Mega-Trends Influencing the Workers Compensation Insurance Industry

Transcription

1 Mega-Trends Influencing the Workers Compensation Insurance Industry 5th Annual National Workers Compensation Insurance ExecuSummit New York, NY February 5, 2008 Steven N. Weisbart, Ph.D., CLU, Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: (212) Fax: (212)

2 Six Mega-Trends to Watch 1. Falling Lost-Time Claim Frequency and Fatality Rates 2. A Shrinking Premium Base? 3. Medical Claim Cost Inflation 4. Indemnity Claim Cost Inflation 5. The Aging Workforce 6. The Obesity Epidemic

3 But First, Some Context: Employment, Real Wages, and Workers Comp Experience

4 Total Private Employment Grew by 26 Million Workers from 1991 to 2007 Millions (at mid-year) Total private employment rose 29% *Source: U.S. Bureau of Labor Statistics, at

5 Average Weekly Real Earnings in Private Employment Grew by 8.5% from 1991 to 2007 (at mid-year) $290 $280 Virtually all of the real wage growth occurred between 1996 and Real weekly wages grew 0.6% from and 0.6% from $271.5 $276.1 $275.0 $275.1 Constant 1982 dollars $279.4 $279.3 $276.0 $276.9 $277.3 $281.2 $270 $260 $259.2 $257.9 $258.3 $260.1 $258.0 $260.7 $264.3 $ *Source: U.S. Bureau of Labor Statistics, at

6 Workers Comp Underwriting Results: A Tale of Two Trends Combined Ratio WC insurers added 25 points to the combined ratio in just 6 years! WC insurers lopped 25 points off the combined ratio in just 5 years! p p Preliminary AY figure. Includes dividends to policyholders Accident Year data is evaluated as of 12/31/2006 and developed to ultimate Sources: Calendar Years , A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years p based on NCCI Annual Statement Analysis.

7 Investment Gains Have Improved Workers Comp Profitability Percent 25% 20% 15% 10% 5% 0% -5% -10% -15% -4.2% -8.6% -3.2% Pre-Tax Operating Gain Ratio (%) 7.5% 12.7% 19.7% 19.8% 17.9% 13.9% 5.2% 1.3% -7.8% -1.0% WC profitability is on the rise, but is it sustainable? Hint: see % 4.4% 8.4% 13.5% 90* 91* p Calendar Year Source: NCCI

8 WC Investment Income Has Been Less Helpful Lately in Producing Profits Pre-Tax Operating Gain Ratio Adjusted Combined Ratio* 25.0% 20.0% 15.0% 10.0% As u/w results strengthened, investment results weakened, producing only a modest operating gain ratio 5.0% 0.0% -5.0% p -10.0% -15.0% -20.0% -25.0% * Adjusted Combined Ratio (ACR) translates combined ratio into typical percentage terms. For example, a combined ratio of becomes a -7.0% ACR. Source: NCCI

9 P/C Insurance Combined Ratio, E As recently as 2001, insurers paid out nearly $1.16 for every earned premium dollar The best underwriting result since 1949 (91.2 combined ratio) 2007 deterioration due mainly to falling rates, but results still strong due to favorable CAT activity figure benefited from heavy use of reinsurance which lowered net losses E Sources: A.M. Best; ISO, III. *III estimate for 2007 based on actual first three quarters.

10 P/C Net Income After Taxes F ($ Millions)* $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10, ROE = -1.2% 2002 ROE = 2.2% 2003 ROE = 8.9% 2004 ROE = 9.4% 2005 ROE= 9.4% 2006 ROE = 12.2% 2007E ROAS 1 = 13.1%** $14,178 $5,840 $19,316 $10,870 $20,598 $24,404 $36,819 P/C insurer profits exceeded $60 billion in 2006/7. $30,773 $21,865 $20,559 $3,046 $30,029 $38,501 $44,155 $63,695 $63,500 $0 -$10, $6,970 *ROE figures are GAAP; 1 ROAS is statutory Return On Average Surplus. 2007E figure of $63.5B is annualized actual 9-month statutory net income of $49.4B adjusted for Q4 catatrophe losses. **Actual 9- month 2007 result. Sources: A.M. Best, ISO, Insurance Information Inst E

