August 18, Hand Delivered

Transcription

1 August 18, 2017 Hand Delivered The Honorable Dave Jones Insurance Commissioner California Department of Insurance 45 Fremont Street, 23rd Floor San Francisco, CA Broadway, Suite 900 Oakland, CA Voice Fax Bill Mudge President & Chief Executive Officer RE: California Workers Compensation Insurance Advisory Pure Premium Rates Effective January 1, 2018 CDI File No. REG Dear Commissioner Jones: Pursuant to Article 2 of Chapter 2, and Articles 2 and 3 of Chapter 3, Part 3, Division 2, of the California Insurance Code, the Workers Compensation Insurance Rating Bureau of California (WCIRB), a licensed rating organization and the designated statistical agent of the Insurance Commissioner, is submitting the recommendations and proposals contained in the enclosed filing for your consideration. The proposed advisory pure premium rates contained in this filing were authorized by the WCIRB s Governing Committee for submission to you for review and approval. Advisory Pure Premium Rates The advisory pure premium rates contained in Section A are proposed to become effective January 1, 2018 for workers compensation insurance policies with an effective date on or after January 1, The pure premium rates, which reflect loss costs including loss adjustment expenses per unit of exposure, are only advisory in that an insurer is not required to use either the proposed or the approved pure premium rates in establishing the rates it will charge. The proposed advisory pure premium rates reflect the changes to the California Workers Compensation Uniform Statistical Reporting Plan 1995 (USRP) that were proposed in the WCIRB s Regulatory Filing submitted on June 27, 2017 (CDI File No REG ) to take effect January 1, If some of these regulatory changes are not approved, the WCIRB may need to amend the pure premium rates proposed in this filing for consistency with the Commissioner s decision on the Regulatory Filing. The advisory pure premium rates for the 502 standard classifications proposed to be effective January 1, 2018 average $2.01 per $100 of payroll. This is $0.33, or 14.3%, less than the industry average filed pure premium rate of $2.34 as of July 1, 2017 and $0.01, or 0.5%, more than the average approved July 1, 2017 advisory pure premium rate of $ The proposed pure premium rates shown in Section A are based on (1) insurer losses incurred during accident year 2016 and prior accident years valued as of March 31, 2017, (2) insurer loss adjustment 1 This average reflects the most current available exposures by classification and insurer. The average approved July 1, 2017 advisory pure rate as reflected in the Commissioner s decision (based on earlier exposure weights) was $2.02 per $100 of payroll. 1

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3 Workers Compensation Insurance Rating Bureau of California January 1, 2018 Pure Premium Rate Filing REG Submitted: August 18, 2017

4 WCIRB California 1221 Broadway, Suite 900 Oakland, CA Tel Fax Workers Compensation Insurance Rating Bureau of California. All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted in this copyright notice or by federal copyright law. No copyright is claimed in the text of statutes and regulations quoted within this work. Copies of the filing may be made and distributed for the purpose of facilitating the transaction of workers compensation insurance in California, provided that all copyright and other proprietary notices are kept intact. To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the WCIRB at

5 Table of Contents Page Executive Summary 1 41 Section A Proposed Pure Premium Rates A-1 A-4 Appendix A Computation of Proposed Pure Premium Rate for Classification 8631, Racing Stables all other employees A-5 A-6 Section B Computation of Indicated Average Pure Premium Rate for 2018 Policies B-1 B-53 Appendix A Loss Development Methodology B-54 B-122 Appendix B Trending Methodology B-123 B-149 Appendix C Projected Loss Adjustment Expense Ratio B-150 B-199 i

6 Executive Summary Executive Summary A. Introduction Since the WCIRB s January 1, 2017 Pure Premium Rate Filing, favorable loss development on 2015 and prior accident years, acceleration in claim settlement rates, lower than projected losses emerging on the 2016 accident year, improving loss adjustment expense trends and increased forecasts of wage level growth 1 have more than offset recently rising claim severities and continued growth in cumulative injury claims. Consequently, in the July 1, 2017 Pure Premium Rate Filing, the WCIRB proposed and the Insurance Commissioner adopted advisory pure premium rates that were on average 7.8% below the January 1, 2017 advisory pure premium rates. The July 1, 2017 advisory pure premium rate decrease was the fifth consecutive pure premium rate decrease approved by the Insurance Commissioner since These decreases have totaled more than 27%. The favorable trends discussed in the WCIRB s July 1, 2017 Pure Premium Rate Filing have now moderated. While claim settlement rates, loss adjustment expense trends and wage growth continue to exert downward pressures on pure premium rates, loss development trends have moderated and claim severities and cumulative injury claim frequency have escalated to levels that in the aggregate offset these positive indications. The WCIRB continues to monitor these areas but, on balance, in this filing the WCIRB is recommending advisory pure premium rates that are on average at a similar level to the approved July 1, 2017 advisory pure premium rates. Specifically, based on methodologies recommended by the WCIRB Actuarial Committee and in accordance with the authorization of the WCIRB Governing Committee, the WCIRB is proposing advisory pure premium rates for policies effective on or after January 1, 2018 that average $2.01 per $100 of payroll. This average proposed pure premium rate is $0.01 above the average approved July 1, 2017 pure premium rate of $2.00, 2 but 7.4% below the average approved January 1, 2017 pure premium rate of $2.17 per $100 of payroll. 3 The pure premium rates approved by the California Insurance Commissioner are only advisory in that insurers may, and often do, file and use rates other than those approved by the Insurance Commissioner. Consistent with the 2011 directive from the Insurance Commissioner, the WCIRB s proposed advisory pure premium rates have been benchmarked against the average pure premium rates filed by insurers. The average of the proposed January 1, 2018 advisory pure premium rates are 14.3% below the average of the industry filed pure premium rates as of July 1, Wage level growth information reflected in this filing is from UCLA Anderson School of Business published information as of June The average approved July 1, 2017 advisory pure rate as reflected in the Commissioner s decision (based on earlier exposure weights) was $2.02 per $100 of payroll. 3 The average approved January 1, 2017 advisory pure rate as reflected in the Commissioner s decision (based on earlier exposure weights) was $2.19 per $100 of payroll. 1

