January 1, 2015 Pure Premium Rate Filing Summary of Actuarial Committee Recommendations

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1 WCIRB Actuarial Committee Meeting of June 11, 214 W o r k e r s C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a January 1, 215 Pure Premium Rate Filing Summary of Actuarial Committee Recommendations WCIRB Governing Committee Meeting August 13, 214 WCIRB Actuarial Committee Meeting of June 11, 214 Notice The information provided in this presentation was developed by the Workers Compensation Insurance Rating Bureau of California (WCIRB) solely for the purpose of discussion during this presentation. The WCIRB shall not be liable for any damages, of any kind, whether direct, indirect, incidental, punitive or consequential, arising from the use, inability to use, or reliance upon information provided in this presentation. 214 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 by federal copyright law. No copyright is claimed in the text of statutes and regulations quoted within this work. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Online, X-Mod Direct, escad and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRB s prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies. To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the Workers Compensation Insurance Rating Bureau of California at customerservice@wcirb.com.

2 Actuarial Committee Review of March 31, 214 Experience Factors Increasing Indication Continued Medical Loss Development Recognition of Long-Term Medical Development Increasing Claim Frequency Factors Moderating Indication SB 863 Lien Savings Greater than Projected 213 Severities Emerging Consistent with Projections 213 Year Emerging Favorably Increasing LAE Costs Less than Projected SB 863 Savings from IMR Reduced Wage Forecasts Indicated Average 1/1/215 Pure Premium Rate Based on Actuarial Committee Recommendations: $2.86 June 3, 214 Experience to Be Reviewed Next Month 3 Average Rate Measures Per $1 of Payroll Based on Current Exposure Estimates* Rate per $1 of payroll $3. $2.86 $2.57 $2.74 $2.68 $2. $1. Indicated Average 1/1/215 Pure Premium Rate Based on Actuarial Committee Recommendations Industry Average Filed Pure Premium Rate as of 7/1/214 WCIRB Indicated Average 1/1/214 Pure Premium Rate (Amended Filing) Approved Average 1/1/214 Advisory Pure Premium Rate * Based on unit statistical payroll by classification and insurer for November 211 through October 212 policies. 4 2

3 Principal Components of Increase in 1/1/15 Indication from 1/1/14 Filing 4% Approximate Effect on Indicated Average Pure Premium Rate in Percentage Points 3.% 2% 2.5% 2.% 1.5%.5%.5%.6% % -2% -2.% -4% Increased Loss Development Recognition of Long-term Med. Development Increased Frequency Projection Reduced UCLA Wage Growth Forecast Increased LAE Additional Year of Trend ERP Off- Balance Increase -3.5% 213 Accident Year Experience Reduced Severity Growth Assumptions 5 Projected Ultimate Medical Loss Ratios Prior to Adjustment to Medical Loss Development Tail % /31/212 3/31/213 6/3/ /3/213 12/31/213 3/31/ Accident Year 6 3

4 1.2 Shift in Ratio of Incurred Medical to Paid Medical Losses at 156 Months Accident Year 7 Paid Medical Development From 36 to 96 Months California vs. Countrywide 2. California Countrywide * Calendar Year * NCCI countrywide pattern is from NCCI Annual Statistical Bulletins (latest year) and excludes California and several other states. 8 4

5 Projected Medical On-Level Loss Ratio Latest Year Incurred Methodology Vs. Latest Year Paid Methodology.6 Latest Year Incurred Latest Year Paid /1/14 Filing (Prior to Methodology Adjustment) 1/1/15 Indication (After Methodology Adjustment) 9 Change in Estimated Indemnity Claim Frequency California vs. NCCI States % California NCCI States 3.2 Preliminary Months Accident Year NCCI estimates are based on the May 8, 214 State of the Line Presentation (NCCI 213 estimate is preliminary and the 21 and 211 estimates have been adjusted to remove the impact of audit premium and other factors). 1 5

