Workers Compensation Insurance Rating Bureau of California. January 1, 2011 Pure Premium Rate Filing

Transcription

1 Workers Compensation Insurance Rating Bureau of California January 1, 2011 Pure Premium Rate Filing Submitted: August 18, 2010

2 WCIRB California 525 Market Street, Suite 800 San Francisco, 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, 525 Market Street, Suite 800, San Francisco, California

3 Table of Contents Page 1 14 Part A Pure Premium Rates A:1 Section A Proposed Pure Premium Rates Section B Computation of Indicated Change in the Claims Cost Benchmark Appendix A Exhibits 1 8 Appendix B Loss Development Methodology Appendix C Trending Methodology Appendix D Projected Loss Adjustment Expense Ratio Appendix E Experience Rating Off Balance Correction Factor Section C Classification Relativities Appendix A Exhibits 1 through 8 Appendix B Classification Relativity Review Sheets Part B Plans Subject to Insurance Commissioner Approval Section A Recommended Amendments to the California Workers Compensation Uniform Statistical Reporting Plan 1995 Title 10, California Code of Regulations, Section Effective January 1, 2011 Section B Recommended Amendments to the California Workers Compensation Uniform Statistical Reporting Plan 1995 Title 10, California Code of Regulations, Section Effective January 1, 2012 Section C Recommended Amendments to the Miscellaneous Regulations for the Recording and Reporting of Data Title 10, California Code of Regulations, Section 2354 Effective January 1, 2011 Section D Recommended Amendments to the California Workers Compensation Experience Rating Plan 1995 Title 10, California Code of Regulations, Section Effective January 1, 2011 A:A-1 A:A-3 A:B-1 A:B-7 A:B-8 A:B-40 A:B-41 A:B-140 A:B-141 A:B-174 A:B-175 A:B-248 A:B-249 A:B-252 A:C-1 A:C-6 A:C-7 A:C-24 A:C-25 A:C-268 B:1 B:A-1 B:A-41 B:B-1 B:B-2 B:C-1 B:D-1 B:D-6 i

4 January 1, 2011 WCIRB Regulatory Filing Table of Contents Appendix A Computation of Experience Rating Plan Values Section E Recommended Amendments to the California Workers Compensation Experience Rating Plan 1995 Title 10, California Code of Regulations, Section Effective January 1, 2012 B:D-7 B:D-28 B:E-1 B:E-8 Part C WCIRB Advisory Plans C:1 Section A Amendments to the California Retrospective Rating Plan Effective January 1, 2011 Section B Amendments to the California Large Risk Deductible Plan Effective January 1, 2011 C:A-1 C:A-119 C:B-1 C:B-101 ii

5 INTRODUCTION Pursuant to the California Insurance Code (CIC) statutory framework, one of the WCIRB s primary purposes is to develop adequate pure premium rates rates that reflect the cost of losses and related loss adjustment expenses (LAE). 1 The proposed change in the pure premium rates reflected in this filing is intended to meet the WCIRB s obligation under the statutes to develop adequate pure premium rates for submission to the Insurance Commissioner for issuance or approval. In addition, pursuant to CIC Section 11734(c), the WCIRB is charged with developing rules related to specified plans subject to the Insurance Commissioner s approval. The WCIRB s January 1, 2011 pure premium rate filing proposes (a) a 29.6% increase in the average pure premium rate level, or claims cost benchmark ; (b) changes to the pure premium rate for each classification based on the overall 29.6% indicated increase and the estimated change in each classification s share of the total statewide losses; and (c) changes to the plans subject to the Insurance Commissioner s approval. In addition, the WCIRB s January 1, 2011 pure premium rate filing contains changes adopted by the WCIRB to the California Advisory Retrospective Rating and Large Risk Deductible Plans to reflect updated loss information. These advisory plans are being submitted to the California Department of Insurance (CDI) for review. INDICATED CHANGE IN THE CLAIMS COST BENCHMARK (PART A, SECTION B) The proposed change in the pure premium rate level, or claims cost benchmark, is based on a comparison of the losses and loss adjustment expenses (LAE) projected to be incurred on policies incepting in 2011 to the premium that would be generated on those policies using the current pure premium rates effective January 1, Based on this comparison, a 29.6% increase in average pure premium rates effective January 1, 2011 will be necessary to generate sufficient pure premium to cover the projected cost of losses and LAE expected to arise under the policies incepting in This proposed average pure premium rate level increase of 29.6% is largely a reflection of increases in claim severity inflation following the full implementation of the reforms in 2005 that have more than offset declining claim frequency. As shown below, over the last several years, pure premium rates have become significantly inadequate, as pure premium rates have not increased commensurately with increasing claim severity. 1 See California Insurance Code Sections 11730(f), and (b). 1