11 Mega-Trend #1: Falling Lost-Time Claim Frequency and Falling Fatality Rates

12 Workers Comp Lost-Time Claim Frequency Down Over 50% Since 1991 Year over Year Change in Number of Lost-Time Claims Percent Change p Accident Year : Based on data through 12/31/2005, developed to ultimate. 2006p: Preliminary based on data valued as of 12/31/2006. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies Source: NCCI

13 Rate of Fatal Work Injuries Continues to Drop Fatal Work Injuries per 100,000 Workers Fatality rates are down 26.4% since p Source: US Bureau of Labor Statistics ; Insurance Information Institute.

14 Number of Fatal Work Injuries Continues to Fall 6,800 6,600 6,400 6,632 The 14% decline in workplace fatalities since 1994 occurred despite the substantial growth in the size of the labor force since then. 6,200 6,000 5,800 5,600 5,400 5,200 6,217 6,331 6,275 6,202 6,238 6,055 6,054 5,920 5,915 5,534 5,575 5,764 5,734 5,703 5, p Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

15 Four Most Frequent Work- Related Fatal Events, Highway Incidents Work-related homicides Work-related homicides down 52% since 1994; in 2006 homicides equal fatal struck by object Struck by Object Falls Homicides Highway Incidents Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

16 But Not All Mega-Trends are Favorable

17 Mega-Trend #2: A Shrinking Premium Base?

18 Competition, Slow Payroll Growth, Large Retentions, Growth of State Funds & Captives Limit Private WC Premium Growth $ Billions $28.2 $3.0 State Funds ($ B) Private Carriers ($ B) $26.9 $2.7 $25.8 $2.6 $24.9 $2.6 $25.2 $24.2 $23.3 $22.3 $28.4 $3.5 $31.9 $5.7 $25.0 $26.1 $37.3 $8.0 $29.2 $41.8 $10.7 $31.1 $45.9 $11.3 $34.7 $47.2 $9.5 $45.9 $7.2 $37.8 $38.6 Total Workers Compensation Premium Declined in p Calendar Year P=Preliminary Sources: Private Carriers, A.M. Best Aggregates & Averages; 2006p, NCCI p State Funds: AZ, CA, CO, HI, ID, KY, LA, MO, MT, NM, OR, RI, TX, UT Annual Statements

19 P/C NWP Growth is Cyclical; We ve Seen Slow Growth Since % 20% : Premium growth through the first 9 months of 2007 was 0%, the lowest reading since % 10% 5% 0% -5% E Note: Shaded areas denote hard market periods. Source: A.M. Best, ISO, Insurance Information Institute 2007E is actual 9-month result.

20 WC Rates Began Dropping in mid-2003 Source: Council of Insurance Agents & Brokers

21 WC Rates Have Retreated to Levels Last Seen in 2002 WC rates red line have generally followed the pattern for other commercial lines WC red line has generally followed the pattern for other commercial lines Source: Council of Insurance Agents & Brokers

22 Employers are Increasingly Accepting a Greater Share of Risk 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Market Share of Plans with Large Deductibles 43% 1% 33% The growing use of large deductibles is part of the explanation for decreased claim frequency Sources: National Council on Compensation Insurance; Insurance Information Institute.

23 The Alternative-Risk-Transfer Market Draws WC Premiums from Traditional Carriers Property, 10% Workers Comp, 43% Workers Compensation accounts for the largest share of the alternative market, particularly captives Automobile, 12% Source: MarketStance. Liability (excl. Auto), 35%

24 Mega-Trend #3: Medical Claim Cost Inflation

25 WC Medical Severity Rising Far Faster than Medical CPI 16% 14% 12% 10% 8% WC medical severity rose more than twice as fast as the medical CPI (8.8% vs. 4.0%) from 1995 through % 10.1% 8.3% 10.6% 8.2% 14.0% 7.4% 9.0% 6.8% 11.7% 7.5% 6% 5.1% 3.5 pts 4% 2% 0% 4.5% 3.6% 2.8% 3.2% 3.5% 4.1% 4.6% 4.7% 4.0% 4.4% 4.2% 4.0% Change in Medical CPI Change Med Cost per Lost Time Claim Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

