Workers Compensation Premium Report, Calendar Year 2001

Transcription

1 Workers Compensation Premium Report, Calendar Year 2001 Research & Analysis Section Oregon Department of Consumer & Business Services 20 April 2003

2 Oregon Workers Compensation Premium Report Calendar Year 2001 Department of Consumer & Business Services Director, Cory Streisinger Information Management Division Administrator, Dan Adelman Research & Analysis Section Manager, Ed Bissell Assistant Manager, Ronni Rachele Financial Economist and Actuary, Rick Elliott Research Analyst, Derek Reinke April 2003 In compliance with the Americans with Disabilities Act (ADA), this publication is available in alternate formats by calling (503) (V/TTY). The information in this report is in the public domain and may be reprinted without permission. Visit the DCBS Web site at: To receive electronic notification of new publications, see the Information Management Web Board at: Research & Analysis Section 350 Winter St. NE, Room 300 Salem, OR (503)

3 Table of contents Highlights... 1 Introduction... 2 Operations summary... 3 Premiums... 3 Market share... 4 Private insurers... 5 Private insurer groups... 7 Loss ratios... 7 Profitability... 8 Dividends Expense loading factors Assigned risk pool Self-insurers Large deductible premium credits Premium rates Assessments Tables 1. Oregon workers compensation premiums and market share by type of insurer for calendar years ($millions) Premium and ranking of 20 largest private insurance companies in 2001 compared to Oregon Assigned Risk Pool expense factors, July 1, 1982 to date Self-insured covered payroll and premiums with year-to-year percentage changes, Premium assessments and Workers Benefit Fund assessment, calendar years 1999 through Figures 1. Direct premiums earned and market share by type of insurer, Oregon, Number of private insurers and direct premiums earned by premium volume groups, Average loss ratios for private insurers and SAIF Corporation, Combined Ratio: Oregon vs. Countrywide, Percent of Direct Premiums Earned Return on Net Worth Dividends paid or credited by SAIF and private insurers in Oregon, Expense loading factors - Top 30 private insurers, SAIF Corporation, and average, Total net premium, Oregon Assigned Risk Pool, Average net premium and number of employers, Oregon Assigned Risk Pool, Average self-insurer net premium rates per $100 of payroll, Number of self-insurers and net premium totals by premium volume groups, 2000 and Large deductible premium credits (LDPCs), 1996 to 2001 ($millions) Appendix Tables 1. Summary of Oregon workers compensation insurance business by type of insurer, calendar year Oregon workers compensation premiums, loss ratios, and expense loading factors for major private insurer groups, 2000 and Assigned Risk Pool premiums written and as percent of total direct premiums written, number of ARP risks, and average size of risks, by state, Industry requests for average manual rate changes and final rates approved, 1966 to date... 24

4 Highlights Workers compensation premiums in Oregon totaled $648.4 million for the 2001 calendar year, up 5.9 percent from Both private insurers and self-insurers experienced premium decreases in 2001, while SAIF had an increase. Private insurers market share was 48.3 percent, SAIF s share was 38.4 percent, and self-insurers share was 13.3 percent. In 2000, their shares were 51.8 percent, 34.1 percent, and 14.1 percent respectively. Although 430 private insurers were authorized to write workers compensation insurance in Oregon in 2001, only 205 reported positive premium earned for the year. The 30 largest private insurers accounted for 78.2 percent of premium for all private insurers. Liberty Northwest led all private insurers in 2001 with $88.5 million in direct earned premium. Liberty Mutual Companies led all private insurer groups with $108.1 million in direct earned premium, 34.5 percent of the total for all private insurers. There were 163 self-insured employers active in Oregon for at least part of Their total simulated net premium was $86.1 million, down 0.3 percent from Large deductible premium credits remain a significant portion of assessable premiums in 2001 with estimated total credits of $37.7 million, representing 12.0 percent of assessable premiums for private insurers. Private insurers overall loss ratio worsened in 2001, increasing to SAIF s ratio decreased to The average loss ratio for privates and SAIF decreased to As a measure of profitability, Oregon s ten-year average direct return on net worth was 10.2 percent, slightly higher than the ten-year countrywide average of 9.6 percent. Oregon s nine- and eight-year averages, however, were below the countrywide average. Another measure of profitability, the combined ratio, shows Oregon s 2001 ratio at 135 while the countrywide ratio was 127. In 2000, Oregon s combined ratio was 191 while the countrywide ratio was 133. Dividends paid or credited to policyholders by SAIF and private insurers decreased sharply from $169.7 million in 2000 to $8.4 million in SAIF is primarily responsible for the drop, decreasing dividends from $159.4 million to under $64,000. Private insurers distributed dividends of nearly $8.4 million, down from $10.3 million in The top 30 private insurers had an average expense loading factor of 1.272, up from in Since 1990, SAIF s load factor has been lower than the private-market average. SAIF had a 2001 load factor of 1.108, up slightly from in Oregon s Assigned Risk Pool (ARP) written premiums were up 53.0 percent, from $16.5 million in 2000 to $25.2 million. At 4.9 percent, Oregon s residual market as a share of its workers compensation market (excluding self insurers and Large Deductible Premium Credits) was 13th smallest among 27 jurisdictions with fully assigned risk plans. The insurance commissioner approved a rate decrease of 3.7 percent for 2001, the eleventh consecutive rate reduction. 1