6 Change in Estimated Indemnity Claim Frequency Projected vs. Actual % As of March 31, Projected 4.9 Actual (Current Estimate) months Accident Year 11 Paid ALAE per Reported Indemnity Claim Excluding MCCP $4,5 $3, $1,5 2,578 1,663 Statewide As of March 31, Months 27 Months 39 Months 4,159 4,411 4,447 3,554 2,875 3,141 2,623 2,862 2,897 2,979 1,845 2,37 2, ,65 1,18 1,125 1,189 $ Private Insurers $5, 15 Months 27 Months 39 Months 4,493 4,648 4,592 3,955 $3,5 3,272 3,43 3,611 2,844 3,29 2,99 3,44 2,171 2,338 2,493 2,8 $2, ,36 1,131 1,147 1,141 1,212 $ Accident Year 12 6

7 Average Paid ULAE per Open Indemnity Claim Private Insurers 2, Paid ULAE per Open Indemnity Claim 8 Annual Percent Change in Paid ULAE Per Open Indemnity Claim 1,676 1,683 1,698 1,762 1,6 6 1, Calendar Year Calendar Year Source: WCIRB Accident Year Experience Calls LAE Severity Changes Projected Vs. Actual 1% Projected 6.2% 5% Actual (Current Estimate) 3.8% % -5% -1% -7.8% -12.3% -15% ALAE ULAE 14 7

8 Number of IMR Requests by Month 2, 19,663 19,576 2,728 15,731 14,99 15, 13,999 13,171 13,76 12,638 12,874 11,571 1, 5, 4, Source: DWC 15 WCIRB Evaluation of SB 863 Evaluation of IMR Process Impact on Frictional Costs Initial October 212 Evaluation of Impact on Frictional Costs Related to Medical Treatment Disputes Lien costs related to medical treatment replaced by lower cost IMRs QME reports on medical treatment replaced by lower cost IMRs Elimination of ALAE on expedited hearings related to utilization review Estimated cost savings:.6%, or $12 million Post-SB 863 Information Volume of IMRs 2 to 4 times higher than projected Claims Working Group suggests that, although less common, treatment is still being provided on a lien basis Expedited hearings on medical still occurring (Dubon) LAE up sharply in 213 instead of declining as projected Actuarial Committee Recommendation: Eliminate Estimated Frictional Cost Savings from IMR 16 8

9 WCIRB Evaluation of SB 863 Evaluation of IMR Process Impact on Medical Treatment & TD Duration Initial October 212 Evaluation No consensus on IMR impact on medical & no impact reflected Consensus that IMR should accelerate claims process & reduce TD duration Assumed 4% reduction in TD duration producing 1.1% or $21 mm. savings Post-SB 863 Information 213 indemnity and medical severities emerging generally consistent with projections Limited information on post-sb 863 TD duration available Actuarial Committee Recommendation: Any Adjustment to Original Estimates Premature 17 WCIRB Evaluation of SB 863 Evaluation of IMR Process Impact on Litigation Initial October 212 Evaluation Consensus that IMR should reduce litigation over medical necessity issues Reduction in ALAE estimated at 2.4% generating estimated savings of.3%, or $6 Million Post-SB 863 Information Suggests that LAE has Increased Significantly Instead of Declining as Projected Actuarial Committee Recommendation: Eliminate Estimated ALAE Savings from IMR 18 9

10 UCLA Forecasts of Wage Level Changes 3.5 % June 213 (1/1/14 Filing) June 214 (1/1/15 Indication) Year 19 Liens Filed Counts by Region In Thousands 5 46K liens filed in million liens filed in Los Angeles Area 65.5 Rest of State K liens filed in Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Calendar Year/Quarter Source: EAMS Liens Data 2 1

11 WCIRB Evaluation of SB 863 Evaluation of Changes in Lien Procedures Initial Evaluation Based on Assumptions Derived from CHSWC 211 Liens Study and WCIRB 212 Special Lien Survey Assumed an approximate 41% reduction in number of liens filed Estimated Savings: 2.5%, or $48 million Post-SB 863 Information from DWC & WCIRB Lien Survey Volume of liens reduced 6%+ As expected impact greatest on smaller liens Actuarial Committee Updated Recommendation: Adjust Liens Reduction to 6%; Increases Savings Estimate by $2 Million Loss Severity Changes Projected Vs. Actual 3% Projected Actual (Current Estimate) 1.6% 1.6% 2.1% % -1.3% -3% Indemnity Medical 22 11

