carrier-estimated payroll, the workers compensation line grew more than the P/C industry as a whole, with a 4.6% increase in net written premium The increase in net written premium contributed to the industry posting another year of underwriting gains Sources National Association of Insurance Commissioners (NAIC) Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Page 2 of 63

3 P/C INDUSTRY NET COMBINED RATIOS SLIDE 5 The calendar year combined ratios in this slide measure the overall performance of each line of business and the P/C industry as a whole, prior to the consideration of investment and other income. A combined ratio is the sum of the loss ratio, the LAE ratio, the dividend ratio, and the underwriting expense ratio. The loss, LAE, and dividend ratios are calculated as ratios to earned premium. The underwriting expense ratio is calculated as a ratio to written premium to provide a better match of the timing of the numerator and denominator. Partially due to catastrophic losses, the combined ratios for the homeowners, commercial multiple peril, and fire and allied lines increased between 2013 and 2014 In response to two consecutive years of P/C combined ratios below 100% and the slight deterioration in the combined ratio from 2013 to 2014, some have speculated that the industry has reached a turning point in the underwriting cycle Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Page 3 of 63

4 P/C INDUSTRY NET COMBINED RATIOS SLIDE 6 This slide displays a longer history of the combined ratios for the total P/C industry. See Slide 5 for more background. For the underwriting cycle beginning in 2002, the industry s average combined ratios were approximately 7 percentage points lower than those in the preceding underwriting cycle After the events of 9/11/2001, the industry s combined ratios decreased more rapidly and to a greater extent than the industry has experienced since Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC p Page 4 of 63

5 P/C INDUSTRY INVESTMENT GAIN RATIOS SLIDE 7 The investment gain ratio includes both realized capital gains and net investment income. The investment gain ratio measures the investment performance of the P/C industry by comparing investment income to earned premium, the primary source of investment funds for insurance carriers. The largest component of the investment gain ratio, net investment income, has averaged 3 points lower post Post-2001, even excluding the realized capital losses of 2008 and 2009, the average realized capital gain has fallen by 1.5 percentage points Carriers have shifted their underwriting strategies to adapt to the changing investment environment Sources NAIC Annual Statement data, Statement of Income: , 2013p 2014p ISO: The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Page 5 of 63

6 SLIDE 7 (CONT D) Year Net Realized Capital Gains to Net Earned Premium Net Investment Income to Net Earned Premium Investment Gain Ratio p Page 6 of 63

7 P/C INDUSTRY EMBEDDED YIELD REMAINS HIGHER THAN NEW MONEY YIELD SLIDE 8 Embedded Yield is the reported pretax investment income, excluding capital gains, for bond instruments held by P/C insurers divided by the asset value of those instruments. Embedded Yield is derived from accounting data as reported. It includes investment income both from (old) bonds owned at the beginning of each year and (new) bonds acquired during the year. New Money Yield is the pretax yield from the same bond portfolio (estimated on a matched type and maturity basis) as if it had been repurchased each year. The gray bars in the graph indicate periods of recession in the United States. Both Embedded and New Money Yields have declined over the last 30 years. For the first two recessions shown here, the gap between Embedded and New Money Yields (dark teal shading) widened for several years during and after the recession, and then narrowed. The yield gap for the Great Recession has been greater and more prolonged than the yield gaps for the previous two recessions. Since 2012, the Great Recession s yield gap appears to be narrowing. Sources Embedded Yield is based on data from Best s Aggregates & Averages New Money Yield is based on data from Best s Aggregates & Averages, the Federal Reserve Bank, Value Line, TreasuryDirect, and Barron s Page 7 of 63

8 SLIDE 8 (CONT D) Pretax Embedded Yield p N/A Pretax New Money Yield p Page 8 of 63

9 P/C INDUSTRY AFTER-TAX RETURN ON SURPLUS SLIDE 9 The after-tax return on surplus compares net income generated from all sources to policyholder surplus. Since surplus varies throughout the year as income is earned, the return is calculated as the ratio of net income to the average of the surplus at the beginning of the year and end of the year. The return on surplus tends to follow the ebb and flow of the underwriting cycle. Under the assumption that the industry generates an after-tax return on surplus that is appropriate over the long term to cover its cost of capital, it is reasonable to conclude that the 8.4% after-tax return in Calendar Year 2014 is a fair return, especially considering the low-interest-rate environment The latest year s after-tax return on surplus is consistent with the long-term average shown Sources NAIC Annual Statement data, Statement of Income: , 2013p 2014p ISO: The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC p Page 9 of 63