5 Under Oregon law, each employer within the state must select one of three workers compensation insurance options: self-insurance, insurance through a private insurance company, or insurance through the state fund (now SAIF Corporation). This report summarizes workers compensation premiums and related data for calendar year 2001 under this three-way system. Premium and loss data are shown for private insurance companies and SAIF Corporation. Payroll and simulated premium are shown in total for self-insurers. In this report, the term premium means direct earned premium. Direct means it excludes premium for reinsurance. Earned premium includes only that premium that has actually accrued to the insurer s benefit for insurance provided in the given year. Oregon Workers Compensation Summary Calendar Year 2001 Introduction classifications, based on expected losses. Each insurer determines an additional percentage for operational expenses, taxes, and profit, and files this expense loading factor with the insurance commissioner. Since January 1, 1988, all filings have been subject to the commissioner s review and approval. In mid-1982, the Oregon Insurance Commissioner directed that insurers bill their policyholders separately for the premium assessment. Therefore, the assessment on direct premiums earned is excluded from premium data in this report. A summary of the premium assessment and the employer/employee assessments and contributions can be found in Table 5, near the end of this report. For comparability, premium data for prior years have been adjusted to also exclude the premium assessment. An assessment on Oregon workers compensation insurance premiums provides administrative operating funds for the Workers Compensation Division, Workers Compensation Board, Oregon Occupational Safety and Health Division, Information Management Division, Business Administration Division and Insurance Division. The assessment also funds the Self-Insured Employers Group Adjustment Reserve and continues to fund rehabilitation costs for workers injured prior to January 1, The divisions and board became part of the Department of Insurance and Finance, effective July 1, The Department of Insurance and Finance was then reorganized into the Department of Consumer & Business Services, effective July 1, Oregon has employed a competitive rate-making system for workers compensation insurance since July 1, Under this system, the rate-making authority (National Council on Compensation Insurance, or NCCI) develops pure premium rates for each of the almost 600 rating In 1996, Large Deductible Premium Credit (LDPCs) plans were added as an option to workers compensation in Oregon. Large deductible premium credit plans allow employers to partially self-insure in return for a credit on their workers compensation premium. The insurer administers all workers compensation claims and bills the employer for costs up to a specified deductible. Just as self-insured employers are assessed on simulated premiums, insurers and employers are assessed on premium prior to deductible credits. Sources of data for this report are the Annual Statements filed with the Oregon Insurance Commissioner by SAIF Corporation and private insurance companies. Data on selfinsurers are compiled from quarterly Payroll and Assessment Reports which self-insurers file with the department s Fiscal Services Section. Data on large deductible premium credits are compiled from Quarterly Reports of Large Deductible Premium Credits and Reimbursements which insurers file with the department s Insurance Division. 2

6 Operations Summary Premiums Premiums paid by Oregon employers and earned by workers compensation insurers totaled $648.4 million in calendar year 2001, an increase of $36.4 million (5.9 percent) from 2000 s total. (See Table 1.) This was the second increase after four consecutive years of decreases in Oregon s premium volume. The Insurance Commissioner approved a rate decrease of 3.7 percent in average pure premium rates for 2001, the eleventh rate reduction in as many years. Prior to 1986, the greatest premium volume for one year was $516.6 million in Reacting to growing premium rates, the 1981 Legislature authorized a competitive rating system, which became effective July 1, That system, coupled with the economic recession of the early 80s, caused premium volume to drop dramatically and remain relatively low until an upward trend began in This trend continued through 1990, with premiums peaking at $825.3 million, before declining to $599.3 million in (See Figure 1.) The industry as a whole grew by 5.9 percent in Private insurers, the largest component of Oregon s three-way workers compensation system, decreased their premiums by $3.5 million, or 1.1 percent, in This followed an increase of 2.1 percent in 2000 and a decrease of 15.4 percent in The simulated premiums of self-insurers and selfinsurer groups decreased 0.3 percent to $86.1 million in The third market segment, SAIF Corporation, reported a premium volume increase of $40.3 million, or 19.3 percent in Table 1 provides data on premiums by market segment for each of the past three years. Appendix Table 1 provides premium and loss data, showing overall totals along with detail from the Annual Statements of SAIF and the thirty private insurers with the highest premiums for Oregon in A total of simulated net premiums for self-insurers is included to provide an Oregon total across all three types of insurers. The table also shows loss ratios and expense loading factors. Premiums earned in Oregon under the Federal Longshore and Harbor Workers Compensation Act and the Jones Act amounted to $11.6 million in 2001, and are included in this report. A small amount of excess coverage (catastrophic loss coverage for self-insurers) is also included in premium figures for this report. Table 1. Oregon workers compensation premiums and market share by type of insurer for calendar years ($ millions) Premiums 1 Market Share Loss Ratio 1999 %Change 2000 %Change Private Insurers $ % $ % $ % 51.8% 48.3% SAIF Corporation $ % $ % $ % 34.1% 38.4% Subtotal $ % $ % $ % 85.9% 86.7% Self-Insurers 2 $ % $ % $ % 14.1% 13.3% TOTAL $ % $ % $ % 100.0% 100.0% Note: Percents, subtotals, and totals are based on unrounded numbers. 1 Excludes WCD premium assessment. Direct premiums earned are shown for private insurers and SAIF Corporation. Estimated net premium is shown for self insurers. 2 Net premium based on experience modification rate and premium volume discount, or estimated at 80 percent of the standard premium to approximate effects of retrospective rating for insurers on the retrospective plan. Source: Private insurers and SAIF Corporation data is from Annual Statements to the Oregon Insurance Commissioner. Self-insurer data is from Workers Compensation Payroll and Assessment Quarterly Reports to Fiscal Services Section. Compiled by the Research & Analysis Section, Information Management Division, Oregon Department of Consumer & Business Services. 3