26 Workers Comp Medical Claim Costs Continue to Climb Medical Claim Cost ($000) $25 Annual Change : +4.1% Annual Change : +9.5% $24.6 $22.9 $20 $15 $10 $8.3 $8.4 $8.2 $14.4 $13.3 $11.1 $12.0 $10.1 $8.9 $9.4 $20.5 $19.2 $16.4 $17.6 Cumulative Change = +200% ( p) $ p Accident Year 2006p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2005, developed to ultimate Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies

27 Med Costs Share of Total Costs is Increasing Steadily 2006p 1996 Indemnity 41% 1986 Indemnity 52% Medical 48% Medical 59% Indemnity 55% Medical 45% Source: NCCI (based on states where NCCI provides ratemaking services).

28 WC Med Cost Will Equal 70% of Total by 2016 if Trends Hold 2016 Estimate Indemnity 30% Medical 70% If this happens, claims severity will accelerate relative to today claims management will become more difficult and complex but even more important Source: Insurance Information Institute.

29 Mega-Trend #4: Indemnity Claim Cost Inflation

30 Workers Comp Indemnity Claims Costs Have Accelerated, p Indemnity Claim Cost (000s) Cost of Lost-Time Claims $19 $17 $15 $13 $11 $9 $7 $5 Annual Change : +1.2% Annual Change : +6.6% $9.9 $9.6 $9.4 $9.8 $10.0 $10.6$11.4 $18.6 $19.6 $17.7$18.0 $16.5 $16.9 $15.1 $13.6 $12.4 Cumulative Change = % ( p) p Accident Year Source: NCCI 2005p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2005, developed to ultimate, from states where NCCI provides ratemaking services. Excludes the effects of deductible policies

31 2006p: Preliminary based on data valued as of 12/31/2006; : Based on data through 12/31/2005, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey. Source: NCCI WC Indemnity Severity vs. Wage Inflation 12% 10% 8% Change in CPS Wage 7.7% 9.0% 10.1% Change in Indemnity Cost per Lost-Time Claim 10.9% 9.7% WC indemnity severity is once again outpacing wage inflation 6% 4% 2% 5.9% 3.0% 3.0% 1.7% 4.3% 5.0% 4.4% 5.2% 4.4% 4.8% 2.4% 1.9% 2.4% 2.4% 2.0% 3.0% 5.5% 2.8% 3.4% 2.1 pts 0% p

32 Mega-Trend #5: The Aging Workforce

33 US Population: 2007 vs Projection* and over 80 to to 79 8,011 5,334 7,557 5,523 7,361 12,268 There will be nearly as many 85+ people in 2025 as there are today 70 to 74 8,440 16, to 69 10,721 19, to 64 14,269 21, ,000 8,000 12,000 16,000 20,000 24,000 Population in each age group (in thousands) *Using the Census Bureau s Middle (i.e., most probable) projections Source: National Projections Program, Population Division, U.S. Census Bureau

34 How accurate are these forecasts?

35 In 1996 the Census Bureau Projected the 2006 U.S. Population High Projection Millions of People Middle Projection Low Projection 1996 Forecast Source: U.S. Bureau of the Census, (NP-T3-C) Population Projections Program, Population Projections of the Total Resident Population by 5-year age groups, middle series, released January 13, 2000.

36 In 2000 the Census Bureau Increased Its Middle Projection for Instead of Low, Middle, and High forecasts, future Census Bureau projections will be probabilistic distributions. Millions of People Middle projection was raised from 288 million to 290 million Forecast 2000 Forecast Source: U.S. Bureau of the Census, (NP-T3-C) Population Projections Program, Population Projections of the Total Resident Population by 5-year age groups, middle series, released January 13, 2000.