7 Executive Summary B. Rate Information The proposed January 1, 2018 advisory pure premium rates average $2.01 per $100 of payroll, which is 14.3% below the industry average filed pure premium rate of $2.34 as of July 1, In the Amended January 1, 2017 Pure Premium Rate Filing, the WCIRB s indicated average pure premium rate was $2.20 per $100 of payroll). 4 The Insurance Commissioner approved an average advisory pure premium rate as of January 1, 2017 of $2.17 per $100 of payroll. 5 In the July 1, 2017 Pure Premium Rate Filing, the average indicated and approved pure premium rate was $2.00 per $100 of payroll. 6 Chart 1 shows (1) the average of the proposed January 1, 2018 advisory pure premium rates, (2) the industry average filed pure premium rate as of July 1, 2017, (3) the average of the approved July 1, 2017 advisory pure premium rates, (4) the industry average filed manual rate as of July 1, 2017 and (5) the industry average charged rate for the first quarter of 2017, after the application of most insurer rating plan adjustments. 7 The methodologies used to compute the industry average filed and charged rates shown in Chart 1 are described in Exhibit 1 of this Executive Summary. Chart 1 Proposed & Approved Advisory and Industry Average Rates per $100 of Payroll $4.00 $3.43 $3.00 $2.00 $2.01 $2.34 $2.00 $2.56 $1.00 $0.00 Average Proposed Advisory PP Rate 1/1/18 Industry Average Filed PP Rate 7/1/17 Average Approved Advisory PP Rate 7/1/17 Industry Average Filed Manual Rate 7/1/17 Industry Average Charged Rate 1/1/17-3/31/17 Sources: WCIRB pure premium rate filings, insurer rate filings submitted to the CDI, and insurer data submitted in WCIRB data calls. Exhibit 2 shows the advisory pure premium rates proposed by the WCIRB to be effective January 1, 2018 for each standard classification, the corresponding industry average filed pure premium rate as of July 1, 2017, and the difference between these two pure premium rates. Exhibit 2 also shows the approved July 1, 2017 advisory pure premium rate for each classification and the difference between the approved July 1, 2017 advisory pure premium rate and the WCIRB s proposed January 1, 2018 advisory pure premium rate. 4 Updated from $2.22 indicated in the Amended January 1, 2017 Pure Premium rate filing based on updated exposure weights. 5 Updated from $2.19 in the Decision on the January 1, 2017 Pure Premium rate filing based on updated exposure weights. The Commissioner s Decision on the WCIRB s January 1, 2017 Pure Premium Rate Filing was based on the WCIRB s actuarial indication, with the exception that the determination of the approved average pure premium rate reflected a slightly lower medical trend severity assumption. 6 Updated from $2.02 indicated in the July1, 2017 Pure Premium Rate Filing based on updated exposure weights. 7 This computation is based on reported premium at the insurer rate level, which includes the impact of all insurer rating plan adjustments except for the application of deductible credits, retrospective rating plan adjustments, and terrorism charges. 2

8 Executive Summary C. System Drivers Impacting the Change in Indicated Pure Premium Rate The indicated average January 1, 2018 pure premium rate of $2.01 per $100 of payroll represents a decrease of $0.16, or 7.4%, from the average January 1, 2017 advisory pure premium rate approved by the Insurance Commissioner of $2.17 per $100 of payroll. Since early 2015, advisory pure premium rates have declined by 27%. In recent pure premium rate filings, the WCIRB has attributed this improvement to a number of factors including downward loss development, acceleration in claim settlement, the latest accident year emerging below the projected level, improving loss adjustment expense trends and increasing wage inflation. Since the time of the July 1, 2017 Pure Premium Rate Filing, some of these factors have moderated and some have continued. Loss Development. Since the WCIRB s Amended January 1, 2017 Pure Premium Rate Filing, based on experience through June 30, 2016, 8 loss development through December 31, 2016 continued to improve and lowered WCIRB estimates of ultimate historical accident year loss ratios and resultant future year medical cost projections. This downward loss development was consistent with the patterns of the last several years and has been a key driver of the pure premium rate decreases since early Chart 2 shows the WCIRB s projected ultimate accident year loss ratios as of June 30, 2016, December 31, 2016 and March 31, As shown, over the last quarter the pattern of downward loss development through December 31, 2016 has moderated as WCIRB estimates of ultimate losses are now generally comparable to those evaluated as of December 31, Chart 2 Change in WCIRB Projected Ultimate Loss Ratio Amended 1/1/2017 Filing (based on June 30, 2016 experience) 7/1/2017 Filing (based on December 31, 2016 experience) 1/1/2018 Filing (based on March 31, 2017 experience) Accident Year Source: WCIRB projections based on reported loss development patterns. For consistency of comparison, projections do not reflect the latest refinement recommended by the WCIRB to long-term loss development. 8 The WCIRB s Amended January 1, 2017 Pure Premium Rate Filing was submitted on October 3, 2016 and reflected experience through June 30, A portion of the downward development through December 31, 2016 is due to updated estimates of the impact of Senate Bill No. 863 on loss development. 3