7 Market Share Market share of premiums for each year from 1980 through 2001 is shown both graphically and numerically in Figure 1. (Note that premium figures for 1982 and earlier years have been adjusted to be comparable with current data by excluding the premium assessment.) Private insurers, with premiums of $313.3 million, held 48.3 percent of the market in They reached their peak market share at 57.0 percent of the workers compensation market in 1990, bottomed in 1994 at 46.8 and increased to 54.3 percent in In contrast, SAIF, for the seventh time since its record low in 1990, experienced an annual market share increase, going from 34.1 percent ($208.7 million) in 2000 to 38.4 percent ($249.0 million) in (See Table 1 and Figure 1.) This year is the highest market share for SAIF since Self-insurers, with 2001 estimated premiums of $86.1 million, reduced market share to 13.3 percent in This is the lowest market share for self-insurers since Prior to this, self-insurers market share peaked at 25.6 percent in 1981, and hit a historical low at 11.8 percent in A change in methodology in estimating self-insurers net premium was introduced in 1987 for purposes of this report. Prior to that year, net premium was estimated strictly as 80 percent of standard premium for all selfinsurers, on the assumption that this would approximate the effects of retrospective rating. Beginning in 1987, however, estimates of net premium have taken into account premium discounts for those self-insurers not electing the retrospective rating plan method of premium calculation. For 2001, simulated net premium under the old methodology would have been $2.5 million lower than estimated by the current system. This would reduce selfinsurers share of the workers compensation premium market by 0.4 percent. Figure 1. Direct premiums earned and market share by type of insurer, Oregon, * Millions ($) Self Private SAIF 825.3** ** Calendar year Self Private SAIF * Excludes premium assessment. Direct premium earned is shown for private insurers and SAIF Corporation, estimated simulated net premium is shown for self-insurers. Premium total for the file and use transition year of 1982 is estimated. ** Includes SAIF Corporation premium adjustment: transfer of $30 million from 1990 to Note: Due to rounding, sum of percents may not equal 100 percent. Source: Private and SAIF Corporation data from Annual Statements filed with the Oregon Department of Consumer and Business Services. Self-insurer data from quarterly Payroll and Assessment Reports to Fiscal Services Section. Data compiled by the Research & Analysis Section, Information Management Division, Oregon Department of Consumer and Business Services. 4

8 Private Insurers Although 430 private insurance companies were authorized by the Insurance Commissioner to write workers compensation insurance in Oregon in 2001 (down 16 from 2000), one firm, Liberty Northwest, accounted for 28.3 percent of the net $313.3 million in premiums by this category of insurers (27.5 percent of total positive premium). (See Figure 2 and Appendix Table 1.) The number of firms reporting positive premiums decreased by three in 2001 to 205. This accounts for only 47.7 percent of all authorized companies. Of the 205 private insurance companies reporting positive direct earned premiums in 2001, 60 companies reported $1,000,001 or more in premiums, a total of $290.3 million or 92.7 percent of all premiums earned by private insurers. The number of companies in this premium volume group decreased by one in 2001, however premiums in the group were up $3.4 million. In 2000, this group earned $286.9 million or 90.6 percent of all premiums. The $500,001 to $1,000,000 group decreased to 23 members (from 29 members in 2000), and showed a decrease in total premium of 13.1 percent. The $100,001 to $500,000 group increased from 42 to 53 members, and its total premium increased by 18.0 percent. The $10,001 to $100,000 group lost four insurers for a total of 37 members, but showed a decrease in premiums of 26.4 percent. The $1 to $10,000 group lost just three insurers for a total of 32, but showed a decrease of 35.8 percent in total premiums. The group earning direct premiums of $0 or less lost 15 members, but had a three-fold increase in premium losses to $8.3 million. Overall, private insurers experienced a premium decrease of $3.6 million, or 1.0 percent, from 2000 to Only four companies topped the $10 million mark in 2001: Liberty Northwest Insurance Corporation, Zurich American Insurance Company, Liberty Mutual Fire Insurance Company, and Lumbermens Mutual Casualty Company. Liberty Northwest Corporation remained the top ranked private insurer in earned premiums for the seventeenth year in a row, registering $88.5 million for 2001, a 10.8 percent increase above 2000 premiums. Zurich American Company earned $14.6 million in premium in 2001, up 70.0 percent from $8.6 million in Liberty Mutual Fire Company recorded $13.0 million in 2001, up 55.6 percent from $8.3 million in Finally, Lumbermens Mutual Casualty Company logged $11.1 million in 2001 after earning only $5.9 million in premiums in This was an 89.4 percent increase and moved Lumbermens from tenth to fourth largest on the ranking of companies by premium volume (see Table 2). Figure 2. Number of private insurers and direct premiums earned by premium volume groups, Insurers $0 or less $1 to $10,000 $10,001 to $100,000 $100,001 to $500,000 $500,001 to $1,000,000 $1,000,001 and over 2000 (2,653,749) 123,708 1,915,638 10,694,463 19,820, ,915, (8,341,228) 79,416 1,409,290 12,615,054 17,217, ,284,997 Source: Research & Analysis Section, Oregon Department of Consumer & Business Services. 5