37 The Actual 2006 Population Exceeded the High 1996 and the Middle 2000 Projections Millions of People The actual 2006 population was just under 300 million Forecast 2000 Forecast Actual 2006 Source: U.S. Bureau of the Census, (NP-T3-C) Population Projections Program, Population Projections of the Total Resident Population by 5-year age groups, middle series, released January 13, 2000.

38 How Does This Mega-Trend Apply to Workers Compensation?

39 Quarterly Labor Force Participation Rate, Ages 65-69, Labor Force participation rate 32.0% 22.1% 22.5% 22.3% 23.0% 22.8% 23.0% 22.9% 23.5% 24.4% 24.4% 24.3% 24.9% 24.4% 24.4% 24.8% 25.2% 25.2% 26.3% 26.5% 26.2% 27.2% 27.0% 27.9% 27.4% 27.3% 26.8% 27.9% 27.8% 27.6% 27.6% 27.9% 28.5% 28.7% 29.3% 29.5% 29.3% 29.1% 30.1% 30.8% 30.0% 28.0% 26.0% 24.0% % 20.0% The labor force participation rate for workers might grow even faster in the future as seniors find they can t fully retire on their meager retirement savings. Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

40 Quarterly Labor Force Participation Rate, Ages 70-74, Labor Force participation rate 20.0% 12.5% 12.2% 12.4% 12.4% 12.9% 13.1% 13.1% 13.6% 13.3% 13.5% 13.6% 13.8% 13.7% 14.2% 13.8% 14.4% 14.2% 14.2% 14.0% 14.0% 14.4% 14.4% 14.6% 14.9% 14.9% 15.4% 15.6% 15.3% 15.8% 16.4% 16.2% 17.0% 16.7% 16.9% 17.2% 17.0% 16.7% 16.8% 18.0% 18.0% 16.0% 14.0% % % The labor force participation rate for workers has grown by about 50% since It too might grow even faster in the future as seniors find they can t fully retire on their meager retirement savings. Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

41 Self Employment Among Workers, by Age Group: 2002 Percent self-employed among persons working for pay 100% 80% 60% In general, self-employed people have higher household incomes than wage earners but are less likely to have pensions and health insurance. 58.0% 69.0% 86.0% 40% 20% 19.0% 23.0% 30.0% 40.0% 44.0% 0% Source: Growing Older in America, US Department of Health and Human Services, p 46.

42 Why Elderly Stop Working, by Age Group: 2002 Percent who stop working 45% 40% 35% 30% 25% 20% 15% 10% 5% Poor Health Wanted To Do Other Things Age 80+ workers not retiring due to poor health! More Time With Family Didn't Like Work 0% Source: Growing Older in America, US Department of Health and Human Services, p 47.

43 Older Workers Have More Lost Time from Work Due to Injury or Illness Median Days Away From Work (2005) 14 Age 65+ workers median lost time is 50% greater than workers age There will be more lost time as the workforce ages in the future Source: US Bureau of Labor Statistics, US Department of Labor

44 Distribution of Non-Fatal Work Injury Days Away From Work, by Length of Period and Age group, Ages 45 and over, 2005 Percentage of cases 45% 40% 35% 30% 25% 20% 15% 10% 5% 40.3% 38.8% 32.5% Workers 65+ more likely to be out two weeks than one 12.3% 11.6% 15.3% 19.1% 20.5% 17.7% 28.4% 30.2% Workers 65+ more likely to be out a month or more 34.5% Ages Age Age 65 and over 0% 1-5 days 6-10 days days 31+ days Source: US Bureau of Labor Statistics, US Department of Labor, Table 8 from 2005 Survey of Nonfatal Occupational Injuries and Illnesses Requiring Days Away from Work, Revised data released

45 Fatal Work Injury Rates Climb Sharply With Age Fatal Work Injuries per 100,000 Workers (2006) The fatality rate for workers 65 and older is triple that of workers age The workplace of the future will have to be completely redesigned to accommodate the surge in older workers Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

46 Workers Compensation and Medicare No Help from Medicare Medicare law has long specified that If Workers Compensation is available, Medicare will pay nothing, Medicare will pay if costs remain after all WC medical benefits are exhausted, and If Medicare does pay a bill, it has a right of recovery from the employer or WC insurer. Source: Title 42 Code of Federal Regulations, Section 411 et seq.

