Workers Compensation Insurance Rating Bureau of California. July 1, 2015 Pure Premium Rate Filing REG

Transcription

1

2

3 Workers Compensation Insurance Rating Bureau of California Workers Compensation Insurance Rating Bureau of California July 1, 2015 Pure Premium Rate Filing REG Submitted: April 6, 2015

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 Workers Compensation Insurance Rating Bureau of California at

5 WCIRB July1, 2015 Pure Premium Rate Filing Table of Contents Page Executive Summary 1 19 Section A Proposed Pure Premium Rates A:1 A:3 Computation of Indicated Average Pure Premium Rate for Policies Incepting Between July 1, 2015 and December 31, 2015 B-1 B:52 i Workers Compensation Insurance Rating Bureau of California

6 Executive Summary Executive Summary A. Introduction Since the WCIRB s January 1, 2015 Pure Premium Rate Filing, favorable loss development on older accident years as well as lower than projected losses emerging on the 2014 accident year has more than offset deterioration in loss adjustment expense experience. Consequently, the indicated pure premium rate level as of July 1, 2015 is significantly below that reflected in the WCIRB s January 1, 2015 Pure Premium Rate Filing. As a result, in accordance with the recommendations of the WCIRB Actuarial Committee that were approved by the WCIRB Governing Committee, the WCIRB is proposing new advisory pure premium rates on policies effective on or after July 1, The proposed July 1, 2015 advisory pure premium rates average $2.46 per $100 of payroll, which is 5.0% less than the industry average filed pure premium rate of $ as of January 1, 2015 and 10.2% lower than the average of the approved January 1, 2015 advisory pure premium rates of $ 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 advisory pure premium rates proposed in this filing reflect the WCIRB s most current evaluation of the impacts of Senate Bill No. 863 (SB 863). 3 The WCIRB s SB 863 Cost Monitoring Plan provides a detailed multi-year plan and schedule for re-evaluating the impact of the provisions of SB 863 based on emerging post-sb 863 cost levels. 4 The WCIRB has begun to refine its SB 863 cost and savings estimates based on emerging post-sb 863 experience 5 and has published SB 863 cost monitoring reports in 2013 and It is likely that some of the recent improvement in emerging indemnity and medical costs are the result of additional SB 863 cost savings and some of the higher than projected loss adjustment expenses are the product of anticipated SB 863 frictional cost reductions not yet materializing. While it remains premature to adjust a number of the prospective SB 863 estimates based on recently emerging post-sb 863 indications, the WCIRB will continue to actively monitor post-sb 863 cost levels and will adjust future pure premium rate indications as appropriate based on the emerging experience. 1 Determined based on insurer rate filings submitted to the California Department of Insurance (CDI). These estimates reflect the most recent payroll weights by insurer and classification (from unit statistical data on policies with effective dates in November 2011 through October 2012). 2 This estimate reflects the most current available set of payroll weights by insurer and classification (from unit statistical data on policies with effective dates in November 2011 through October 2012). 3 See WCIRB Evaluation of the Cost Impact of Senate Bill No. 863, WCIRB, updated October 12, 2012, for the WCIRB s initial prospective evaluations of SB 863. See of the WCIRB s Amended January 1, 2014 Pure Premium Rate Filing submitted on October 23, 2013 for an evaluation of the new RBRVS schedule adopted pursuant to SB Senate Bill No. 863 WCIRB Cost Monitoring Plan, WCIRB, March 27, See Item AC of the August 5, 2014 WCIRB Actuarial Committee meeting for updates to the WCIRB s initial evaluation of SB 863 based on post-sb 863 emerging costs. 6 Senate Bill No. 863 WCIRB Cost Monitoring Report Initial Retrospective Evaluation, WCIRB, October 28, Senate Bill No. 863 WCIRB Cost Monitoring Report 2014 Retrospective Evaluation, WCIRB, November 14, Workers Compensation Insurance Rating Bureau of California