9 Of the top twenty companies shown in Table 2, Liberty Northwest Insurance Corporation showed the greatest absolute increase in premium of $8.6 million. This ends a five-year period in which Liberty Northwest reported annual decreases in premium from a peak of $142.6 million in National Union Fire Insurance Company of Pittsburgh showed the largest absolute decrease of $8.2 million. This was also the greatest relative decrease within the top 20, as premiums were down 58.0 percent. The greatest place increase was by Insurance Company of the State of Pennsylvania, which moved from 90th to13th (77 places) at $4.8 million. The greatest place decrease within the top 20 was made by Hartford Underwriters Insurance Company, which moved from seventh to 19th place at $3.4 million. Likewise, Twin City Fire Insurance Company jumped from 34th to eighth, more than tripling its earned premium from $2.1 million to $6.7 million. Five firms from the top 20 in 2000 were replaced in 2001: Fremont Industrial Indemnity Company, Liberty Mutual Insurance Company, Commercial Compensation Casualty Company, Reliance Insurance Company, and The Connecticut Indemnity Company. Newcomers were Twin City Fire Insurance Company, Insurance Company of the State of Pennsylvania, Birmingham Fire Insurance Company of Pennsylvania, Argonaut-Northwest Insurance Company, and Truck Insurance Company, ranking eighth, 13th, 17th, 18th, and 20th respectively. (See Table 2.) The following section on Private Insurer Groups provides more insight into premium shifts among affiliated companies operating in the Oregon workers compensation market. Table 2. Premium and ranking of 20 largest private insurance companies in 2001 compared to 2000 Ranking Premium ($millions) Insurance company Liberty Northwest Insurance Corporation Zurich American Insurance Company Liberty Mutual Fire Insurance Company Lumbermens Mutual Casualty Company Travelers Indemnity Company of Illinois Paula Insurance Company Pacific Employers Insurance Company Twin City Fire Ins. Company American Home Assurance Company National Union Fire Insurance Company of Pittsburgh Employers Insurance of Wausau, a Mutual Company Fidelity and Guaranty Insurance Company Ins. Company of the State of Pennsylvania American Manufacturers Mutual Ins. Company Security Insurance Company Of Hartford Transportation Insurance Company Birmingham Fire Ins. Company of Pennsylvania Argonaut-Northwest Ins. Company Hartford Underwriters Insurance Company Truck Insurance Company Note: Ranking of insurers is based on direct premium earned. Source: Research & Analysis Section, Information Management Division, Oregon Department of Consumer and Business Services. 6

10 . Private Insurer Groups Private insurer groups have been a major factor in Oregon s workers compensation insurance since private insurers were authorized to compete with the state fund (now SAIF Corporation) in Although organization and business practices may vary widely among groups, affiliated insurers all subsidiaries of the same corporation can offer policyholders variations in rates, payment options, services, etc., in a very competitive market. Appendix Table 2 shows premium, loss ratios, and expense loading factors for 2000 and 2001 for the eight largest private insurer groups. Additional private insurer groups wrote business in Oregon in 2001, but only eight groups earned premium of $10 million or more. Combined, these groups earned $215.4 million in premium, or 68.8 percent of the private-insurer total business in The Liberty Mutual Insurance Group (formerly Liberty Mutual Insurance Company) once again held the top spot among private insurer groups with $108.1 million in premium. As the top private insurer group, Liberty Mutual Insurance Group accounted for 34.5 percent of the state s private insurer total premiums. The Zurich Insurance Group moved from third place in 2000 to second in 2001 with premium of $27.6 million, a 47.5 percent increase. Lumbermens Mutual Casualty Group was next with $22.3 million, a 42.7 percent increase from The American International Group dropped two slots in the table with a 1.8 percent decrease in premiums. Royal and Sun Alliance Group, Hartford Fire and Casualty Group, and Safeco Insurance Group each recorded less premium in 2001 than in 2000; down 11.0 percent, 4.2 percent, and 14.2 percent, respectively. CNA Insurance Group just cleared the $10 million mark with $10.1 million in earned premium in Loss Ratios Generally, loss ratios are calculated by dividing some measure of losses (or claims costs) by some measure of premium. Claims costs are comprised of indemnity payments such as time loss, temporary and permanent disability, and medical payments. Premium is the consideration paid by an employer to insurers for protection against the risk of financial loss arising from a workers compensation claim. The Loss Ratios displayed in Appendix Table 1 show insurer-specific calendar year incurred loss ratios which measure the relationship of direct losses incurred (column f) to direct premiums earned (column b) as reported on the Annual Statements submitted to the Insurance Commissioner. This particularly defined loss ratio is monitored because it imparts summary information about the results of an insurer s calendar year operations. The rich information content of the calendar year incurred loss ratio (CYLIR) can be better appreciated by examining a detailed definition of the measure expressed by the following formula: CYILR = Where, calendar year direct incurred losses (CYDIL) calendar year earned premium (CYEP) CYDIL = calendar year paid losses + change in outstanding case reserves + change in incurred but not yet reported (IBNR) losses Calendar year paid losses include amounts paid in the current year for claims arising from coverage in the current and prior years but exclude amounts which will be paid in future years for claims arising from all years. Outstanding case reserves are estimates by claims examiners of the remaining amount required to settle or close outstanding, known claims based upon the knowledge of the claims at a particular date. IBNR losses are estimates of the ultimate costs of claims that are expected to emerge in the future but not yet reported. Other events, such as reform legislation and major court decisions, can have substantial effects on incurred loss ratios. For example, SAIF had a low loss ratio in 1992 due to a substantial downward revision in prior accident years outstanding reserves and IBNR arising from the reform legislation of Senate Bill Conversely, SAIF s high 1999 loss ratio was a reflection, in part, of the Johansen Court of Appeals decision. The average loss ratio for private insurers has been on the rise, from 67.3 in 1999, to 76.2 in 2000, and 87.4 in The previous year in which the average loss ratio for private insurers exceeded 80 was SAIF s 1998 loss ratio was 40.6, by 2000 it had increased to Despite these trends, SAIF and Liberty Northwest saw decreasing loss ratios in SAIF s loss ratio decreased to 94.5 in 2001, while Liberty s loss ratio decreased from 97.1 to CYEP = premium earned in the calendar year 7