9 Executive Summary Rate of Claim Settlement. Since the implementation of Senate Bill No. 863 (SB 863) beginning in 2013, claim settlement rates have been increasing. We believe SB 863 has contributed to an accelerated rate at which claims have settled due to quicker medical treatment dispute resolution through independent medical review (IMR), reduction in the volume of liens, and a significant decrease in the number of spinal surgeries following the elimination of the duplicate reimbursement for these procedures. A speed-up in claim settlement can positively affect both loss development patterns and loss adjustment expenses. Chart 3 shows the continued acceleration in claim settlement rates since Chart 3 Indemnity Claim Settlement Ratios At 27 Months At 39 Months At 51 Months March 31 Evaluations of Accident Years Source: WCIRB projections of ultimate indemnity claim counts and reported claim count information as of March 31, Accident Year Losses. The WCIRB s Amended January 1, 2017 Pure Premium Rate Filing reflected accident year experience through The July Pure Premium Rate Filing as well as this latest filing for January 1, 2018 have included experience for accident year Despite indications of rising claim severity, in large part due to the downward medical loss development discussed above, the 2016 accident year is emerging at cost levels consistent with that of 2015 and below the level projected by the WCIRB in the Amended January 1, 2017 Pure Premium Rate Filing. Chart 4 shows the WCIRB s projected ultimate total indemnity and medical loss ratio based on the latest available industry loss experience as of March 31, 2017 for the last several accident years adjusted for the factors that the WCIRB is able to directly measure (e.g., benefit changes, fee schedule changes and wage inflation) to a current or on-level basis. Also shown is the onlevel loss ratio projected for accident year 2016 in the Amended January 1, 2017 Pure Premium Rate Filing. The WCIRB s methodology for determining the indicated pure premium rate is responsive to the experience level of the latest two accident years (2015 and 2016) and, as a result, lower than projected loss experience for accident year 2016 has a downward effect on the indicated January 1, 2018 average pure premium rate level. 4

10 Executive Summary Chart 4 Projected Indemnity and Medical Combined On-Level Loss Ratio 80% 63.4% 63.8% 63.6% 62.7% 64.7% 64.7% 66.6% 60% 40% /1/17 Filing Source: WCIRB projections as of 3/31/2017 based on reported and indemnity medical loss development patterns. Premiums are on-leveled to the industry average filed pure premium rate level as of July 1, Loss Adjustment Expenses. SB 863 was intended to significantly reduce frictional costs while increasing permanent disability benefits for injured workers. A key measure of frictional costs in the system is loss adjustment expenses (LAE). LAE are costs paid by insurers for investigating, administering, defending and settling workers compensation claims. These expenses include the costs associated with handling claims that can be directly allocated to a particular claim (allocated loss adjustment expenses or ALAE) as well as costs associated with handling claims that cannot be directly allocated to a particular claim (unallocated loss adjustment expenses or ULAE). Until recently, loss adjustment expenses had been rapidly increasing following SB 863. Chart 5 shows the average paid ALAE per reported indemnity claim by accident year for private insurers as of 15 months maturity through accident year As shown, rather than decreasing with the implementation of SB 863, the average paid ALAE per indemnity claim at 15 months increased by approximately 9% per year in the three years following the implementation of SB 863. However, the 2016 average paid ALAE has moderated and is only 3% above the accident year 2015 amount. Chart 5 Paid ALAE Per Indemnity Claim at 15 Months Private Insurers $1,500 $1,385 $1,477 $1,526 $1,000 $849 $944 $1,037 $1,135 $1,153 $1,147 $1,237 $ Accident Year 5

11 Executive Summary ALAE development has also improved significantly over the last year as accelerating claim settlement rates have also impacted how quickly ALAE amounts are paid. Chart 6 shows the projected ultimate ALAE paid per indemnity claim as of March 31, 2016, December 31, 2016 and March 31, The paid ALAE per indemnity claim showed significant downward development over the last nine months of 2016, but with the first quarter of 2017 the indicated trend has moderated as paid ALAE development was essentially flat. Chart 6 Reduction in Projected Ultimate ALAE Per Indemnity Claim $14,000 1/1/2017 Filing (based on March 31, 2016 private insurer ALAE experience) 7/1/2017 Filing (based on December 31, 2016 private insurer ALAE experience) 1/1/2018 Filing (based on March 31, 2017 private insurer ALAE experience) 13,598 $12,000 11,351 10,939 11,001 11,747 11,122 11,255 12,509 11,636 11,665 12,206 12,057 $10,000 $8, Accident Year Source: WCIRB projections based on private insurer paid ALAE and indemnity claim count development patterns. Increasing Economic Forecasts of Future Wage Inflation. Pure premium rates are expressed in terms of payroll. As a result, growth in average wage levels can offset inflation in loss and loss adjustment expense levels and reduce the need for pure premium rate increases. For many years, the WCIRB s indications of future wage level growth in the pure premium rate projection has been based on economic forecasts by the UCLA Anderson School of Business. Chart 7 shows the changes in average California wage levels based on UCLA published information. As shown, the latest UCLA forecasts as of June 2017 for the 2017 through 2019 period reflected in this filing are higher than most of the recent historical figures shown. 6