7 Executive Summary B. Rate Information The proposed July 1, 2015 advisory pure premium rates average to $2.46 per $100 of payroll, which is 5.0% lower than the industry average filed pure premium rate of $2.59 as of January 1, In the Amended January 1, 2015 Pure Premium Rate Filing submitted by the WCIRB on September 5, 2015, the WCIRB s indicated average pure premium rate was $2.77 per $100 of payroll. The Insurance Commissioner approved advisory pure premium rates as of January 1, 2015 that averaged $2.74 per $100 of payroll. 7 Chart 1 shows (1) the average proposed July 1, 2015 advisory pure premium rate, (2) the industry average filed pure premium rate as of January 1, 2015, (3) the industry average filed manual rate as of January 1, 2015, 8 and (4) the industry average charged rate for 2014, after the application of most insurer rating plan adjustments. 9 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. Exhibit 2 shows the advisory pure premium rates proposed by the WCIRB to be effective July 1, 2015 for each standard classification, the corresponding industry average filed pure premium rates as of January 1, 2015, and the difference between the two pure premium rates. 7 The Insurance Commissioner s Decision on the WCIRB s Amended January 1, 2015 Pure Premium Rate Filing was based on the WCIRB s actuarial indication, with the exception that the determination of the approved average pure premium reflected an assumed 2.5% reduction in medical treatment levels resulting from the independent medical review provisions of SB The industry average filed manual rate as of January 1, 2015 of $3.83 per $100 of payroll is $0.03 (+0.8%) higher than the industry average filed manual rate as of July 1, 2014 of $ 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 Workers Compensation Insurance Rating Bureau of California

8 Executive Summary C. System Cost Drivers Impacting the Change in Indicated Pure Premium Rate The indicated average July 1, 2015 pure premium rate of $2.46 per $100 of payroll represents a decrease of $0.31, or 11.2%, from the indicated average January 1, 2015 pure premium rate reflected in the WCIRB s Amended January 1, 2015 Pure Premium Rate Filing. This decrease is attributable to improving experience in several loss components that have more than offset deterioration in other system components. The primary components driving the reduction in the indicated pure premium rate level include the following: Medical Loss Development. In the two quarters since the time of the WCIRB s Amended January 1, 2015 Pure Premium Rate Filing, 10 medical loss development improved significantly thereby decreasing WCIRB estimates of ultimate historical accident year loss ratios and the resultant future year medical cost projections. Chart 2 shows the improvement in the WCIRB s projected historical accident year loss ratios as of December 31, 2014 from those evaluated as of June 30, 2014 that were reflected in the WCIRB s Amended January 1, 2015 Pure Premium Rate Filing. Indemnity and Medical Severities. The average cost of indemnity and medical on indemnity claims continue to emerge below prior projections. In fact, for both indemnity and medical, the change in average severities in 2014 was significantly less than projected by the WCIRB. Chart 3 compares the cumulative change in average indemnity and medical per indemnity claim for 2013 and 2014 that was projected following the enactment of SB 863 with the WCIRB s current estimate of the actual change. As shown in Chart 3, the significant decline in estimated ultimate medical per indemnity claim over the last two years contrasts dramatically with the projected growth. The WCIRB believes this decline is likely in large part attributable to the many provisions 10 The WCIRB s Amended January 1, 2015 Pure Premium Rate Filing was submitted on September 5, 2014 and reflected experience through June 30, Workers Compensation Insurance Rating Bureau of California