11 Figure 3. Average loss ratios for private insurers & SAIF Corporation, Loss ratio SAIF Priv & SAIF Private Calendar year SAIF Priv & SAIF Private Source: Research & Analysis Section, Oregon Deparatment of Consumer & Business Services. It should be noted that for any given insurer, calendar year direct incurred loss ratios can vary from year to year. In Figure 3, only SAIF s loss ratio is shown. If other insurers were similarly displayed, substantial variation in their loss ratios would be seen. For example, Hartford Underwriters Insurance Company has reported loss ratios that have ranged from 33.1 to during the period 1996 though Similarly, Liberty Mutual Fire Insurance Company reported a loss ratio of 54.2 in 1996 but it rose to in The loss ratios for the 30 largest private insurers and the other private insurers, which were comparable in 1991 (61.9 vs 61.4), have since demonstrated considerable disparity. In 1998, the top 30 privates loss ratio was 73.1 and the smaller privates ratio was In 1999, the top 30 privates ratio improved to 58.7 and the smaller privates worsened to due to Transportation Insurance Company s large premium losses. In 2000, the top 30 privates ratio worsened to 81.9 and the smaller privates improved to In 2001, both ratios worsened to 90.7 for the top 30 and 75.3 for smaller privates. (See Appendix Table 1.) Ten of the top 30 companies had loss ratios in excess of 100 in This doubles the 2000 total of five. Before 2000, the highest count of top 30 companies with loss ratios in excess of 100 was three (1999, 1998, and 1996). The highest top 30 loss ratio in 2001 was for National Union Fire of Pittsburgh. The same company had the highest loss ratio in 1999 at Lumbermens Mutual Casualty Company, American Home Assurance Company, and Fremont Indemnity Company also had loss ratios in excess of 200 in (See Appendix Table 1.) Profitability There are numerous methods to quantify the profitability of Oregon s workers compensation market. One widely used measure is the combined ratio. Although there are two different ways to calculate this ratio, this report defines the combined ratio as the sum of the loss ratio, the expense ratio, and the policyholders dividend ratio. The loss ratio has been described in a previous section. The expense ratio is calculated by dividing expenses by written premium. The policyholders dividend ratio is obtained by dividing dividends (to policyholders) by earned premium. If the combined ratio is below 100 percent, it indicates that the industry is paying out less in losses, expenses, and dividends than it is taking in as premium, and is therefore profitable. Conversely, if the combined ratio is in excess of 100 percent, it indicates that expenditures exceed premium income. It should be noted that the combined ratio is a simple measure and does not reflect investment income, which can be a significant source of profit. According to the NCCI, the combined ratio for Oregon s workers compensation insurers in 2001 was The measure indicates that workers compensation insurers were paying out more in losses, expenses, and dividends than earned in premium. Oregon s combined ratio is quite similar 8

12 to the countrywide average combined ratio of 127. In 2000, however, Oregon had the highest combined ratio in the US at In large part this high 2000 ratio is due to the $159.4 million that SAIF paid out to policyholders (compared to $208.7 million in earned premium). If SAIF s large dividend pay out is eliminated from the calculation, Oregon would have a combined ratio of 145.3, which is closer to the countrywide average of 133 in Figure 4 compares Oregon s combined ratio with the countrywide average for 1990 through Percentage Figure 4. Combined Ratio: Oregon vs. Countrywide, Oregon Countrywide Accident Year Source: NCCI State of the Line, 2002 and NCCI Annual Statistical Bulletin Another measure of the profitability of an insurer is the percent of direct premiums return on net worth as calculated and reported in the NAIC s Report on Profitability by Line by State in This measure takes into account investment income and allows one to evaluate the profits earned in a particular market in relation to the net worth that is committed to that market. For this measure, profit on insurance transactions is equal to underwriting profits plus investment gain on insurance transactions minus estimated related federal income taxes. The return on net worth is equal to profit after taxes divided by allocated capital and surplus adjusted to place it on a generally accepted accounting principles (GAAP) basis. In the calculation of this measure, capital and surplus is allocated to each line/state on the same basis used for the total investment gain allocation. GAAP-adjusted net worth in the report is equal to statutory capital and surplus plus excess statutory reserves, unauthorized reinsurance, non-admitted assets, prepaid expense and salvage/subrogation, minus deferred taxes. The data and definition for this measurement comes from the above-mentioned NAIC report. In 2001, Oregon s direct return on net worth stood at 7.2 percent. Oregon s ten-year average direct return on net worth amounts to 10.2 percent, just higher than the tenyear countrywide average of 9.6 percent. Eight- and nineyear averages show Oregon s return on net worth lagging behind the countrywide average. Since 1992, the direct return on net worth has been more modest then during the period from 1990 to In 1999 and 2000, return on net worth in Oregon was actually a negative number according to NAIC. (See Figure 5) Figure 5. Percent of Direct Premiums Earned Return on Net Worth Average Source: NAIC Profitability Report, November