12 Executive Summary % Change as of June 2017 Chart 7 Historical and UCLA Forecast Wage Level Growth Actual Forecast Calendar Year Source: Derived from information provided by UCLA Anderson School of Business as of June of The figures shown for period are the UCLA forecasts of future wage level growth used in the January 1, 2018 Pure Premium Rate Filing. As discussed, there are a number of factors reducing the indicated average pure premium rate level from that reflected in the Amended January 1, 2017 Pure Premium Rate Filing. However, several of these factors have now recently moderated. In addition, increasing cumulative injury claim frequency and rising claim severity are eroding the positive impacts, leading to an indicated January 1, 2018 pure premium rate level that is slightly above that of the July 1, 2017 pure premium rate level. Other areas including indemnity claim frequency, the volume of lien filings and the volume of independent medical reviews warrant continued monitoring by the WCIRB. Cumulative Injury Claims. Although overall indemnity claim frequency has been relatively flat the last several years, the frequency of cumulative injury claims has been steadily increasing. Cumulative injury claims often involve multiple injuries, are very frequently litigated, are filed disproportionately in Southern California, are often initially denied in part or in whole and often are filed on a post-termination basis. 10 Chart 8 shows the proportion of indemnity claims that involve cumulative injury. The proportion of indemnity claims involving cumulative injury has increased from approximately 8% in the 2005 and 2006 period to almost 19% by Increases in the number of cumulative injury claims are impacting the loss development, frequency and loss adjustment expense components of the pure premium rate projections included in this filing. 10 See Analysis of Changes in Indemnity Claim Frequency January 2016 Update Report (WCIRB, January 7, 2016) for the WCIRB s most recent report on indemnity claim frequency. 7

13 Executive Summary 20.0% Chart 8 Cumulative Injury Claims as a Proportion of All Indemnity Claims 17.4% 18.8% 15.0% 10.0% 8.3% 8.3% 8.7% 9.5% 11.2% 11.9% 12.0% 12.7% 15.1% 5.0% 0.0% Accident Year Source: WCIRB unit statistical data developed to a tenth unit statistical level (126 months from policy inception). Claim Severities. Recent advisory pure premium rate declines have been largely driven by medical severities emerging at significantly lower than projected levels as a result of the various reform provisions in SB 863 reducing the utilization of medical services. 11 In comparison, the projected ultimate accident year 2014 average medical cost on indemnity claims is 11% below that of accident year Chart 9 shows the estimated ultimate medical loss per indemnity claim by accident year. Following a period of either relatively flat or declining medical severities from accident year 2011 through accident year 2015, the average medical cost per indemnity claim increased by 6% in It is not clear whether this sharp increase in medical severity is an aberration that may moderate as accident year 2016 develops or, is an early indication of the upturn to increasing medical inflation that has historically followed after previous periods of reform. If 2016 is indicative of a period of sharply increasing severity, the proposed pure premium rates could be understated. 11 In the WCIRB s November 2016 retrospective evaluation of SB 863 approximately $2 billion a year in annual system-wide savings were attributed to the medical-related reforms of SB

14 Executive Summary Chart 9 WCIRB Estimated Ultimate Medical Loss Per Indemnity Claim Based on Experience as of March 31, 2017 $35,000 $34,550 $36,922 $39,141 $39,480 $39,585 $37,643 $35,848 $35,344 $35,836 $38,016 $30,907 $25,000 $15, Accident Year Chart 10 shows estimated ultimate indemnity losses per indemnity claim. As expected, the average indemnity loss per indemnity claim increased for the 2013 and 2014 accident years consistent with the projected impact of the SB 863 permanent disability indemnity benefit increases. However, once the SB 863 benefit increases were fully implemented in 2014, average indemnity losses per indemnity claim have increased by 4% per year, which is higher than what would be expected based on wage inflation and the automatic annual cost of living adjustments incorporated into the California benefit structure. Chart 10 WCIRB Estimated Ultimate Indemnity Loss Per Indemnity Claim Based on Experience as of March 31, 2017 $35,000 $27,199 $28,311 $29,343 $25,000 $22,566 $24,775 $25,819 $25,533 $25,186 $24,747 $25,156 $20,733 $15, Accident Year 9

15 Executive Summary Indemnity Claim Frequency. For many years, indemnity claim frequency in California, as in most other states, had declined. This decades-long decrease in indemnity claim frequency, which in California had averaged approximately 3% to 4% per year, was attributable to multiple factors including long-term shifts from heavy manufacturing to a more service-based economy, increased mechanization within industries, and enhanced employer-sponsored safety efforts. However, in 2010, there was a sharp increase in indemnity claim frequency that was partly attributable to a spike in cumulative injury claims in the immediate post-recession environment. 12 Rather than returning to the long-term pattern of decline that occurred in most other states during the post-recession recovery, California s indemnity claim frequency did not and has generally continued to increase. Over the last several years, the WCIRB has conducted a number of analyses of indemnity claim frequency changes. 13 The WCIRB found that the drivers of recent frequency increases differed from the drivers of the 2010 increase. While the 2010 increase was very broad-based, largely driven by economic factors, and mostly affected smaller claims, the later frequency increases are largely focused in the Los Angeles regions and are largely impacted by an increasing number of cumulative injury claims. Chart 11 shows indemnity claim frequency changes by accident year. As shown, through the first quarter of 2017, indemnity claim frequency remains relatively flat. 10.0% Chart 11 WCIRB Estimated Change in Indemnity Claim Frequency 6.8% 3.6% 0.0% -2.3% -2.0% -0.2% 0.5% 1.1% -0.8% -1.0% 0.2% -3.9% -6.5% -10.0% First Qtr Accident Year Source: WCIRB projections based on reported indemnity claim count information as of 3/31/ See Analysis of Changes in Indemnity Claim Frequency (WCIRB, August 2012) for a full analysis of the 2010 indemnity claim frequency increase. 13 Analysis of Changes in Indemnity Claim Frequency 2013 Report (WCIRB, December 2013), Analysis of Changes in Indemnity Claim Frequency January 2015 Update Report (WCIRB, January 14, 2015) and Analysis of Changes in Indemnity Claim Frequency January 2016 Update Report (WCIRB, January 7, 2016). 10