10 P/C INDUSTRY PREMIUM-TO-SURPLUS RATIOS SLIDE 10 The premium-to-surplus ratio is one measure that can be used to help determine whether there is sufficient policyholder surplus to support the P/C insurance industry s writings. The favorable ratio of 0.74:1 in Calendar Year 2014 implies a well-capitalized market Contributions to surplus were approximately $21 billion in Calendar Year 2014, or approximately one-third of the 2013 contributions, with the largest decrease occurring in unrealized capital gains With few exceptions, surplus has increased every year since 1985 Sources NAIC Annual Statement data, Statement of Income: , 2013p 2014p ISO: The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Page 10 of 63

11 SLIDE 10 (CONT D) Year Surplus Net Written Premium (NWP) Premium-to-Surplus Ratio p Page 11 of 63

12 WC NET WRITTEN PREMIUM GROWTH SLIDE 12 This slide exhibits workers compensation (WC) net written premium by year, separately for private carriers and state funds. In the context of the State of the Line presentation, NCCI s definition of state funds includes only those carriers that are exempt from paying federal income taxes. All other carriers are included in the private carrier values. For state funds, net written premium in 2014 grew by $800 million, more than half of which is attributable to the California state fund NCCI estimated an increase of 5.9% in total premium to $44.2 billion 2014 marks the fourth consecutive year of workers compensation premium volume increases Sources NAIC Annual Statement data, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Page 12 of 63

13 SLIDE 12 (CONT D) Year State Funds Private Carriers Total p Page 13 of 63

14 WC COMBINED RATIOS SLIDE 13 This slide shows workers compensation combined ratios. See Slide 5 for more background. The combined ratio improved by 4 points in 2014, a 17-point drop from the peak of the cycle in 2011 This most recent underwriting cycle was comparatively milder than the prior cycle Combined ratios for workers compensation insurance have typically been higher than those for the P/C industry as a whole Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Page 14 of 63

15 SLIDE 13 (CONT D) Year Dividend Ratio Underwriting Expense Ratio LAE Ratio Loss Ratio Combined Ratio p Page 15 of 63

16 WC LOSS RATIOS SLIDE 14 The loss ratios in this slide compare the net incurred losses to net earned premium. The loss ratio is the largest component of the combined ratio. The 3-point drop in the loss ratio from 2013 to 2014 was the largest contributor to the decrease in the overall combined ratio The 2014 loss ratio is the lowest observed since 1997 Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year Loss p Page 16 of 63

17 WC LAE RATIOS SLIDE 15 The LAE ratio compares net incurred LAE to net earned premium. LAE includes both defense and cost containment expenses and adjusting and other expenses. Key Takeaway The estimated 2014 LAE ratio was approximately 14%. Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year LAE to Earned Premium p Page 17 of 63

18 WC LAE TO LOSS RATIOS SLIDE 16 While taking net incurred LAE as a ratio to net earned premium provides the contribution of LAE to the overall combined ratio, LAE as a ratio to loss may be a more meaningful measure of the effort that it takes to manage and settle claims. The LAE-to-loss ratios have more year-to-year variation than the LAE-to-premium ratios. Defense and Cost Containment Expense was the driver of the increase in the LAE-to-loss ratio in 2014 while the ratio of Adjusting and Other Expense to loss remained relatively flat. California contributed to the increase in the countrywide LAE ratio because the Workers Compensation Insurance Rating Bureau of California observed an increase in LAE following the enactment of Senate Bill 863. Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year LAE to Incurred Losses p Page 18 of 63

19 WC UNDERWRITING EXPENSE RATIOS SLIDE 17 The underwriting expense ratio compares the costs associated with writing insurance to net written premium. The underwriting expenses included in the ratio are: Commission and Brokerage Expenses Taxes, Licenses, and Fees Other Acquisition Expenses General Expenses Key Takeaway The underwriting expense ratio fell by 1 point from 25 to 24. The main driver of the decrease in the ratio was the increase in net written premium, rather than a decrease in expenses. Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year Underwriting Expense Ratio p Page 19 of 63

20 WC POLICYHOLDER DIVIDEND RATIOS SLIDE 18 Policyholder dividends are the smallest component of the combined ratio. Fifteen to 20 years ago, before the majority of states moved to competitive rating, dividends were a more significant component of workers compensation combined ratios Today, policyholder dividends are virtually nonexistent, except in a few states (e.g., Florida) Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year Dividend Ratio p Page 20 of 63