13 Dividends are very sensitive to changes in the workers compensation insurance environment. In 1981, private insurers and SAIF paid or credited a combined total of $84.4 million in dividends to policyholders. However, with the introduction of competitive pricing in July 1982, dividends began a dizzying four year plunge. In 1985, private insurer and SAIF dividends combined totaled only $4.8 million. By 1988, the figure had risen only to $7.8 million. But in 1990, due in part to its own cost-saving measures as well as the 1990 workers compensation insurance reforms, SAIF paid $20.4 million in dividends in its first pay out since In 2001, the combined dividends for private insurers and SAIF were down, falling to $8.4 million from $169.7 million in SAIF s dividends accounted for most of this change, decreasing from $159.4 million to $63,734. Private companies paid dividends of $8.4 million, decreasing $1.9 million from dividends of $10.3 million in (See Figure 6.) Dividends Dividends are largely a function of premiums and profitability from a year or more in the past. For that reason, the ratio of current year s dividends to prior year s premium is worth noting when comparing yearto-year dividend payouts. For private insurers, this ratio was 2.7 percent in 2001, down from 3.3 percent in SAIF s ratio was 0.03 percent, down sharply from 80.5 percent in 2000 and in (See Figure 6 and Appendix Table 1.) In 2001, two private insurers, Transportation Insurance Company and Lumbermens Mutual Casualty Company paid their policyholders greater than $1,000,000 in dividends. These two companies, at $3,953,708, accounted for 47.2 percent of total private dividends. (See Appendix Table 1.) Figure 6: Dividends paid or credited by SAIF and private insurers in Oregon, Millions ($) SAIF Private Private & SAIF Calendar year Source: Research & Data Analysis Section, Oregon Department of Consumer & Business Services Expense Loading Factors The National Council on Compensation Insurance (NCCI) is the rating bureau for workers compensation insurance in Oregon. They have established nearly 600 rating classifications and are charged with developing a pure premium rate for each, subject to approval by the Oregon Insurance Commissioner. Pure premium is the amount of premium necessary to pay expected losses on each $100 of payroll. Under Oregon s competitive ratemaking system, each insurer develops an expense loading factor, subject to the commissioner s approval, to cover operating expenses, taxes, profit, and contingencies. This factor is multiplied by the pure premium rate for a classification to arrive at the manual rate to be applied to the employer s payroll to determine gross premium. Appendix Table 1 shows the expense loading factor used in 2001 for each of the 30 largest private insurers and SAIF. The top 30 companies account for 78.2 percent of all premium earned by private insurers. Figure 7 shows average factors for these private insurers and SAIF for each year since The Top 30 s weighted average expense loading factor was for 2001, up from for Expense loading factors among the top 30 private insurers ranged from 1.0 for Fidelity and Guaranty Insurance Company, to 1.57 for Lumbermens Mutual Casualty Company. Twelve insurance providers in the top 30 in 2001 realized an expense loading factor increase. Twin City Fire Insurance and Hartford Underwriters Insurance Companies recorded the largest increase in 2001, both showing an increase of 7.6 percent. 10

14 Two insurance providers in the top 30 in 2001 realized an expense loading factor decrease. Grocers Insurance Company recorded the largest decrease in expense loading factors in 2001 with a 2.3 percent drop. SAIF s expense loading factor, weighted across rating tiers, was 1.108, up from their 1999 average factor of SAIF s factor registered lower than the average factor for private insurers; this has been true every year except These figures ignore assigned risk and federal coverage. (See Figure 7 and Appendix Table 1.) Figure 7. Expense loading factors - Top 30 private insurers, SAIF Corporation, and average, Loading Factor Private SAIF Priv & SAIF Calendar Year Private SAIF Priv & SAIF Assigned Risk Pool When Oregon s legislature created SAIF in 1965 they established a three-way workers compensation system and provided that, if requested by either SAIF or NCCI, the Insurance Commissioner must promulgate an Assigned Risk Plan to make workers compensation insurance available to employers who are unable to obtain coverage in the voluntary market. The law was amended in 1979 to mandate the implementation of such a plan. In 1980, the commissioner adopted rules constituting the Oregon Workers Compensation Insurance Plan and establishing the state s Assigned Risk Pool (ARP). This effectively freed SAIF from its status as insurer of last resort. Under Oregon s Assigned Risk Plan, two insurance companies Liberty Northwest Insurance Company, and SAIF Corporation act as service providers. Premium rates paid by employers for ARP coverage reflect pure premium rates and an expense load factor recommended by NCCI and subject to the commissioner s approval. Reinsurance is provided by the National Workers Compensation Reinsurance Pool, with the cost borne by all insurers in proportion to their share of all Oregon workers compensation premiums written. The ARP expense factor was in 1999, rose to in 2000, and rose again to in This means that Figure 8. Total net premium, Oregon Assigned Risk Pool, Millions ($) Calendar Year Source: Based on data from Residual Market Management Summary