16 Executive Summary Lien Filings. One cornerstone of SB 863 was the reform provisions related to liens. In the WCIRB s most recent SB 863 Cost Monitoring Report, 14 the WCIRB estimated that the lien reforms reduced costs levels by approximately $500 million annually. However, increases in the counts of lien filings in 2015 and 2016 suggested that some of those savings were eroding. Increased lien activity affects medical loss development as well loss adjustment expenses. Senate Bill No (SB 1160) and Assembly Bill No (AB 1244), which were enacted in the 2016 legislative session, intended to address the volume of lien filings. 15 Chart 12 shows annual counts of lien filings through the second quarter of 2017 based on data provided by the Division of Workers Compensation (DWC). After dramatic reductions beginning in 2013, lien counts increased sharply in 2015 and 2016 to a level twice that of While there was a significant decline in lien filings in the first six months of 2017 following the implementation of SB 1160 and AB 1244, some of that decrease was likely due to an acceleration of lien filings in the fourth quarter of 2016 in order to file a lien prior to the January 1, 2017 effective date of the new legislation. As there remain several outstanding legal challenges to SB 1160 and AB 1244 and not all the components of the legislation are fully implemented, the ultimate impact of the new legislation on lien costs remains uncertain. Chart 12 Lien Filings by Calendar Year (in Thousands) 1,200 1, Jan - Jun 2017 Source: DWC EAMS lien filings Volume of Independent Medical Reviews. Another cornerstone of the SB 863 reforms was the creation of the independent medical review (IMR) process. While IMR has been a significant contributor to the reduced medical costs that underlie recent pure premium rate decreases, the volume of IMRs has far exceeded expectations. Chart 13 shows the number of IMR requests filed each year since While the counts shown include a certain number of duplicate and invalid requests; the total number of valid requests on the order of 150,000 a year is three times that expected following the enactment of SB 863. In addition, as shown, despite IMR upholding the utilization review decision in approximately 90% of the reviews, there is no indication of a learning curve that would lead to a decline in the number 14 Senate Bill No. 863 WCIRB Cost Monitoring Report 2016 Retrospective Evaluation (WCIRB, November 17, 2016). 15 An estimated 0.6% reduction of total costs based on the estimated impact of AB 1160 and SB 1244 was reflected in this filing as well as the Amended January 1, 2017 and July 1, 2017 Pure Premium Rate Filings. 11

17 Executive Summary of IMRs being filed. While IMR has been a significant factor in reducing medical costs, the high number of these reports has increased loss adjustment expenses. Chart 13 Independent Medical Reviews Filed by Calendar Period (in Thousands) Jan- Mar 2017 Source: DWC Data Collected from IMR Vendor. 12

18 Executive Summary D. Supplemental Insurance Market Information After a period of decline and following significant increases in underlying cost drivers since 2005, the industry average charged rates began to increase in 2010 and continued to grow through early Subsequently, with favorable post-sb 863 medical trends emerging and advisory pure premium rates declining, the average charged rates began to decline. As shown in Chart 14, the average rate charged during the first quarter of 2017 is approximately 15% less than the average charged rate for the first half of $8.00 Chart 14 Industry Average Charged Rate Per $100 of Payroll $6.00 $6.29 $5.49 $4.36 $4.00 $2.85 $2.30 $2.15 $2.10 $2.25 $2.32 $2.59 $2.90 $2.97 $3.01 $2.83 $2.56 $2.00 $0.00 7/03-12/03 7/04-12/04 7/05-12/05 7/06-12/06 7/07-12/ /12-12/12 Policy Period /15-6/15 1/16-6/16 1/17-3/17 Source: Insurer unit statistical reports and WCIRB data calls. Chart 15 shows the WCIRB s projected combined ratios of losses, loss adjustment expenses, and other insurer expenses to earned premium by accident year. 16 Rising claim costs, combined with relatively flat industry average charged rates, led to increasing accident year combined ratios beginning for 2006 through accident year For accident years 2012 through 2016, higher insurer charged rates, modest claim cost trends, and lower insurer expense ratios resulted in lower insurer combined loss and expense ratios. The accident year 2016 combined ratio of 95% represents the fourth consecutive year of statewide projected combined ratios below 100%. 16 These combined ratios reflect WCIRB estimates of ultimate losses and loss adjustment expenses by accident year relative to calendar year earned premiums. Insurers also report calendar year combined ratios, which reflect their paid losses and loss adjustment expenses and changes in reserves reported during a calendar year relative to calendar year earned premium. These two measures of combined ratios may differ. Also, these are combined underwriting results and, as such, do not reflect profits, federal income taxes, or investment income returns. 13

19 Executive Summary 200% Chart 15 WCIRB Projected Ultimate Accident Year Combined Loss and Expense Ratios as of March 31, 2017 Losses LAE Other Expenses 150% 150% 100% 119% 84% 96% 117% 137% 137% 135% 113% 99% 94% 94% 95% 61% 58% 72% 50% 0% * 2012* 2013* 2014* 2015* 2016* Accident Year Source: WCIRB projections based on insurer aggregate financial data submissions to the WCIRB. *For accident years , MCCP costs are included in LAE rather than loss. For all other accident years, MCCP costs are included in loss. The combined ratios shown in Chart 15 do not include the impact of investment income, federal income taxes or insurer profits. The National Association of Insurance Commissioners (NAIC) annually publishes a summary of total insurer profitability by line of insurance and state that reflect all these components based on calendar year information reported by each insurer to the NAIC. Chart 16 provides a summary of the information published by the NAIC over the last 15 years. As shown in Chart 16 relatively high loss and expense ratios as well as relatively low investment returns have led to relatively modest profitability (return on net worth) over the last 8 years. The estimated return on net worth for calendar year 2015 for California workers compensation insurance, as reflected in the most recent NAIC report on profitability, 17 is 7.9%. This is well below the 12.7% Fortune Magazine allindustry average return shown in the NAIC report. The long-term 15-year average return on net worth for California workers compensation as published by the NAIC is 5.6% as compared to 13.1% for the Fortune Magazine all-industry average. 17 Report on Profitability by Line and State in 2013, NAIC,