21 WC IGIT RATIOS SLIDE 19 The overall investment gain is allocated by line of business according to the NAIC-prescribed allocation procedure. The WC Investment Gain on Insurance Transactions (IGIT) ratio measures investment performance by comparing investment income allocated to the WC line to WC earned premium. There was a general downward trend in investment gain from 2010 to The 2014 IGIT for workers compensation was 12%, the lowest in five years. In 2013, a major carrier had a material realized capital gain resulting from a corporate restructuring. The adjusted ratio provides a better picture of the industry performance as a whole. Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year Reported Adjusted p Page 21 of 63

22 WC IGIT RATIOS: MOVING AVERAGE SLIDE 20 Since investment gains can be volatile and lead to conclusions based on single-year observations that may not be pertinent to long-tailed lines of business, this slide shows five-year moving averages of the IGIT ratios shown on Slide 19. See Slide 19 for more background. Key Takeaway Given the embedded yield in the industry s portfolio and the downward trend in the investment gain on insurance transactions in recent years, short-term improvement in these numbers is not anticipated. Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year Five-Year Moving Average p Page 22 of 63

23 WC PRETAX OPERATING GAIN SLIDE 21 The pretax operating gain in this slide measures the overall financial performance of the workers compensation business, taking into account both underwriting income and investment income. Pretax operating gain excludes direct changes to surplus, including, but not limited to, changes in: Unrealized capital gains Unrealized foreign exchange gain Net deferred income tax Non-admitted assets The provision for reinsurance Surplus notes Key Takeaway The 2-point underwriting gain and 12-point investment gain on insurance transactions resulted in a favorable 14-point pretax operating gain in Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year Reported Adjusted p Page 23 of 63

24 WC NET COMBINED RATIOS SLIDE 22 This slide compares the net combined ratios of private carriers and state funds. See Slide 5 for more background. With few exceptions, the combined ratios for state funds are significantly higher than those for the private carriers The 2014 state fund combined ratio of 115 is 17 points higher than the private carrier combined ratio Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year Private Carriers State Funds p Page 24 of 63

25 WC PRETAX OPERATING GAIN RATIOS SLIDE 23 The pretax operating gain ratios of private carriers and state funds are compared. See Slide 21 for more background. The state funds had a 5% operating gain 9 points lower than that for the private carriers. The 17-point difference in the combined ratio is now only a 9-point difference in pretax operating gain ratio. State funds typically have a much larger contribution from investment income to their operating results due to their significantly higher reserve-to-premium ratios. Sources NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year Private Carriers State Funds p Page 25 of 63

26 WC NET COMBINED RATIOS SLIDE 25 The net combined ratios are the sum of the net incurred loss and LAE ratio, the dividend ratio, and the underwriting expense ratio. In this slide, the overall private carrier workers compensation combined ratios are shown for the most recent 10 years on both calendar year (CY) and accident year (AY) bases. The AY combined ratio reflects the experience of accidents that occurred in that calendar year. Unlike the CY combined ratio, AY combined ratios are not influenced by changes in reserves for prior AYs. See Slide 5 for more background. Compared with 2013, both the 2014 CY and AY net combined ratios improved. A 3-point improvement on a CY basis and a 4-point improvement on an AY basis were observed. The 2014 CY net combined ratio was higher than the 2014 AY value due to carrier reserve strengthening on prior accident years. Sources NAIC Annual Statement, Schedule P, Part 1D of the 2014 Annual Statement for individual private carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 Insurance Expense Exhibit Part II Allocation to Lines of Business Net of Reinsurance The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. Year p Calendar Year Accident Year Page 26 of 63

27 WC LOSS AND LAE NET RESERVE DEFICIENCIES SLIDE 26 The net reserve deficiency is the dollar difference (in billions) between NCCI s estimate of net loss and LAE reserves and net reserves as reported by private carriers in the NAIC Annual Statement, Schedule P, Part 1D. The overall workers compensation net reserve deficiency is calculated for all accident years combined at each year-end valuation. The net reserve deficiency decreased from $11B to $10B between year-ends 2013 and These values include tabular discounts from lifetime pension cases. The year-end 2014 net reserve deficiency is 8% of net reported reserves compared with 33% of net reported reserves at year-end Source NAIC Annual Statement, Schedule P, Part 1D of the 2014 Annual Statement for individual private carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/ Page 27 of 63