9 Executive Summary of SB 863 that impact medical costs. Later this year, in accordance with the multi-year SB 863 Cost Monitoring Plan submitted to the Insurance Commissioner, 11 we will be conducting a study of the impact of SB 863 on medical losses Accident Year. The WCIRB s Amended January 1, 2015 Pure Premium Rate Filing reflected accident year experience through In this filing, accident year 2014 experience, evaluated as of 12 months, is available. In large part due to the favorable severity experience discussed previously, the 2014 accident year is emerging at cost levels below the level of recent prior accident years. Chart 4 shows the WCIRB projected ultimate combined indemnity and medical loss ratio 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, wage inflation) to a current or on-level basis. As shown in Chart 4, after three years of relatively stable on-level loss ratios, the 2014 ratio is well below that of the prior years. The WCIRB s loss projection methodology is responsive to the experience level of the latest two accident years and, as a result, the improvement in 2014 loss experience is significant in reducing the indicated average pure premium rate. 11 Senate Bill No. 863 WCIRB Cost Monitoring Plan, WCIRB, March 27, Workers Compensation Insurance Rating Bureau of California

10 Executive Summary While the favorable medical loss development, recent changes in indemnity and medical severity, and favorable accident year 2014 emergence at 12 months is reducing the indicated pure premium rate level, deterioration in several cost components including indemnity claim frequency and loss adjustment expenses mitigates that impact. Increasing Indemnity Claim Frequency. For many years, in California, like most other states, indemnity claim frequency had declined. This decades-long decrease in indemnity claim frequency, which had averaged approximately 3% to 4% per year, is 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 as occurred in most other states following the recent economic recovery, California s indemnity claim frequency in 2011 remained high and in 2012, 2013, and 2014 continued to increase. In 2013 and early 2015, the WCIRB conducted additional analyses of indemnity claim frequency changes. 13 The WCIRB found that the drivers of these recent year 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 changes were largely focused in the Los Angeles regions and largely impacted by cumulative injury claims, particularly those involving multiple body parts. Chart 5 shows indemnity claim frequency changes by accident year. 12 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 and Analysis of Changes in Indemnity Claim Frequency January 2015 Update Report, WCIRB, January Workers Compensation Insurance Rating Bureau of California

11 Executive Summary Increasing 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 in 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). Chart 6 shows the average paid ALAE per reported indemnity claim by accident year for private insurers as of 12 months through accident year Chart 7 shows the average calendar year incurred ULAE as a ratio to indemnity claims open at the beginning of the calendar year for private insurers through calendar year (Calendar year 2014 ULAE is not yet available.) As shown in Charts 6 and 7, both ALAE and ULAE severities show significant increases following the enactment of SB Workers Compensation Insurance Rating Bureau of California

12 Executive Summary As shown in Chart 8, these increases vary dramatically from the WCIRB s projections made in the last several pure premium rate filings that reflected the projected frictional cost reductions arising from SB 863. The WCIRB has begun to refine its SB 863 cost estimates based on emerging post- SB 863 loss adjustment expense experience 14 and will continue that process as additional loss adjustment expense experience emerges. 14 See Item AC of the August 5, 2014 WCIRB Actuarial Committee meeting for updates to the WCIRB s SB 863 cost evaluation based post-sb 863 emerging costs. 7 Workers Compensation Insurance Rating Bureau of California

13 Executive Summary D. Computation of Indicated Average July 1, 2015 Pure Premium Rate The proposed July 1, 2015 advisory pure premium rates and the methodologies used to compute those pure premium rates are presented in Sections A and B. The indicated average pure premium rate of $2.46 per $100 of payroll is based on a comparison of the losses and loss adjustment expenses projected to be incurred on policies incepting between July 1, 2015 and December 31, 2015 to the premium that would be generated on those policies using the industry average filed pure premium rates as of January 1, This projection is based on insurer loss, allocated loss adjustment expense, and premium experience through December 31, 2014 and unallocated loss adjustment expense (ULAE) experience through calendar year (Calendar year 2014 ULAE is reported to the WCIRB in May of 2015 and will be reflected in the WCIRB s January 1, 2016 Pure Premium Rate Filing.) Indemnity and Medical Loss Projection The loss development, on-leveling, and trending methodologies used to develop the loss component of the indicated July 1, 2015 average pure premium rate are summarized in and are analogous to the methodologies used in the WCIRB s January 1, 2015 Pure Premium Rate Filing. However, the basis of the selection of the projected future rate of claim severity growth varied slightly from that reflected in the WCIRB s January 1, 2015 Amended Pure Premium Rate Filing. Chart 9 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. 8 Workers Compensation Insurance Rating Bureau of California