20 Executive Summary Chart 16 NAIC Estimates of Average Return on Net Worth 30% 20% Fortune Magazine - All Industry California Workers' Compensation 10.4% 10.2% 12.6%13.9% 14.9% 15.4% 15.2% 13.1% 10.5% 12.7% 12.9% 14.3% 13.4% 14.3% 12.7% 12.6% 14.2% 16.4% 10% 12.1% 7.0% 3.1% 4.6% 5.2% 7.4% 5.8% 7.9% 0% 3.9% 3.0% -7.3% -10% 15-Year Arithmetic Average Return -11.5% California Workers Compensation 5.6% Fortune Magazine All Industry 13.1% -20% Calendar Year Source: NAIC Report on Profitability By Line and State in

21 Executive Summary E. Computation of Indicated Average January 1, 2018 Pure Premium Rate and Proposed Standard Classification Pure Premium Rates The average proposed January 1, 2018 pure premium rate of $2.01 per $100 of payroll is based on the losses and loss adjustment expenses (LAE) projected to be incurred on policies incepting in 2018 as compared to the premium that would be generated on those policies using the industry average filed pure premium rates as of July 1, The proposed advisory pure premium rates for policies incepting in 2018 are based on an evaluation of the loss, LAE, and premium experience of calendar accident years 1985 through 2016, valued as of March 31, The principal methodologies and projections used by the WCIRB in calculating the average proposed pure premium rate as detailed in Section B of this filing are summarized below. Loss Development Methodology The proposed 2018 pure premium rates are intended to reflect the estimated final, or ultimate, cost of losses and LAE on all accidents that arise on policies incepting in Since workers compensation claims that are incurred in a particular year will be paid out over many years, the losses reported for each historical accident year are adjusted, or developed, to reflect the ultimate cost of all accidents that occurred during that year. This process is known as loss development. Consistent with recent WCIRB pure premium rate filings and corresponding CDI decisions, the WCIRB is again recommending projecting statewide insured losses paid for each accident year as of March 31, 2017 through 231 months based on historical development patterns of losses paid as the claims mature. Based on a 2014 WCIRB analysis of long-term loss development, 18 and as in the last several pure premium rate filings, the WCIRB is recommending that development beyond 231 months be based on historical incurred loss development patterns, which are less affected by the shift in payment pattern that occurred following the 1996 Minniear decision. 19 Incurred loss development beyond 387 months is based on fitting an inverse power curve to historical development factors from 111 to 351 months. 20 Over the last several years, insurer reported case reserve levels have declined sharply. Chart 17 shows the changes in medical case reserves by year in comparison to the changes in paid medical losses. With the impact of SB 863 and despite an increase in the number of claims, paid medical loss amounts have been very flat since Conversely, medical case reserves continued to rise in the first 2 years following SB 863 as there was apparent delay in the recognition of the impacts of SB 863 in average insurer case reserves. However, since 2015 average medical reserves have dropped by almost $1.2 billion, while medical payments have remained flat. These sharply declining medical case reserves have significantly impacted incurred development patterns beyond 231 months, which is the period reflected in the WCIRB s loss development projection. As a result, in this filing the WCIRB has refined its incurred loss development projection to mitigate the impact of this sharp reduction in case reserves See Item AC of the June 11, 2014 WCIRB Actuarial Committee Agenda for a complete discussion of this analysis. 19 Minniear v. Mount San Antonio Community College District (1996) 61 Cal. Comp. Cases 1055 (Appeals Board en banc opinion). 20 See Item AC of the April 5, 2016 WCIRB Actuarial Committee Agenda for a complete discussion of this long-term loss development methodology. 21 See Section B, Appendix A of this filing and Item AC of the August 2, 2017 WCIRB Actuarial Committee Agenda for a complete discussion of this adjustment. 16

22 Executive Summary Chart 17 Change in Medical Case Reserves by Calendar Period Change in Total Medical Case Reserves by Calendar Period ($s in millions) Q Change in Total Medical Payments by Calendar Period ($ s in millions) Q17 SB 863 increased indemnity benefits effective January 1, 2013 and January 1, 2014 and included a number of structural reforms to the workers compensation benefit delivery system. Many of these structural reforms impact benefits incurred on all open claims regardless of the date of injury. Accident year development factors for 2012 and prior years that emerged after January 1, 2013 reflect a mix of payments made under the pre-sb 863 environment and the post-sb 863 environment and can be distorted. In addition, the indemnity benefit changes in SB 863 impacted late-paying benefits such as permanent partial disability benefits much differently than early-paying benefits such as temporary disability benefits. In 2013, the WCIRB analyzed the potential impact of SB 863 on indemnity and medical paid loss development patterns and implemented a number of adjustments to correct for the impact of SB 863 on paid loss patterns. 22 The WCIRB continues to believe these reform adjustments are appropriate. The recommended adjustments to loss development to reflect the impact of SB 863 are discussed in Section B, Appendix A. 23 The SB 863 reform adjustments included in this filing reflect the most current available information on emerging post-sb 863 costs Impact of Senate Bill No. 863 on Loss Development Patterns, WCIRB, August 13, See Item AC of the August 3, 2016 WCIRB Actuarial Committee Agenda for an evaluation of the continued appropriateness of the SB 863 reform adjustments to the loss development projections. 24 Senate Bill No. 863 WCIRB Cost Monitoring Report 2016 Retrospective Evaluation (WCIRB, November 17, 2016). 17