28 WC NET LOSS AND LAE RATIOS NCCI ULTIMATE ACCIDENT YEAR SELECTIONS VS. AS REPORTED SLIDE 27 The accident year (AY) net incurred loss and LAE ratio is calculated as a ratio of AY net losses and LAE to CY earned premium. The values in this slide reflect ultimate loss and LAE ratios estimated by NCCI compared with loss and LAE ratios reported at the latest evaluation by private carriers in the NAIC Annual Statement, Schedule P, Part 1D. NCCI s estimates reflect some level of net reserve deficiency for every year through 2011, as NCCI s estimated net incurred loss and LAE ratios are higher than the net incurred loss and LAE ratios reported by private carriers in Schedule P. NCCI s estimate for AY 2014 is 70%, whereas that reported by the industry is 73% indicating an estimated 3-point redundancy. Similarly, NCCI s estimate for AY 2013 is 73%, whereas that reported by the industry is 74% indicating a 1-point redundancy. The total $10B net reserve deficiency as of year-end 2014 shown on the previous slide is comprised of redundancies in the most recent two accident years, which are more than offset by reserve deficiencies in Years 2011 and prior. Source NAIC Annual Statement, Schedule P, Part 1D of the 2014 Annual Statement for individual private carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/ NCCI Selections As Reported Page 28 of 63

29 WC NET LOSS AND LAE RATIOS ACCIDENT YEAR AS REPORTED SLIDE 28 The net incurred loss and LAE ratio is calculated as the ratio of incurred losses and LAE to earned premium. In contrast to calendar year ratios, accident year net incurred loss and LAE ratios change over time as the reserves on claims are reevaluated from one report to the next. A 73% net incurred loss and LAE ratio was originally reported for AY 2005, and subsequent reserve reductions have contributed to its year-end 2014 value of 61%. As AY 2005, 2006, and 2007 have developed favorably over time, they have revealed redundancies in the initially reported net loss and LAE reserves for these years. The industry has used those reserves to work off the large reserve deficiencies it had accumulated on prior accident years. The more recent accident years have shown comparatively greater stability between the respective values observed at first report and those as of year-end Source NAIC Annual Statement, Schedule P, Part 1D of the 2014 Annual Statement for individual private carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/ At First Report At 12/31/ Page 29 of 63

30 WC DIRECT WRITTEN PREMIUM 2014 COUNTRYWIDE GROWTH SLIDE 30 This slide displays the change in countrywide direct written premium between Calendar Years 2013 and 2014 for private carriers only. Monopolistic fund states are represented in gray and are not included in the displayed countrywide value. Key Takeaway Countrywide Direct Written Premium for private carriers grew +4.6% between 2013 and Source Statutory Page 14 from the NAIC Annual Statement for calendar year written premium by state Page 30 of 63

31 WC DIRECT WRITTEN PREMIUM 2014 GROWTH BY STATE SLIDE 31 Underlying the change in countrywide direct written premium volume is the change in each state s direct written premium. This change is based on private carrier data only and is not shown for monopolistic fund states. Teal represents premium volume increases, while gold represents premium volume decreases. The deeper colors represent larger magnitudes of change. Premium growth varies significantly across individual states The countrywide direct written premium growth of +4.6% includes increases as high as +16.4% and decreases as large as 10.6% Source Statutory Page 14 from the NAIC Annual Statement for calendar year written premium by state AK AL AR AZ CA CO CT DC DE FL GA HI IA ID IL IN KS KY LA MA MD ME MI MN MO MS MT NC NE NH NJ NM NV NY OK OR PA RI SC SD TN TX UT VA VT WI WV Page 31 of 63

32 WC COMPONENTS OF WRITTEN PREMIUM CHANGE SLIDE 32 This slide provides the major components that impact the change in direct written premium in NCCI states for private carriers. Net written premium and direct written premium each changed by +4.6% on a countrywide basis The direct written premium change for NCCI states changed by a similar amount of +4.5% The increase in carrier estimated payroll was the largest driver that impacted premium growth Changes in NCCI loss cost level from approved filings and changes in the mix of business by private carriers led to a decrease in premium A lower level of carrier discounting in 2014 compared to 2013 also led to an increase in premium Some items in Other Factors include: o Change in audit impacts o Change in average experience mod o Change in mix of policy types o Change in deductible credit amounts o Change in mix between private carrier and state fund markets Sources Countrywide: NAIC Annual Statement data NCCI States: NAIC Annual Statement Statutory Page 14 for all states where NCCI provides ratemaking services Components: NCCI Policy data Page 32 of 63