14 Executive Summary Sources: WCIRB January 1, 2015 Pure Premium Rate Filing, insurer rate filings submitted to the CDI, and insurer data submitted in WCIRB data calls. As shown in Chart 9, projected medical costs per indemnity claim, even after adjusting for the WCIRB s estimated impact of SB 863, has declined significantly for the two years following the implementation of SB 863. The WCIRB believes this decrease in adjusted medical severities is likely attributable to additional savings in medical costs resulting from the many SB 863 provisions impacting medical costs that were not reflected in the WCIRB s initial cost estimates of SB 863. While, the WCIRB will be studying the impact of SB 863 on medical costs in 2015, we believe it is inappropriate to assume that this rate of decline (4% in 2014), which is likely largely attributable to one-time system reforms, will continue into the future. As a result, the WCIRB has projected future medical severity trend on a basis that excludes the rate of decline in accident year 2014 severities. The WCIRB used a similar approach to project indemnity severity growth and the growth in ALAE costs per indemnity claim. Loss Adjustment Expense Projection The loss adjustment expense provision reflected in the indicated average July 1, 2015 pure premium rate was computed using the same methodologies as reflected in the WCIRB s January 1, 2015 Pure Premium Rate Filing. The ALAE provision was based on private insurer accident year ALAE data through accident year 2014 evaluated as of December 31, As in prior pure premium rate filings, the ALAE projection was based on a methodology that reflected estimated ultimate ALAE per indemnity claim. The provision for the cost of medical cost containment programs was computed separately from the provision for other ALAE costs. The projected July 1, 2015 policy period ALAE, including the cost of medical cost containment programs, is 26.6% of losses. Reported ULAE experience for calendar year 2014 is not yet available. As a result, the ULAE provision reflected in the indicated average July 1, 2015 pure premium rate was computed based on the same private insurer calendar year ULAE experience and methodologies reflected in the WCIRB s Amended January 1, 2015 Pure Premium Rate Filing (experience through calendar year 2013). The projected July 1, 2015 policy period ULAE projected on this basis is 6.3% of losses. 9 Workers Compensation Insurance Rating Bureau of California

15 Executive Summary As discussed in prior pure premium rate filings, the ratios of ULAE to losses of State Compensation Insurance Fund and private insurers who principally write workers compensation insurance only in California are significantly higher than that of insurers who write workers compensation insurance on a national basis and whose reported ULAE is based on an allocation of countrywide ULAE that may not be fully reflective of the complexity of the claims process in California. Chart 10 compares the paid ULAE ratios of the national insurers to the private insurers who predominantly write workers compensation insurance in California. While the WCIRB s projected ULAE provision continues to reflect the paid ULAE reported by all private insurers, the WCIRB remains concerned that the reported ULAE by some insurers may not fully reflect the complexity of the claims process in California and may not always reflect the full cost of ULAE on large deductible policies. The WCIRB is in the process of analyzing these differences in ULAE reporting and anticipates providing additional information and possible recommended adjustments as part of the January 1, 2016 Pure Premium Rate Filing. 10 Workers Compensation Insurance Rating Bureau of California