15 in 2001, employers in the Assigned Risk Pool paid manual rates equal to 1.58 times pure premium rates. The ARP expense factor remained at for 2002, but an increase to is set for Manual rates in the voluntary market averaged times pure premium rates in 2001, which is up from 2000 s average of Table 3 shows ARP expense factors in effect for the second half of 1982 and for each of the years 1983 through For comparison, average expense loading factors for the voluntary market for 1983 through 2001 can be found in Figure 7. Total net premiums written in the Oregon Assigned Risk Pool were $25,243,756 in 2001, up 53.0 percent from $16,498,992 in 2000, according to the 2001 Residual Market Management Summary published by NCCI on workers compensation reinsurance pools. After falling for eight years in a row, the average premium per risk increased in 2000 and again in 2001, moving from $1,773 in 1999 to $3,036 this year. (See Figures 8 and 9.) The number of risks (policyholders) insured under Oregon s Plan rose 14.9 percent to 8,316 for 2001, up from 7,237 for During the period from 1990 through 1998, the Pool insured more than 10,000 risks each year. This was due in part to SAIF s 1990 Corporate Plan, which included a decision to eliminate coverage of approximately 10,000 small companies. Most of these employers were assigned to the Pool by the end of The following year, the AOI Compwise program was created by SAIF and Table 3. Oregon Assigned Risk Pool expense factors, July 1, 1982 to date Adverse Adjusted Filing Expense experience expense effective factor differential factor 7/1/82* ** /1/83* ** /1/84* ** /1/85* ** /1/ *** /1/ *** /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ * The expense factor in these years reflects the inclusion of the 16.8% Workers Compensation Premium Assessment. ** Requested by NCCI to help offset excessive ARP losses. Approved by Commissioner as part of rate filing. *** Assigned Risk Safety Rating Plan approved. Actual effect of program not available. Estimated effect is Source: Research and Analysis Section, Oregon Department of Consumer & Business Services. Figure 9. Average net premium and number of employers, Oregon Assigned Risk Pool, Average Premium ($) Employers (#) 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Employers Avg Premium Calendar Year Source: Based on data from Residual Market Management Summary 2001, published by NCCI,

16 Associated Oregon Industries, Oregon s largest business organization, to cover employers with annual premiums between $500 and $2,500 and no experience rating. This program, which groups small businesses together and provides risk management services, may have played a role in the 1991 drop in ARP risks. In addition, an NCCI Take- Out Credit Program was adopted in Oregon on May 1, 1990, which rewards insurers for removing policies from the assigned risk market. Insurers receive a credit against their ARP assessment base equal to the premium of any risk they absorb from the Pool. On July 1, 1990, the Plan provided a two-tier rating structure, as mandated by the 1990 Special Session of the Oregon Legislature, with differing rate tiers for insureds too small to qualify for experience rating and for those large enough to be experience-rated. Small insureds under the Plan receive a premium discount. In addition, a merit rating system, open to those employers that do not qualify for experience rating, enhances the two-tier structure. Overall, for the District of Columbia and the 26 states that have full risk pools managed by NCCI, residual market premiums written were 4.3 percent of all direct premiums written in In Oregon, this measure peaked in 1991 at 11.4 percent. Later, the percentage dropped steadily from 8.7 in 1994 to 7.9 in 1995, 5.6 in 1996, 4.2 in 1997, 3.8 in 1998, 3.4 in 1999, and 3.2 in In 2001, the percentage broke this trend by rising to 4.9 percent. Among the 27 jurisdictions referred to above, 12 (Massachusetts, North Carolina, Connecticut, Delaware, Nevada, Georgia, New Jersey, Alabama, Idaho, South Carolina, Arizona, and Tennessee) had lower percentages of assigned risk premiums than Oregon in Like Oregon, Arizona and Idaho employ a three-way workers compensation system. (See Appendix Table 3.). Self Insurers Although self-insured employers do not pay premiums for workers compensation insurance, the Workers Compensation Division calculates a simulated net premium for each self-insurer as the basis for the workers compensation premium assessment. Under the competitive rating system, each insurance company determines an expense loading factor to apply to pure premium rates developed by the rating bureau. In estimating net premium for self-insurers, the division uses the lowest widely available expense loading factor used by an insurer who provides retrospective rating and premium discounts. This factor was in 1997, in 1998 fell to 1.050, in 1999 fell to The factor remained at through Simulated net premiums for self-insurers and self-insurer groups totaled $86,111,146 in 2001, down 0.3 percent from $86,413,044 in (See Tables 1 and 4.) Self-insurers market share, 13.3 percent in 2001, peaked at 25.6 percent in 1981, the year prior to the implementation of open competition in Oregon. (See Table 1 and Figure 1.) The 0.3 percent decrease ($0.3 million) in self-insurer simulated premiums in 2001 occurred along with a 2.1 percent increase in self-insurer covered payroll for that year, as the average net premium rate sank 2.4 percent to $0.91 per $100 of payroll. (See Table 4 and Figure 10.) In addition to covered payroll, other factors influence the net premium calculated for assessment purposes. These factors include the industry classifications represented in the population of self-insurers, the rate reductions in each of the last eleven years (see Appendix Table 4), employers experience rating modifications, and changes in the mix of rating plans employed. 13