33 US EMPLOYMENT LEVELS SLIDE 33 Several economic indicators are indexed to 2007, just before the onset of the Great Recession. Beginning at the top right, the indexes for both Payroll and Gross Domestic Product (GDP) surpassed their prerecession level in In 2014, for the first time since the Great Recession, employment exceeded its prerecession level by 1%. Manufacturing and construction employment are still well below their prerecession levels. Weak demand for new single-family housing has hampered recovery in the construction sector, while the manufacturing industry continues to suffer from reduced overseas demand as a result of a weak global economy and a strong US dollar. This is significant for the workers compensation industry because these two sectors accounted for about 40% of the industry s prerecession premium volume. Sources US Bureau of Labor Statistics (BLS) US Bureau of Economic Analysis (BEA) Page 33 of 63

34 SLIDE 33 (CONT D) Index of Manufacturing Employment Index of Construction Employment Year Index of Payroll Index of Real GDP Index of Employment Page 34 of 63

35 WC APPROVED CHANGES IN BUREAU PREMIUM LEVEL SLIDE 34 Bureau premium level changes are countrywide approved changes in advisory rates, loss costs, assigned risk rates, and rating values as filed by the applicable rating organization. The changes by state are weighted using calendar year written premium as reported to the NAIC. System reforms and reductions in claim frequency drove many of the decreases shown on the slide. Reforms leading to a reduction in rate level do not necessarily mean that benefits to injured workers are reduced. Cost containment measures, such as limits on reimbursements to medical providers and attorneys, result in lower system costs and lower rates. Sources Statutory Page 14 from the NAIC Annual Statement for calendar year written premium by state Approved loss cost and rate filings for the premium level changes by state The value for the most recent year is preliminary because there may be additional filing approvals with effective dates in p Page 35 of 63

36 WC APPROVED CHANGES IN BUREAU PREMIUM LEVEL SLIDE 35 See Slide 34 for background. While the cumulative bureau premium level change between 2004 and 2014 is similar between NCCI states and all states combined, the premium level changes observed by year in the NCCI states have tended to fluctuate in a relatively smaller range California drives most of the years where there are significant differences between all states and NCCI states only Sources Statutory Page 14 from the NAIC Annual Statement for calendar year written premium by state Approved loss cost and rate filings for the premium level changes by state p All States NCCI States Page 36 of 63

37 WC APPROVED OR FILED AND PENDING CHANGE IN BUREAU PREMIUM LEVEL SLIDE 36 The countrywide value reflects the most recent voluntary market approved or filed and pending bureau premium level changes for advisory rates, loss costs, and rating values as filed by the applicable rating organization as of April 24, The changes by state are weighted using calendar year written premium as reported to the NAIC. Monopolistic state funds are represented in gray and are not included in the displayed countrywide value. Key Takeaway The countrywide decrease of 4.8% includes the July 1, 2015 pending California filing of 10.2%. Sources Statutory Page 14 from the NAIC Annual Statement for calendar year written premium by state Approved loss cost and rate filings for the premium level changes by state Page 37 of 63

38 WC APPROVED OR FILED AND PENDING CHANGE IN NCCI PREMIUM LEVEL SLIDE 37 The countrywide value reflects the most recent voluntary market approved or filed and pending bureau premium level changes for advisory rates, loss costs, and rating values as filed in jurisdictions where NCCI provides ratemaking services as of April 24, The changes by state are weighted using calendar year written premium as reported to the NAIC. Key Takeaway On average, the countrywide premium level change for those states in which NCCI provides ratemaking services is similar to that shown for all states (Slide 36). Sources Statutory Page 14 from the NAIC Annual Statement for calendar year written premium by state Approved loss cost and rate filings for the premium level changes by state Page 38 of 63

39 WC APPROVED OR FILED AND PENDING CHANGE IN NCCI PREMIUM LEVEL SLIDE 38 Each state s value reflects the most recent voluntary market approved or filed and pending bureau premium level changes for advisory rates, loss costs, and rating values as filed in jurisdictions where NCCI provides ratemaking services as of April 24, The changes by state are weighted using calendar year written premium as reported to the NAIC. In the slide, light teal represents premium level increases, while gold represents premium level decreases. The deeper colors represent larger magnitudes of change. Key Takeaway Premium level changes vary significantly by state. Sources Statutory Page 14 from the NAIC Annual Statement for calendar year written premium by state Approved loss cost and rate filings for the premium level changes by state AK AL AR AZ CO CT DC FL GA HI IA ID IL IN KS KY LA MD ME MO MS MT NC NE NH NM NV OK OR RI SC SD TN TX UT VA VT WV Page 39 of 63