16 Executive Summary Exhibit 1 Computation of Proposed and Industry Average Rates A. Computation of Industry Average Filed Manual Rate as of January 1, For each of the 120 largest insurers in California, 2 the WCIRB determined the filed manual rate for each standard classification as of July 1, 2014 based on the insurer s rate filing information submitted to the California Department of Insurance (CDI). In instances when an insurer s filed manual rates reflected a deviation from the standard classification system (e.g., by sub-classification, tier or territory), the WCIRB obtained additional information from the insurer as to the volume of business written for each of the deviated classifications. This information was used to compute the insurer s average filed manual rate for the applicable standard classification. 2. For each of the 120 insurers, the payroll reported to the WCIRB on unit statistical reports (USRs) for 2012 policies 3 (reported payroll) for each standard classification (classification) was extended by the insurer s applicable filed manual rate. 4 For each classification, the resulting premium for all 120 insurers was summed and divided by the total reported payroll for the classification for all 120 insurers to produce an industry average filed manual rate for the classification. 3. The total reported payroll for each classification for all insurers was extended by the industry average filed manual rate for the classification. The resulting premium for each classification was summed and divided by the total reported payroll for all classifications for all insurers to produce the industry average filed manual rate as of July 1, The industry average filed manual rate as of January 1, 2015 was determined by adjusting the July 1, 2014 industry filed manual rate by the average change in filed manual rates by insurer from July 1, 2014 through January 1, 2015 provided by the CDI. B. Computation of Industry Average Filed Pure Premium Rate as of January 1, For each of the 120 largest insurers in California, the WCIRB determined the filed pure premium rate for each classification as of July 1, 2014 by adjusting each insurer s filed manual rate by classification, derived as described in Section A, paragraph 1 above, to remove the applicable underwriting expense loading factor reflected in the insurer s rate filing information. 2. For each of the 120 insurers, the reported payroll for each classification was extended by the insurer s applicable filed pure premium rate. For each classification, the resulting pure premium for all 120 insurers was summed and divided by the total reported payroll for the classification for all 120 insurers to produce an industry average filed pure premium rate for the classification. 3. The total reported payroll for each classification for all insurers was extended by the industry average filed pure premium rate for the classification. The resulting pure premium for each classification was summed and divided by the total reported payroll for all classifications for all insurers to produce the industry average filed pure premium rate as of July 1, The average filed manual rate varies dramatically across insurers for a variety of reasons, including the mix of classifications written, underwriting practices, and use of rating plan adjustments. For example, an insurer with relatively high manual rates may, as a matter of underwriting practice, apply higher schedule credits than an insurer with lower manual rates. 2 In total, these insurers wrote in excess of 98% of the California workers compensation insurance market in The most current USRs available were for policies incepting November of 2011 through October of If an insurer filed deviations from standard classifications, the average filed manual rate for the applicable standard classification, derived as described in Section A, paragraph 1 above, was used instead. 5 An insurer s filed pure premium rates are a function of the set of advisory pure premium rates referenced in its rate filing as well as the manner in which the rate filing was developed. An insurer with an average filed pure premium rate greater than the industry average filed pure premium rate may or may not have higher than average filed manual rates, as the insurer may choose to apply a relatively small expense loading to develop the manual rates filed with the CDI. 11 Workers Compensation Insurance Rating Bureau of California

17 Executive Summary Exhibit 1 4. The industry average filed pure premium rate as of January 1, 2015 was determined by adjusting the July 1, 2014 industry average filed pure premium rate by the average change in filed pure premium rates by insurer from July 1, 2014 through January 1, 2015 provided by the CDI. C. Computation of Proposed Average Pure Premium Rate The industry average filed pure premium rate as of January 1, 2015 derived as described in, paragraph 4 above, is adjusted by the Indicated Difference from Industry Average Filed Pure Premium Rate as of July 1, 2015 (line 4 of, Exhibit 8) to produce the proposed average pure premium rate per $100 of payroll for policies incepting in the July 1, 2015 through December 31, 2015 period. D. Computation of Industry Average Charged Rate for The average advisory pure premium rate for 2014 is estimated by extending the January 1, 2014 advisory pure premium rate for each classification by the reported payroll for the classification for all insurers. 2. The industry average charged rate for 2014 is estimated by multiplying (a) the average advisory pure premium rate for 2014, derived as described in paragraph 1 above, by (b) the average policy year 2014 ratio of premium written at the industry average charged rate level to premium written at the advisory pure premium rate level based on the WCIRB s quarterly calls for experience 6 through December 31, Premiums reported on the WCIRB s quarterly calls for experience exclude the impact of deductible credits, retrospective rating plan adjustments, and terrorism charges. 12 Workers Compensation Insurance Rating Bureau of California