47 Workers Compensation and Medicare and Maybe a Fight from Medicare Medicare is worried that, for workers who are covered by, or eligible for, Medicare, it will be stuck with costs shifted from those responsible for paying WC costs. So, in those cases, It wants to review, and maybe disapprove, Workers Compensation settlements, if it believes there is insufficient WC money to pay for future medical costs, This may align Medicare with workers against employers and WC insurers This will increase WC administration costs

48 Workers Compensation and Social Security Effect on WC Claims of Social Security Retirement Income When a SS DI recipient reaches the full benefit retirement age, the DI benefit becomes a retirement benefit Social Security Retirement Income is not offset for WC indemnity payments So disabled workers age 66 and over can collect both moral hazard?

49 Continuing to Work is Associated with (leads to?) Better Health One paper studied people age who were working or not in 2000 and alive in It found that those who had paid work reduced the likelihood of reporting fair/poor health in 2002 by 6% had a modest but significant positive impact on actual health in 2002: 2% fewer cases of ADL limitations, 2% fewer cases of IADL limitations, 2% fewer cases of reporting negative mood indicators, and 1% less mortality. Interestingly, these findings (except the mood indicators) apply even to people in undesirable and high stress jobs Implication: improvements in the working environment for older workers will lessen their impact on employer-sponsored health and other insurance plans Esteban Calvo, Does Working Longer Make People Healthier and Happier, Center for Retirement Research, Boston College, Series 2, February 2006.

50 Mega-Trend #6: The Obesity Epidemic

51 What Do We Mean by Obesity and How Do We Measure It? Definitions: Obesity Having a very high amount of body fat in relation to lean body mass Body Mass Index of 30 or higher Body Mass Index (BMI) A measure of an adult s weight in relation to his or her height, Specifically, the adult s weight in kilograms divided by the square of his or her height in meters Note: This slide and the next 23 slides are courtesy of the Centers for Disease Control and Prevention.

52 Obesity Trends* Among U.S. Adults BRFSS, 1985 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) Not a complete picture; many states didn t provide data then. No Data <10% 10% 14% BRFSS is the CDC s Behavioral Risk Factor Surveillance System. Each year, state health departments use standard procedures to collect data through a series of monthly telephone interviews with U.S. adults.

53 Obesity Trends* Among U.S. Adults BRFSS, 1986 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14%

54 Obesity Trends* Among U.S. Adults BRFSS, 1987 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14%

55 Obesity Trends* Among U.S. Adults BRFSS, 1988 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14%

56 Obesity Trends* Among U.S. Adults BRFSS, 1989 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14%

57 Obesity Trends* Among U.S. Adults BRFSS, 1990 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14%

58 Obesity Trends* Among U.S. Adults BRFSS, 1991 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19%

59 Obesity Trends* Among U.S. Adults BRFSS, 1992 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19%

60 Obesity Trends* Among U.S. Adults BRFSS, 1993 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19%

61 Obesity Trends* Among U.S. Adults BRFSS, 1994 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19%

62 Obesity Trends* Among U.S. Adults BRFSS, 1995 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19%

63 Obesity Trends* Among U.S. Adults BRFSS, 1996 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19%

64 Obesity Trends* Among U.S. Adults BRFSS, 1997 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20%

65 Obesity Trends* Among U.S. Adults BRFSS, 1998 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20%

66 Obesity Trends* Among U.S. Adults BRFSS, 1999 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20%

67 Obesity Trends* Among U.S. Adults BRFSS, 2000 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20%

68 Obesity Trends* Among U.S. Adults BRFSS, 2001 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20% 24% 25%

69 Obesity Trends* Among U.S. Adults BRFSS, 2002 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20% 24% 25%

70 Obesity Trends* Among U.S. Adults BRFSS, 2003 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20% 24% 25%

71 Obesity Trends* Among U.S. Adults BRFSS, 2004 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20% 24% 25%

72 Obesity Trends* Among U.S. Adults BRFSS, 2005 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20% 24% 25% 29% 30%

