Ohio Bureau of Workers Compensation Actuarial Committee

Transcription

1 Ohio Bureau of Workers Compensation Actuarial Committee Private Employer (PA) Rate Recommendations to be Effective July 1, 2012 Bob Miccolis, FCAS, MAAA Dave Heppen, FCAS, MAAA Deloitte Consulting LLP April 26, 2012

2 Rate Change Recommendations: Indicated Overall Rate Changes by Loss Cost Scenario Baseline Loss Cost Scenario Reasonable Expectation Optimistic Loss Cost Scenario Reasonable Expectation Conservative Loss Cost Scenario 2.8% -2.8% 7.0% Notes: 1. Indicated overall rate changes are for the policy period starting 7/1/ The indicated changes represent overall average rate changes actual rate changes will vary by class 3. The loss costs used to determine the rate change recommendations are derived from Deloitte Consulting s December 2011 Reserve Analysis for private employers ( PA ) 4. Indicated rate changes are based on projections from the analysis of historical loss cost trends for Indemnity losses and Medical losses separately including adjustments for frequency and severity trends and payroll trends 5. A discount rate of 4.0% is used for discounting the costs based on expected cash flows for losses and premiums Page 2

3 Frequency Trends (Lost Time Claims) : Lost Time Claim Frequency (Ultimate Number of Claims per $100 of payroll adjusted for wage inflation) Lost Time Claim Frequency * Accident Year (* Projected for July 1, 2012 Policy Year) Claim frequency decreases have slowed and there is an increase in recent years For the rate indication, Deloitte used 0% change in claims frequency from 2011 to 2012 Page 3

4 Indemnity Severity Trends: 60,000 Calendar Accident Year Ultimate Indemnity Severity 50,000 Average Indemnity Cost Per Lost Time Claim 40,000 30,000 20,000 10, * Accident Year (* Projected for July 1, 2012 Policy Year) The indicated indemnity severity change from 2009 to 2011 (slightly negative) is based on projected ultimate losses from Deloitte s December 2011 reserve study For the rate indication, Deloitte used 3.0% indemnity trend for 2012 based on the average trend over a multi-year period, with more weight given to recent years Page 4

5 Medical Severity Observations: 60,000 Calendar Accident Year Ultimate Medical Severity 50,000 Average Medical Cost Per Lost Time Claim 40,000 30,000 20,000 10, * Accident Year (* Projected for July 1, 2012 Policy Year) Countrywide medical costs have been rising and Ohio shows a similar pattern For the rate indication, Deloitte used 6.0% medical trend for 2012 based on the long-term average trend for both BWC and the industry. Page 5

6 Total On-Level Loss Costs (Undiscounted): $2.05 Private Employers July 1, Rate Indication - Comparison of Total On-Level Loss Costs for Accident Years and 7/1/12 Selected Loss Costs $2.00 On-Level Loss Costs (per $100 of payroll) $1.95 $1.90 $1.85 $1.80 $1.75 $1.70 Accident Year On-Level Loss Costs Baseline Scenario Current Loss Cost (Not On-Level) Range of Scenarios Deloitte s selection for the 7/1/12 policy year gives some weight to the loss costs Estimated ultimate loss costs for are higher than loss costs from older years, but the more recent accident years are immature and were not considered to be as reliable as more mature years The loss costs above were adjusted for changes in frequency, severity, and payrolls from year to year The loss costs above are undiscounted; indicated rates are discounted for future investment income Page 6

7 RECOMMENDATIONS Significant loss cost risk considerations for rate decision: 1. Estimated loss costs from recent years may be more indicative of future loss costs, compared to our selected scenarios 2. Actual future investment income might be less than we projected using a 4% discount rate for the rate indications 3. Future medical inflation might be worse than expected almost 50% of loss costs are from medical losses 4. Future indemnity claim severity trends may not moderate as we have assumed 5. The cumulative impact of selecting optimistic scenarios can lead to higher future rate increases if the loss costs turn out to be higher than we expect under the optimistic scenarios 6. The Optimistic and Conservative Scenarios do not capture the full range of possible outcomes Page 7

8 RECOMMENDATIONS Significant financial risk considerations for rate decision: The financial strength of the State Insurance Fund is dependent on the following main factors (based on December 2011 financial statement): Reserve Risk 1. $25 billion of undiscounted liabilities for unpaid claims and claim expenses 2. $9 billion of anticipated investment income from invested assets 3. $16 billion of discounted liabilities $25b liabilities less $9b investment income Net Asset Risk 4. $20 billion of cash and securities 5. $4 billion of cash and securities in excess of discounted liabilities $20b cash and securities less $16b discounted liabilities 6. $5.6 billion of Net Assets are significantly leveraged by market values of investments 10% drop in the market value of securities would reduce Net Assets by over 35% Page 8

9 RECOMMENDATIONS Deloitte Overall Observations: We note that the Funding Ratio is one measure of financial strength, but it is dependent on understanding the risk from changes in the market value of the investments in securities o Notwithstanding the potential for significant impact* from swings in the market value of the State Insurance Fund s investments, there is much less risk to the SIF s financial strength from a rate change that falls within the range of our reasonable scenarios Consequently, the current financial strength of the SIF is sufficient to support the full range of rate change indications * The market value of the Fund s investments in securities during the financial crisis had a substantial impact on the Net Assets for the State Insurance Fund which dropped to $91 million in October, 2008 as compared to $5.6 billion as of December 31, 2011 Page 9