17 The number of self-insured employers decreased from 164 active on December 31, 2000 to 158 on December 31, This was down from the overall peak of 195 in There were two new authorizations and eight cancellations in 2001, changing from four and five in 2000, respectively. A total of 163 self-insurers, including five groups, were authorized and active for at least part of 2001, down from 169 in As with private insurers, a relatively small number of self-insurers account for most of the premium volume. Figure 11 provides a count of self-insurers and a total net premium amount for each netpremium-dollar range. The $1,000,000-plus range included only 16.0 percent of all self-insureds, but accounted for 57.2 percent of all self-insurer simulated net premium. The average (mean) premium for self-insureds was $528,289, and the median was $282,305. The $100,001 to $500,000 premium range contained 46.0 percent of all selfinsurers. Seven self-insured companies had less than $10,000 in simulated net premiums. The highest simulated net premium for a single self-insurer in 2001 was Fred Meyer, Inc. s $4.1 million. Since 1988, two associations, the Special Districts Association and the CIS Workers Compensation Group, have operated as self-insurer groups under the provisions of ORS (7). Since then other groups have been added. The Oregon Operators Group was authorized in 1995, the Oregon Education Employers in 1996, and the Oregon Contractors Group in 1997, all under the same provisions. The aforementioned statute allows five or more employers who, as a group, meet a prescribed set of criteria, to become jointly and severally liable for one another s workers compensation claims. On Dec 31, 2001, the Special Districts Association included 476 entities (from 466 in 2000, 465 in 1999, 466 in 1998, 464 in 1997, and 463 in 1996), such as fire districts, irrigation districts, and other special districts. The combined 2001 estimated net premium for the group was $1,406,451, up 5.9 percent from 2000 s net premium total. The CIS Workers Compensation Group which has a membership of mostly cities and counties increased by three, to 210, as of December 31, The group s estimated net premium was up 12.7 percent to $2,883,661 in The Oregon Operators group had 55 members, increasing three from Its estimated Table 4. Self-insured covered payroll and premiums with year-to-year percentage changes, ($ thousands) Calendar Covered Manual Standard Net Avg. net year payroll (base) premium premium premium 1 prem. rate $9,430,057 $132,268 $104,515 $86,111 $ % -1.19% -0.48% -0.35% -2.40% 2000 $9,236,309 $133,866 $105,016 $86,413 $ % -5.66% -4.57% -4.66% -5.73% 1999 $9,132,528 $141,899 $110,051 $90,639 $ % % % % % 1998 $8,741,206 $165,264 $127,630 $104,725 $ % % % % % 1997 $8,558,976 $188,002 $148,585 $121,926 $ % -0.99% -2.77% -3.26% % 1996 $7,549,904 $189,886 $152,818 $126,036 $ % 0.22% 1.39% 2.83% 2.66% 1995 $7,537,588 $189,477 $150,726 $122,569 $ % 4.93% 4.07% 5.12% -7.25% 1994 $6,650,755 $180,573 $144,826 $116,604 $ % -4.12% -8.21% -8.57% % 1993 $6,263,220 $188,327 $157,773 $127,537 $ % -1.51% -3.43% -3.03% -9.09% 1992 $5,883,190 $191,222 $163,385 $131,517 $ % 2.83% 11.45% 11.41% 0.90% 1991 $5,314,565 $185,962 $146,594 $118,053 $ % -3.88% 0.53% -1.84% -7.50% 1990 $5,009,941 $193,475 $145,816 $120,268 $ % 8.11% 4.74% 2.56% -6.61% 1989 $4,567,318 $178,957 $139,222 $117,267 $ % 13.91% 3.57% 0.39% -9.51% 1988 $4,107,778 $157,108 $134,419 $116,809 $ % 13.83% 16.13% 19.62% 7.98% 1987 $3,709,413 $138,016 $115,751 $97,649 $ % 32.04% 38.88% 46.45% 33.50% 1986 $3,388,555 $104,525 $83,348 $66,678 $ % 21.86% 24.46% 24.46% 17.96% 1985 $3,204,729 $85,775 $66,967 $53,574 $ % 2.40% -0.21% -1.01% -1.18% 1984 $3,202,005 $83,766 $67,108 $54,119 $ % -4.28% -6.32% -5.57% -4.52% 1983 $3,230,868 $87,511 $71,636 $57,309 $ % % % % % 1982 $3,216,432 $114,559 $90,667 $74,810 $ % % % % % 1981 $3,244,456 $152,134 $122,760 $108,186 $ For net premium was estimated as 80 percent of standard premium. For other years the 80 percent method was used only for retrospective plans. All other plans calculate net premium as standard premium minus premium discounts. 2 Average net premium rate per $100 of payroll. Source: Fiscal Services Section, Department of Consumer & Business Services. premiums were $521,280 for 2001, down 6.4 percent from Oregon Contractors, new in 1997, had 252 entities in 2001 (down from 290 in 2000) and decreased net premium 21.2 percent to $1,993,550. Oregon Educators, new in 1996, had 17 members in 2001 and decreased net premium 8.0 percent to $244,