40 WC APPROVED OR FILED AND PENDING CHANGE IN NCCI PREMIUM LEVEL SLIDE 39 See Slide 38 for background. Filings vary significantly by state, with the largest decrease in Texas and the largest increase in the District of Columbia. The majority of the premium level changes were decreases. Most of these changes were experience driven, with the most recent year of experience being relatively more favorable. Sources Statutory Page 14 from the NAIC Annual Statement for calendar year written premium by state Approved loss cost and rate filings for the premium level changes by state AK AL AR AZ CO CT DC FL GA HI IA ID IL IN KS KY LA MD ME MO MS MT NC NE NH NM NV OK OR RI SC SD TN TX UT VA VT WV Page 40 of 63

41 WC IMPACT OF DISCOUNTING ON PREMIUM, NCCI STATES SLIDE 40 The slide shows the impact of rate/loss cost departures, schedule rating, and dividends on policy year premium based on data through December 31, 2014, for all states in which NCCI provides ratemaking services, excluding Texas. Dividend ratios are based on calendar year statistics. The NCCI benchmark level does not include an underwriting contingency provision. Key Takeaway The impact of discounting on premium values appears to be somewhat cyclical over time. Sources Statutory Page 14 from the NAIC Annual Statement NCCI Financial Call data The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC p Page 41 of 63

42 PRICING SURVEY SLIDE 41 Survey respondents were asked to review recent renewals and determine how premium rates have changed over a specific period of time. The green shading represents the percentage of agents that observed an increase, while teal represents the percentage of agents that observed a decrease. These observations can be used to determine trends in pricing from year to year. Key Takeaway In the first quarter of 2013, more than 91% of agents observed increases in workers compensation premiums at renewal. By the first quarter of 2015, only 33% reported observing increases. Source The pricing survey was provided by The Council of Insurance Agents & Brokers. Increase > 10% Increase 1% 10% No Change Decrease 1% 10% Decrease > 10% 1Q % 45.4% 7.2% 0.0% 1.0% 1Q % 51.5% 19.6% 14.4% 0.0% 1Q % 32.6% 28.8% 34.9% 3.0% Page 42 of 63

43 WC LOST-TIME CLAIM FREQUENCY SLIDE 43 The change in lost-time claims per million dollars of pure premium includes data for all states in which NCCI provides ratemaking services, except West Virginia. Premium is developed to an ultimate basis and adjusted to current wage and voluntary pure premium level. Accident Years 2013 and prior are valued as of 12/31/2013. Accident Year 2014 is based on preliminary data valued as of 12/31/2014. Accident Years 2010 and 2011 show adjusted values, primarily due to significant changes in audit activity. Key Takeaway NCCI estimates a 2% claim frequency change between Accident Years 2013 and This is comparatively less than the annual decreases observed in 2012 and 2013 and less than the long-term average decrease of 3.7%. Source NCCI Financial Call data AY Freq Adj Freq AY p Freq Adj Freq Page 43 of 63

44 WC LOST-TIME CLAIM FREQUENCY CHANGES BY TOTAL SIZE OF LOSS SLIDE 44 Exposure Accident Year frequency is calculated as a ratio of undeveloped lost-time claims at first report to premium adjusted to current wage and average carrier rate level. Individual claim amounts were adjusted to the current inflation level prior to being assigned to a size category. Lost-time claims less than $10,000 were defined as small, and those above $10,000 were defined as large. The 2009 frequency levels for each size range are indexed to 1.00 to better illustrate the changes by size over the time period shown. After the most recent recession, small claims reentered the workers compensation system at a relatively faster pace than large claims. In 2010, small claim frequency increased by 7% while large claim frequency increased by 4%. Both loss groups have experienced similar changes in claim frequency after Source Unit Statistical Plan data for all states where NCCI provides ratemaking services Size of Loss p $1 to $10, $10,001 and up Page 44 of 63

45 WC AVERAGE INDEMNITY COST PER LOST-TIME CLAIM SLIDE 45 The average indemnity cost per lost-time claim uses losses developed to an ultimate basis and includes data for all states where NCCI provides ratemaking services, except West Virginia. High-deductible policies are excluded. Accident Years 2013 and prior are valued as of 12/31/2013. Accident Year 2014 is based on preliminary data valued as of 12/31/2014. Key Takeaway The average indemnity cost per lost-time claim continues to increase. Source NCCI Financial Call data AY Indemnity Severity (000) $9.8 $10.4 $11.2 $12.2 $13.4 $14.8 $16.1 $16.6 $17.4 $17.5 Change (%) AY p Indemnity Severity (000) $18.1 $19.2 $20.4 $22.3 $22.5 $21.9 $22.2 $22.2 $22.6 $23.6 Change (%) Page 45 of 63