12 Change in On-Level Medical Severity % Change As of March 31, 214 MCCP Included MCCP Excluded Based on WCIRB CY Data Calls Accident Year Annual Exponential Trend Based on 25 to 213 (Excluding MCCP): +5.4% Annual Exponential Trend Based on 28 to 213 (Excluding MCCP): +2.5% 1/1/15 Actuarial Committee Selected: +4.% 1/1/14 Filing Selected: +5.% 23 Medical Loss Trend & Projections Latest Year Reform-Adjusted Development Method Projected On-level Medical Loss Ratio.7 Latest Year Reform-Adjusted Paid Development Method Frequency & Severity Trends Applied to Latest Two Years.6 Post-29 Exponential Trend Applied to Latest Two Years %** +3.1%** +6.1%* +7.7%** % +.8% +4.6%* % % % % %.372 Annual Exponential Trend 25 to 213 (including MCCP) = +8.1% Annual Exponential Trend 29 to 213 (including MCCP) = +6.1%.31 Annual Exponential Trend 21 to 213 (including MCCP) = +3.9% *Implied average annual growth rate for selected trending method **Growth rate including MCCP (for informational purposes only) /1/216 Accident Year 24 12

13 Ratios of Paid ULAE to Paid Loss 6 % 5 4 State Fund National Insurers California Private Insurers 45.* Calendar Year California private insurers are insurers with more than 8% of their workers compensation writings in California. *212 figure includes a one-time adjustment made by the State Compensation Insurance Fund to reallocate liabilities related to pension benefits. 25 Projections of LAE to Loss Policy Year 214 Projection (Amended January 1, 214 Pure Premium Rate Filing) Projection Method Statewide Ratio Private Insurer Ratio [1] Using 92%/8% private insurer/state Fund split based on accident year 212 estimated ultimate losses. [2] Using 9%/1% private insurer/state Fund split based on accident year 213 estimated ultimate losses. Private Insurer & State Fund Ratios Combined at Current Weights Tempered 5% [1] Projected ULAE Ratio 7.3% 4.9% 5.8% Projected ALAE (ex MCCP) Ratio 13.1% 13.3% 13.2% Projected MCCP Ratio 7.% 7.3% 7.% Projected Total LAE Ratio 27.4% 25.5% 26.% Policy Year 215 Projection Projection Method Statewide Ratio Private Insurer Ratio Private Insurer & State Fund Ratios Combined at Current Weights Tempered 5% [2] Projected ULAE Ratio 7.4% 5.4% 6.2% Projected ALAE (ex MCCP) Ratio 13.9% 15.% 14.7% Projected MCCP Ratio 6.8% 7.1% 6.8% Projected Total LAE Ratio 28.1% 27.5% 27.7% 26 13

14 Computation of Indicated Average 1/1/15 Pure Premium Rate Based on Actuarial Committee Recommendations (1) Indemnity to Industry Average Filed PP Ratio:.36 (2) Medical to Industry Average Filed PP Ratio:.562 (3) Total Loss to Industry Average Filed PP Ratio (1) + (2):.868 (4) Projected Factor of LAE to Losses: 27.5% (5) Projected Loss & LAE to Industry Average Filed PP Ratio: 1.17 (3) x (4) (6) Projected Change in Experience Rating Off-Balance: +.6% (7) Indicated Change in PP Rates {(5) x [1. + (6)]} 1.: +11.4% (8) Industry Average Filed PP Rate per $1 as of 7/1/214: $2.57 (9) Indicated 1/1/15 Average PP Rate [1. + (7)] x (8): $ Total Medical Payments by Calendar Quarter $ 1,4 Total Medical Payments by Quarter ($ s in millions) % Change from Prior Year Quarter ,3 1,283 1,295 1,29 1,279 1, ,2 1,168 1,163 1, ,1 1, , 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14-6 1Q12-1Q13 2Q12-2Q13 3Q12-3Q13 4Q12-4Q Q13-1Q14 Calendar Quarter Calendar Quarter Source: WCIRB Quarterly Calls for Experience 28 14