6 Indicated Inadequacy(+)/ Redundancy(-) in Approved Pure Premium Rates* % As of December 31, /1/06 7/1/06 1/1/07 7/1/ Approved Pure Premium Rates Effective * - Based on WCIRB s December 31, 2009 Solvency Monitoring Report provided to the CDI.. 1 The proposed 29.6% average increase in pure premium rates is the fifth consecutive pure premium rate level increase proposed by the WCIRB. However, as shown below, despite increases recommended by the CDI actuaries in proposed pure premium rate decisions, only one increase (+5% effective January 1, 2009) has been approved. Recent CDI Pure Premium Rate Decisions % Change 30 WCIRB Recommended CDI Actuaries Recommended Commissioner Approved /1/08 1/1/09 7/1/09 1/1/10 1/1/11 Rate Effective Date 2. However, as shown below, even if the indicated 29.6% increase in the claims cost benchmark is adopted by the Insurance Commissioner in its entirety, the average pure premium rates for policies incepting in 2010 would still be approximately 53% less than they were at their peak prior to implementation of the 2002 to 2004 reforms. 2

7 Average Pure Premium Rate Per $100 of Payroll $6.00 $4.80 $4.00 $4.09 $3.72 $2.00 $2.58 $1.95 $1.68 $1.76 $1.76 $2.28 $0.00 7/1/03 1/1/04 1/1/05 1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 Policy Period WCIRB Recommended 3. The proposed change in the pure premium rates reflects a wide range of actuarial and economic projections based on methodologies recommended by the WCIRB. Over the last several years, at the direction of the CDI, the WCIRB has undertaken a comprehensive review of its actuarial methodologies and processes. Exhibit 1 is a list of specific enhancements developed over this period that are reflected in this filing as a result of this review. The principal methodologies and projections used by the WCIRB in calculating the proposed 29.6% increase in the claims cost benchmark are summarized below. Loss Development Methodology In general, 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 during the 2011 year. However, 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 final or ultimate cost of all accidents that have 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 losses paid for each accident year to an ultimate cost level based on historical development patterns of losses paid as the claims mature. These projections also include adjustments to reflect the cost impact of the 2002 to 2004 reforms on these payment patterns. Additionally, as shown below, the rate at which claims are being settled has been slowing. Changing settlement rates can significantly distort projections based on historical paid loss development. As a result, the WCIRB has further adjusted the paid development projections for the impact of the changes in claim settlement rates. 3

8 Percentage of Indemnity Claims Settled at 15 Months 40 % Accident Year 4. For informational purposes, the WCIRB has computed a series of alternative indicated changes in the claims cost benchmark over a wide range of alternative loss development methodologies (see Exhibit 2). The resultant indicated change in the claims cost benchmark based on these alternative loss development methods ranges from +14% to +38%. The assumptions underlying these alternative loss development methodologies as well as the methodologies recommended by the WCIRB are discussed in detail in Part A, Section B, Appendix B. Trending Methodology The pure premium rates effective January 1, 2011 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 years is adjusted, or trended, to reflect the ultimate cost of claims covered by policies incepting in First, both premiums and losses are adjusted to a current, or on-level, basis by adjusting for average rate changes, wage inflation, statutory benefit changes and reforms, and fee schedule changes. Then, the on-level losses are trended forward for anticipated changes in the underlying cost of claims covered by the policies incepting in As a result, each historical accident year s costs is adjusted, or trended, to reflect the cost levels anticipated on claims covered by policies incepting in As in its January 1, 2010 pure premium rate filing, the WCIRB has projected future loss levels based on separate projections of the frequency of claims and the average cost, or severity, of claims. The WCIRB s January 1, 2010 pure premium rate filing indication projected a sharp frequency decline in 2009 based largely on the major economic slowdown in California, and a sharp increase in severity. While final figures on the accident year 2009 frequency decline are not yet available, as shown below, preliminary estimates range from a moderate increase to a moderate decline. Similarly, as shown below for medical, severity inflation trends moderated somewhat in

9 Estimated Change in Indemnity Claim Frequency 15 % Change As of March 31, 2010 Frequency per On-level Premium Frequency Adjusted for Workforce Change Accident Year 5. Change in On-Level Medical Claim Severity % Change As of March 31, Accident Year 6. To be responsive to the actual losses emerging for accident year 2009 rather than relying on the earlier forecasts of 2009 frequency and severity changes, the WCIRB is recommending projecting the policy year 2011 loss level based on the actual 2009 loss experience adjusted by estimated post-2009 frequency and severity changes. The average combined annual loss trends from 2009 computed on this basis are +2.5% for indemnity and +5.5% for medical. For informational purposes, the WCIRB has computed a series of alternative projected changes in the claims cost benchmark over a wide range of alternative trending methodologies (see Exhibit 3). The resultant indicated change in the claims cost benchmark based on these alternative trending methods ranges from +23% to +37%. The assumptions underlying each of these alternative trending methodologies are discussed in detail in Part A, Section B, Appendix C. 5