18 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2015 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2015 NOTE: THE INDUSTRY AVERAGE FILED PURE PREMIUM RATE SHOWN BELOW FOR EACH CLASSIFICATION REFLECTS THE MIX OF INSURERS WRITING BUSINESS IN THAT CLASSIFICATION AS WELL AS THEIR UNDERWRITING AND RATE FILING PRACTICES. THE DIFFERENCES SHOWN BELOW ARE NOT NECESSARILY INDICATIVE OF FUTURE CHANGES IN ANY INDIVIDUAL INSURER S FILED PURE PREMIUM RATE OR THE RATE IT WILL CHARGE ITS POLICYHOLDERS AS INSURERS MAY, AND OFTEN DO, FILE AND USE RATES OTHER THAN THOSE PROPOSED OR APPROVED BY THE COMMISSIONER. Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. 13

19 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2015 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2015 (continued) Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. 14

20 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2015 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2015 (continued) Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % 5029* 6.31 N/A N/A % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. * This classification is newly established effective January 1, 2014; therefore there is no reported payroll for this classification for policy year 2012 to derive an industry average filed pure premium rate. 15

21 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2015 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2015 (continued) Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. 16

22 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2015 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2015 (continued) Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference % % % % % % % % % % % % 7707** % % % % % % 7722** % % % % % % % % % % % % % % % 8278** % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. ** The rates for classifications 7707 and 7722 are per capita, and the rate for classification 8278 is per race. 17

23 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2015 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2015 (continued) Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % 9095* 6.18 N/A N/A % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. * This classification is newly established effective January 1, 2014; therefore there is no reported payroll for this classification for policy year 2012 to derive an industry average filed pure premium rate. 18

24 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2015 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2015 (continued) Class Code Proposed July 1, 2015 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1,2015 Difference % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. 19

25 Section A Section A Proposed Pure Premium Rates This section summarizes the calculation of the proposed pure premium rates applicable to new and renewal policies as of the first anniversary rating date of a risk on or after July 1, Pure premium rates contemplate provision for losses and loss adjustment expenses. The methodologies used to develop the indicated pure premium rates are discussed in. As shown on, Exhibit 8, the indicated average pure premium rate, based on aggregate loss, loss adjustment expense and premium experience valued as of December 31, 2014 and the methodologies described in, is $2.46 per $100 of payroll. The proposed July 1, 2015 pure premium rate for each classification was determined by multiplying the January 1, 2015 advisory pure premium rate for the classification by the ratio of $2.46 to the average January 1, 2015 advisory pure premium rate of $2.74 per $100 of payroll as reflected in the California Department of Insurance Decision on the WCIRB s January 1, 2015 Pure Premium Rate Filing. A-1 Workers Compensation Insurance Rating Bureau of California

26 Section A Proposed July 1, 2015 Pure Premium Rates Effective July 1, 2015 on New and Renewal Policies Code No. P.P. Code P.P. Code P.P. Code P.P. Code P.P. Code P.P. Code P.P. Rate* No. Rate* No. Rate* No. Rate* No. Rate* No. Rate* No. Rate* *Pure Premium Rates are per $100 of payroll unless otherwise noted. A-2

27 Section A Legend: Proposed July 1, 2015 Pure Premium Rates Effective July 1, 2015 on New and Renewal Policies with Anniversary Rating Dates on or after July 1, 2015 (Continued) (A) See below Code P.P. Code P.P. Code P.P. Code P.P. Code P.P. Code P.P. Code P.P. No. Rate* No. Rate* No. Rate* No. Rate* No. Rate* No. Rate* No. Rate* (A) (A) (A) Per Capita Classifications Code P.P. Firefighters, Police, Police Deputies, etc. No. Rate* Firefighters - volunteers Police, Sheriffs - volunteers Per Race Classification Code P.P. Horse Racing No. Rate* Jockeys employed at a rate per race *Pure Premium Rates are per $100 of payroll unless otherwise noted. A-3