23 Executive Summary Since the implementation of SB 863, the rate at which claims have settled in California has accelerated. (See Chart 3, above). Changing settlement rates can distort projections based on historical paid loss development. As a result, as in the last two pure premium rate filings, the WCIRB has further adjusted the paid development projections for the impact of the changes in claim settlement rates by adjusting paid patterns to a common rate of claim settlement. 25 For informational purposes, the WCIRB has computed a series of alternative January 1, 2018 loss ratio projections over a wide range of alternative loss development methodologies (see Exhibit 3). The resultant indicated policy year 2018 ratios of losses to the industry average filed pure premium rate level as of July 1, 2017 range from to 0.682, compared to based on the methodology reflected in this filing. The assumptions underlying these alternative loss development methodologies as well as the methodology reflected in this filing are discussed in detail in Section B, Appendix A. Trending Methodology The proposed pure premium rates are intended to reflect the cost of losses and LAE incurred on all accidents that arise on policies incepting in As a result, ultimate cost (loss) information on historical accident years is adjusted, or trended, to reflect the ultimate cost of claims covered by policies incepting in First, losses are adjusted to a current, or on-level, basis by adjusting for wage inflation, statutory benefit changes and reforms, and fee schedule changes. The on-level adjustments to reflect the impact of SB 863 have been updated from those included in prior pure premium rate filings to reflect the most current post-sb 863 information available. 26 As with accident year losses, each historical year s earned premium is adjusted to a current, or on-level, basis by adjusting for wage level changes, rate changes and other factors impacting premiums. The loss ratios shown for historical accident years, once adjusted to an ultimate and on-level basis, are used to project the policy year 2018 loss ratio at the industry average filed pure premium rate level as of July 1, As in pure premium rate filings and CDI pure premium rate filing decisions for a number of years, the WCIRB s projected future loss trends are based on separate projections of indemnity claim frequency and claim severity. The WCIRB forecasts frequency changes primarily using an econometric model developed based on a long-term, forty-year history of California frequency changes in relation to changes in economic and other claims-related factors. 27 After a long period of steady decline, indemnity claim frequency increased sharply in 2010 and since that time has generally continued to increase rather than returning to the historical long-term rate of decline. The WCIRB s frequency forecast reflects a balance between long-term and shorter term trends. The frequency forecasts reflected in the WCIRB s policy year 2018 projection average approximately -1.4% annually for the 2017 through 2019 period. Conversely, recent accident year claim severities have not increased at rates consistent with historical trends. Chart 18 shows the WCIRB s estimated ultimate indemnity losses per indemnity claim adjusted to a current on-level basis for the impact of fee schedule changes and legislative reforms. As shown, in the two years following the full implementation of the SB 863 permanent disability benefit increases in 2014, indemnity on-level severities have increased by 1.6% per year. These latest on-level severity increases reflect a rate of growth in excess of that estimated based on the projected wage inflation and annual cost of living adjustments to statutory indemnity benefit levels incorporated into the WCIRB s on-level adjustments. In recent prior pure premium rate filings, the WCIRB had been projecting an on-level indemnity trend factor of 0.0% based largely on the long-term historical trend rate shown in Chart 18. However, given the growth rate of the last two post-sb 863 years, the pattern of increasing growth rates over the last five 25 See Item AC of the March 21, 2017 and June 16, 2017 WCIRB Actuarial Committee Agendas for a discussion of the methodology used to adjust loss development projections for the impact of changing claim settlement rates. 26 Senate Bill No. 863 WCIRB Cost Monitoring Report 2016 Retrospective Evaluation (WCIRB, November 17, 2016). 27 Brooks, Ward, California Workers Compensation Benefit Utilization A Study of Changes in Frequency and Severity in Response to Changes in Statutory Workers Compensation Benefit Levels, Proceedings of the Casualty Actuarial Society, Volume LXXXVI, 1999, pp

24 Executive Summary years (see Chart 18) and longer-term average rates of growth in indemnity severities, the WCIRB is projecting an annual 1% indemnity on-level severity trend. Chart 19 shows the WCIRB s estimated ultimate medical losses per indemnity claim adjusted to a current on-level basis for the impact of fee schedule changes and legislative reforms. Projected on-level medical costs per indemnity claim declined in accident years 2012 and 2013 as SB 863 was implemented and were relatively flat in 2014 and However, in 2016, the average on-level medical severity increased by almost 6%. The WCIRB believes that the modest rate of on-level medical severity growth through 2015 is largely attributable to the many SB 863 provisions impacting medical costs. Of concern is the sharp upswing in average medical severity in 2016, but given the relative immaturity of this accident year as of March 31, 2017, we continue to believe a trending approach that balances recent experience with longer-term trends is appropriate, The WCIRB projects a medical severity trend rate of 3.0%, which is based on the approximate average rate of growth in medical severities for the 2005 through 2016 period. 28 While the WCIRB s projected medical severity growth remains modest, we remain concerned that the sharp upswing in 2016 may be indicative of a return to the high rates of medical inflation that historically have followed periods of reform-related cost reductions. 28 In the last several pure premium rate filings, the WCIRB s projected on-level medical severity trend was 2.5%. 19