46 WC CHANGE IN INDEMNITY CLAIM SEVERITY COMPARISON TO CHANGE IN AVERAGE WEEKLY WAGE SLIDE 46 Changes in indemnity severity are compared to changes in average weekly wage. Values for indemnity severity for are based on data valued as of 12/31/2013. Indemnity severity for 2014 is preliminary and based on data valued as of 12/31/2014. It includes all states in which NCCI provides ratemaking services, excluding West Virginia. Average weekly wages for 2008 to 2011 were adjusted to account for volatility due largely to bonuses in the financial sector during the financial crisis and subsequent recession. On average, indemnity severity increased by 4.6% per year, while the average weekly wage increased 3.4% per year since 1994 In 13 of the last 20 years, average indemnity benefits have increased at a faster pace than the average weekly wage In 2014, indemnity severity increased by 4% while the estimated increase in the average weekly wage was 3% Sources Indemnity severity is from NCCI Financial Call data, developed to an ultimate basis; excludes highdeductible policies US Average Weekly Wage is based on Quarterly Census of Employment and Wages (QCEW) data from the US Bureau of Labor Statistics (BLS) for and ; QCEW and average weekly earnings data from the BLS for ; and is estimated by NCCI using forecasts from Moody s Economy.com for 2014 Page 46 of 63

47 SLIDE 46 (CONT D) Year Change in Lost-Time Indemnity Claim Severity Change in US Average Weekly Wage p Page 47 of 63

48 WC CHANGE IN INDEMNITY CLAIM SEVERITY BY STATE SLIDE 47 The average annual change in indemnity claim severity between 2009 and 2013 includes data for all states in which NCCI provides ratemaking services. In West Virginia, the average change between 2010 and 2013 is shown. There are twice as many increases as there are decreases, indicating that the average indemnity benefit level across most states was higher in 2013 than it was in 2009 Changes in indemnity claim severity vary significantly across states Source NCCI s Analysis of Frequency and Severity of Claims Across the Country as of 12/31/2013 on ncci.com Page 48 of 63

49 WC AVERAGE MEDICAL COST PER LOST-TIME CLAIM SLIDE 48 The average medical cost per lost-time claim uses losses developed to an ultimate basis and includes data for all states in which NCCI provides ratemaking services, except West Virginia. High-deductible policies are excluded. Accident Years 2013 and prior are based on data through 12/31/2013. Accident Year 2014 is based on preliminary data valued as of 12/31/2014. The 2014 medical severity change of +4% is similar to the 2014 indemnity severity change observed on Slide 45 The average medical benefits paid to injured workers have increased every year for the past 20 years The average medical cost per claim has more than tripled since 1995 Source NCCI Financial Call data AY Medical Severity (000) Change (%) AY p Medical Severity (000) Change (%) Page 49 of 63

50 WC CHANGE IN MEDICAL SEVERITY COMPARISON TO CHANGE IN MEDICAL CONSUMER PRICE INDEX (CPI) SLIDE 49 Changes in medical severity are compared to changes in the medical Consumer Price Index (CPI). Values for medical severity for are based on data valued as of 12/31/2013. Medical severity for 2014 is preliminary and based on data valued as of 12/31/2014. It includes all states where NCCI provides ratemaking services, excluding West Virginia. Since 2009, annual increases to both medical severity and the medical CPI have been below their long-term averages since 1994 of 6.4% and 3.8%, respectively Most recently, the observed increases in lost-time medical claim severity for 2013 and 2014 exceeded the respective increases in the US medical CPI Sources Medical severity is from NCCI Financial Call data, developed to an ultimate basis; excludes highdeductible policies US medical CPI is from the US Bureau of Labor Statistics (BLS) Year Change in Lost-Time Medical Claim Severity Change in US Medical CPI p Page 50 of 63

51 WC CHANGE IN MEDICAL CLAIM SEVERITY BY STATE SLIDE 50 The average annual change in medical claim severity between 2009 and 2013 includes data for all states where NCCI provides ratemaking services. For West Virginia, the average change between 2010 and 2013 is shown. Similar to indemnity severity, medical average cost per claim varies across states Only six states had an average annual decrease in medical claim severity over this time period Source NCCI s Analysis of Frequency and Severity of Claims Across the Country as of 12/31/2013 on ncci.com Page 51 of 63