28 Computation of Indicated Average Pure Premium Rate for Policies Incepting between July 1, 2015 and December 31, 2015 The ratio of losses to premium at the industry average filed pure premium rate level as of January 1, 2015 for policies incepting between July 1, 2015 and December 31, 2015 based on experience through December 31, 2014 is 71.5%. The projected provision for loss adjustment expenses (LAE) is 32.9% of losses. In total, the projected loss and LAE as a percentage of premium at the industry average filed pure premium rate level as of January 1, 2015 is 95.0%, resulting in an indicated -5.0% difference from the industry average filed pure premium rate as of January 1, 2015 of $2.59 per $100 of payroll. The resulting indicated average pure premium rate for policies incepting between July 1, 2015 and December 31, 2015 is $2.46 per $100 of payroll. Computation of Projected Loss to Pure Premium Ratio The projected ratio of loss to premium at the industry average filed pure premium rate level as of January 1, 2015 for policies incepting between July 1, 2015 and December 31, 2015 of 71.5% has been derived based on the following experience and actuarial methodologies: A. Calendar Accident Year Experience The projected loss to pure premium ratio is based on an evaluation of calendar accident year experience through 2014, valued as of December 31, A summary of the 1984 through 2014 calendar year premiums and accident year losses is shown in Exhibit 1. The experience contained in this summary reflects the data reported by insurers representing almost 100% of the California workers compensation insurance market in (The December 31, 2014 experience of a number of insurers that were in liquidation by 2014 but may have written a significant portion of the market in prior accident years has not been reported to the WCIRB and is, therefore, not included in this analysis.) Exhibit 1 shows the earned premium, the indemnity paid losses and case reserves, and the medical paid losses and case reserves as of December 31, 2014 for accident years 1984 through Beginning with policies incepting on or after July 1, 2010, the California Workers Compensation Uniform Statistical Reporting Plan 1995 requires that the cost of medical cost containment programs (MCCP) be reported as allocated loss adjustment expense (ALAE) rather than as medical loss. As a result, portions of accident year 2010 and accident year 2011 MCCP costs are reported in medical loss and portions are reported in ALAE. In order to provide for a consistent comparison across more recent accident years, as in recent pure premium rate filings, the paid medical losses shown in Exhibit 1 for accident year 2011 have been adjusted to exclude all MCCP paid costs including the portion of MCCP costs reported in medical losses. 1 The paid medical losses shown in Exhibit 1 for accident years 2010 and prior continue to include all MCCP costs including the MCCP costs for the 2010 accident year reported as ALAE. 2 (MCCP costs are projected as a component of loss adjustment expenses as shown on Exhibit 9 and discussed in Part A,, Appendix C of the WCIRB s January 1, 2015 Pure Premium Rate Filing.) Exhibit 1 also shows, for informational purposes, the incurred but not reported (IBNR) losses reported by insurers as of December 31, 2014, the total incurred losses including IBNR losses, and the total loss ratio reported for each accident year. For example, as shown in the last column of Exhibit 1, insurers reported a total loss ratio of 58.2% for accident year 2014 as of December 31, B. Loss Development The indemnity and medical losses paid and incurred (paid plus case reserves) shown in Exhibit 1 for each accident year are valued as of December 31, For example, the paid indemnity losses of 1 The amount of MCCP paid costs estimated to be reported in medical losses and excluded from the paid medical amount shown in Exhibit 1 for accident year 2011 is $33,631, The amount of MCCP paid costs reported as ALAE, but included in the paid medical amount for accident year 2010 is $46,190,760. B-1 Workers Compensation Insurance Rating Bureau of California