25 Executive Summary For informational purposes, the WCIRB has computed a series of alternative loss ratio projections over a range of alternative trending methodologies (see Exhibit 4). The resultant indicated policy year 2018 ratios of losses to the industry average filed pure premium rate level as of July 1, 2017 range from to 0.715, compared to based on the methodology reflected in this filing. The assumptions underlying each of these alternative trending methodologies as well as the methodology reflected in this filing are discussed in detail in Section B, Appendix B. Loss Adjustment Expense Projection Methodology The California Insurance Code provides that the advisory pure premium rates include a provision for the cost of administering claims or loss adjustment expenses (LAE) including both allocated loss adjustment expenses (ALAE) and unallocated loss adjustment expenses (ULAE). Additionally, beginning with policies incepting on or after July 1, 2010, the cost of medical cost containment programs (MCCP) are also included in ALAE. The WCIRB makes separate projections of ULAE, ALAE excluding MCCP costs, and MCCP costs. Historically, the ratios of ULAE to losses of the State Compensation Insurance Fund (State Fund) and private insurers that principally write workers compensation insurance only in California had been significantly higher than those for insurers that write workers compensation insurance on a national basis. In 2015, the WCIRB undertook a comprehensive study of insurer reported ULAE amounts. 29 The WCIRB found that the large differences in the ULAE amounts reported by insurers are the result of the treatment of negative adjustments to ULAE for reimbursements by policyholders for claims-related services provided to policyholders and non-reported claims handling costs on claims handled by third party administrators (TPA), primarily on large deductible policies. Given these factors, in 2016 the WCIRB modified its data call to insurers for calendar year expenses to collect additional information that allows 29 See Item AC of the March 18, 2015, June 12, 2015, and August 6, 2015 WCIRB Actuarial Committee Agendas for a more complete analysis of ULAE reporting differences. 20

26 Executive Summary for correction of the impact of negative adjustments to ULAE, TPA claims-handling costs and other issues related to large deductible policies. Chart 20 compares ratios of calendar year paid ULAE to calendar year paid losses for private insurers that write workers compensation predominantly in California to private insurers that write workers compensation on a national basis over the last seven calendar years. The calendar year 2015 and 2016 ULAE ratios shown in Chart 20 reflect the information collected through this modified data call, while the 2013 and 2014 ratios reflect partial corrections based on additional information collected for those years from several large national insurers. As shown, recent differences in ULAE ratios have narrowed significantly as a result of this additional information. Further, as shown in Chart 21 for calendar years 2015 and 2016, the ratio of total LAE to loss for the national insurers following this adjustment to ULAE is slightly above that for the predominantly California private insurers. Chart 20 Ratios of Reported Paid ULAE to Paid Losses 20% 15% 17.3% 15.9% National Insurers 15.0% 16.3% "California Private Insurers" 14.7% 14.8% 14.0% 10% 6.4% 6.5% 6.4% 8.5% 7.7% 10.2% 10.8% 5% 0% Calendar Year Source: Calendar year paid losses and paid ULAE reported to the WCIRB. California Private Insurers include insurers that write 80% or more of their business in California (excluding the State Fund). 21

27 Executive Summary Chart 21 Ratios of Reported Total Paid LAE to Paid Losses 40% 30% National Insurers "California Private Insurers" 31.4% 31.8% 30.3% 31.7% 32.5% 32.9% 32.7% 33.1% 31.9% 28.5% 29.0% 25.5% 22.0% 23.8% 20% 10% 0% Calendar Year Source: Calendar year paid losses and paid LAE reported to the WCIRB. California Private Insurers include As in the last several pure premium rate filings, the WCIRB projected policy year 2018 ULAE is based on the relationship of calendar year paid ULAE amounts to paid losses and open indemnity claim counts. Given the unusual patterns of State Fund ULAE experience and the unique statutory characteristics of the State Fund, as with the last several pure premium rate filings, the WCIRB computed the policy year 2018 ULAE provision based solely on the ULAE experience of private insurers. The WCIRB s projected ratio of ULAE to losses for policy year 2018 using these methodologies is 9.9%. As in prior pure premium rate filings, the WCIRB s ALAE projection is based on a methodology that reflects estimated ultimate ALAE per indemnity claim. In this filing, the WCIRB refined the ALAE and MCCP projection methodologies to adjust the underlying data to correct for the change in reporting requirements related to independent medical review and independent bill review costs that was effective on reviews conducted after January 1, The projected policy year 2018 ALAE ratio, excluding both MCCP costs and the State Fund s ALAE experience, computed on this basis is 17.7% of losses. The WCIRB separately projected the cost of MCCP using a similar methodology as used for the projection of ALAE excluding MCCP costs based on the cost of estimated ultimate MCCP per indemnity claim by accident year. Since MCCP costs are not affected by the factors impacting the State Fund s other LAE costs, the projected policy year 2018 ratio of MCCP to loss is based on statewide MCCP experience. The projected policy year 2018 MCCP provision computed on this basis is 4.1% of losses. For informational purposes, the WCIRB has computed a series of indicated policy year 2018 LAE provisions based on a variety of alternative ALAE and ULAE projection methodologies. Estimates of ULAE range from 8.9% to 14.3% of losses as compared to 9.9% reflected in this filing (see Exhibit 5.1). Estimates of ALAE excluding MCCP costs range from 16.8% to 18.0% of losses, as compared to 17.7% reflected in this filing (see Exhibit 5.2). The assumptions underlying each of the alternative LAE projection methodologies as well as the methodologies reflected in this filing are discussed in Section B, Appendix C. 30 See Section B, Appendix C of this filing and Item AC of the August 2, 2017 WCIRB Actuarial Committee Minutes meeting for a more complete discussion of this adjustment. 22