52 WC RESIDUAL MARKET POOL PREMIUM SLIDE 52 Insureds unable to obtain coverage in the voluntary market are provided coverage through the residual market pool in participating states. The estimated ultimate premium for all residual market pools serviced by NCCI is displayed by policy year. Premium for the NCCIserviced residual market pools has fluctuated moderately for the last 20 years Estimated ultimate premium for the most recent policy year was $1.2B approximately 7% higher than that for 2013 The residual market serves as a safety net for both employers and employees, and it continues to perform as intended Sources Pool data for all NCCI-serviced WC residual market pool states valued as of 12/31/2014 NCCI, Residual Market Quarterly Results p Page 52 of 63

53 WC RESIDUAL MARKET SHARE SLIDE 53 Pool and direct assignment premium as a portion of the total WC market for all NCCI-serviced residual market pool states is displayed by calendar year. The residual market share remained steady at 8% for the most recent year. Residual market shares can vary greatly across states, but they tend to move in similar cycles and remain generally persistent over time. NCCI s goal of maintaining self-funded residual markets requires adequate pricing so that very little burden falls on the voluntary market. Appropriate assigned risk programs are also important. Sources Pool and direct assignment data for all NCCI-serviced WC residual market pool states valued as of 12/31/2014 NAIC Annual Statement data for individual carriers prior to consolidation of affiliated carriers, including all data available as of 4/16/2015 NCCI, Residual Market Management Summary p Page 53 of 63

54 WC RESIDUAL MARKET PREMIUM VS. AVERAGE POLICY SIZE SLIDE 54 The residual market total estimated annual premium and average policy size are displayed by policy year. Key Takeaway In 2014, the average policy size decreased. Source Pool and direct assignment data for all NCCI-administered WC residual market plan states, including prorated premium of cancelled policies Average Policy Size Premium (in millions of dollars) ,407 5,405 5,419 4,948 4,426 3,822 3,436 3,024 2,790 2,675 3,008 4,194 4,875 4, Page 54 of 63

55 WC RESIDUAL MARKET GROWTH AT FIRST QUARTER SLIDE 55 This slide compares estimated residual market premium by size of risk for the first quarter of 2014 and Key Takeaway Written premium volume for risks greater than $10,000 began to decline between First Quarter 2014 and First Quarter 2015 an indicator that growth in the residual market may have begun to subside. Source Pool and direct assignment premium for all NCCIadministered WC residual market plan states, including the prorated premium of cancelled policies Page 55 of 63

56 WC RESIDUAL MARKET POOL COMBINED RATIO SLIDE 56 The residual market combined ratios displayed on this slide reflect projected ultimate losses, servicing carrier allowance, producer fees, and other pool and plan administration expenses as a ratio to ultimate premium plus pool interest income on cash flow for all NCCI-serviced residual market pool states. The results are calculated by policy year (PY), which allows a direct match between premium earned and claims incurred for a given block of policies. PY combined ratios can change over time as new claims are reported and the reserves on existing claims are reevaluated. The estimated combined ratio for Policy Year 2014 has remained stable at 106%. Primarily driven by the increase in premium, this represents an 8% improvement since The residual market combined ratios have been stable since the early 1990s. Sources Pool data and Plan expenses for pool members for all NCCI-serviced WC residual market pool states valued as of 12/31/2014 NCCI, Residual Market Quarterly Results Page 56 of 63

57 SLIDE 56 (CONT D) p Page 57 of 63

58 WC RESIDUAL MARKET POOL OPERATING RESULTS SLIDE 57 The combined ratios shown on Slide 56 are based on the residual market operating gain or loss by policy year for all NCCI-serviced residual market pool states. The operating gain or loss is calculated as ultimate premium plus pool interest income on cash flow, minus the following: Projected ultimate losses Servicing carrier allowance, producer fees, and other pool expenses Plan administration expenses charged by NCCI These results may vary greatly as experience develops, particularly for the most recent policy years. Key Takeaway An operating loss of $74M is projected for Policy Year This is relatively small when compared with the operating losses in the late 1980s and early 1990s. Sources Pool data and Plan expenses for pool members for all NCCI-serviced WC residual market pool states data valued as of 12/31/2014 NCCI, Residual Market Quarterly Results ,392 1,816 1,922 2,053 1,714 1, p Page 58 of 63