73 Obesity Trends* Among U.S. Adults BRFSS, 2006 (*BMI 30, or ~ 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20% 24% 25% 29% 30%

74 Obesity Trends* Among U.S. Adults BRFSS, 1990, 1998, 2006 (*BMI 30, or about 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20% 24% 25% 29% 30%

75 For Analysis Purposes, We Create BMI Categories BMI Categories Underweight: BMI <18.5 Healthy Weight: BMI= Overweight: BMI= Obese Class I BMI= Class II BMI= Class III BMI>40.0

76 Summary: Obesity Trends Among states participating in the CDC s BRFSS*, In 1990, 10 states had a prevalence of obesity of less than 10% and no states had prevalence equal to or greater than 15% By 1998, every state had prevalence of at least 10%, 7 states had a prevalence between 20-24%, and No state had prevalence equal to or greater than 25% In 2006, Only 4 states had a prevalence of obesity of less than 20% 22 states had prevalence equal to or greater than 25% 2 of these states had prevalence equal to or greater than 30% *Behavioral Risk Factor Surveillance System

77 The Most Obese Workers (BMI=40+) File Twice as Many WC Claims as Healthy-Weight (BMI= ) Workers Lost Workdays per 100 FTEs The most obese have 13 times more lost workdays than healthy weight workers! BMI <18.5 (Underweight) (Healthy Weight) (Overweight) Lost Workdays (Obese (Obese Class I) Class II) Claims (Obese Class III) Source: Ostbye, T., et al, Obesity and Workers Compensation, Archives of Internal Medicine, April 23, Claims per 100 FTEs

78 WC Medical Claims Costs are 6.8x Higher for the Most Obese Workers $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $7,109 $3,924 Indemnity costs are 11 times higher for the most obese workers than for healthyweight workers. $7,503 $5,396 $13,338 $13,569 $19,661 $23,633 $23,373 $34,293 $51,091 $59,178 $0 BMI <18.5 (Underweight) (Healthy Weight) (Overweight) (Obese Class I) (Obese Class II) 40+ (Obese Class II) Medical Claims Costs Indemnity Claims Costs Source: Ostbye, T., et al, Obesity and Workers Compensation, J. of the American Medical Association, April 23, 2007.

79 Not a Mega-Trend Yet, but Other things to keep aware of

80 Regulatory Concerns McCarran-Ferguson Narrowing could be harmful to WC rating bureaus and smaller insurers who rely most heavily on advisory loss cost information Health Care Reform Déjà Vu 1992 Health Care reform will be a major theme in 2008 elections as in 1992 Back in 1992, it was proposed that workers comp would be rolled into the general health care system This could happen again Insurers back then fretted about the Medical Indemnity Disconnect

81 The Terrorism Risk Insurance Program Reauthorization Act of Year Extension, expiring 12/31/14 Keeps Federal government s cap at $100 billion Keeps 20% Direct Earned Premium Deductible (about $35B) Eliminates distinction between foreign and domestic acts of terrorism requirement that terrorist act be on behalf of foreign person or foreign interest Changes in definition of terrorist act require substantial rate and form filings in states Requires Comptroller General to issue report within 180 days on obstacles in development of private sector market for terror insurance NBCR NBCR risks remain excluded Requires Comptroller General to issue report within 1 year on feasibility of NBCR insurance market Source: Insurance Information Institute

82 Insured Loss Estimates: Large NBCR Terrorist Attack ($ Bill) Type of Coverage New York Washington San Francisco Des Moines Group Life $82.0 $22.5 $21.5 $3.4 General Liability Workers Comp Residential Prop Commercial Prop Auto TOTAL $778.1 $196.8 $171.2 $42.3 Source: American Academy of Actuaries, Response to President s Working Group, Appendix II, April 26, 2006.

83 Summary Workers Compensation Has Benefited from Favorable Underlying Claims Trends, but this might not continue WC Premium Trends have followed the trend for Commercial Insurance generally Trends in Medical and Indemnity Cost are Worrisome The Aging of the Population and the Obesity Epidemic could cause WC claims to explode Q & A

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