10 Impact of Ogilvie and Almaraz/Guzman The WCIRB s July 1, 2009 and January 1, 2010 pure premium rate filings reflected a +5.8% estimated impact of the 2009 Ogilvie v. City and County of San Francisco and Almaraz v. Environmental Recovery Services/Guzman v. Milpitas Unified School District WCAB en banc decisions on cost levels. The WCIRB has reviewed a wide range of preliminary information on costs emerging subsequent to the WCAB decisions. This information has emerged at a level that is not inconsistent with the initial estimates reflected in the WCIRB s earlier pure premium rate filings. As a result, the WCIRB is not recommending any adjustments to the initial estimates of these decisions for purposes of adjusting the older accident years to the current cost level. Also, inasmuch as the impact of the Ogilvie and Almaraz/Guzman decisions is to a large extent already reflected in underlying loss and LAE experience, the WCIRB is not recommending the application of any additional adjustment to the indicated pure premium rate level to reflect these costs. Loss Adjustment Expense Projection Methodology The California Insurance Code provides that the advisory pure premium rates include a provision to reflect the costs associated with LAE. In 2008, the WCIRB completed a comprehensive study that analyzed the impact of the 2002 through 2004 reforms on LAE. As a result of this analysis, the WCIRB is recommending projection methodologies which relate changes in LAE to changes in the number of claims and loss measures which have been shown to be correlated with LAE. The WCIRB s recommended LAE provision of 21.1% of losses for policies incepting in 2011 is predicated on these methodologies. Recently, State Compensation Insurance Fund s (State Fund s) incurred LAE amounts have been unusually high. Given the unique characteristics of State Fund s operations, recent changes in State Fund s market share, and the current sharp increase in State Fund s LAE ratios, as in the last several pure premium rate filings, the WCIRB believes some adjustment to the projected LAE ratio applicable to policies incepting in 2011 to reflect State Fund s unusually high LAE is appropriate. However, pure premium rates are intended to reflect the average experience of all insured policies, and the higher State Fund LAE is, to some extent, indicative of the higher cost of claim-adjusting in California. As a result, the WCIRB does not recommend basing the LAE projection solely on private insurer experience, but instead, recommends an LAE provision that tempers the weight given to State Fund s LAE experience by 50%. For informational purposes, the WCIRB has computed a series of indicated LAE provisions based on a variety of alternative LAE projection methodologies. Estimates of the unallocated component of LAE range from 7% to15% of losses, as compared to 9.3% reflected in this filing (see Exhibit 4.1). Estimates of the allocated component of LAE range from 10% to 16% of losses, as compared to 11.8% reflected in this filing (see Exhibit 4.2). The assumptions underlying each of the alternative LAE projection methodologies are discussed in Part A, Section B, Appendix D. PROPOSED CHANGES IN CLASSIFICATION PURE PREMIUM RATES (PART A, SECTION C) The indicated 29.6% increase in the claims cost benchmark represents the average proposed change in pure premium rates for approximately 500 industry classifications used in California. The specific pure premium rate recommended for each of these industry classifications is determined by both the overall change in the claims cost benchmark and the estimated change in each classification s relative share of total statewide losses. The process by which the proposed January 1, 2011 pure premium rate for each classification is determined is described in Part A, Section C. 6

11 PROPOSED CHANGES TO THE INSURANCE COMMISSIONER S PLANS (PART B) The WCIRB s January 1, 2011 pure premium rate filing proposes changes to both the California Workers Compensation Uniform Statistical Reporting Plan 1995 (USRP) and the California Workers Compensation Experience Rating Plan 1995 (ERP). Proposed Changes to the USRP (Part B, Sections A and B) The WCIRB s proposed changes to the USRP to be effective January 1, 2011 include the creation of a new classification for land surveyors and the elimination of classifications related to radiator manufacturing and wire mattress manufacturing. The WCIRB s proposed changes to the USRP to be effective January 1, 2012 include amendments to the rules related to welfare funds to clarify that vacation and holiday pay are not subject to exclusion from reportable remuneration. Proposed Changes to the ERP (Part B, Sections D and E) The WCIRB s proposed ERP changes to be effective January 1, 2011 include the annual updates to the rating values of the ERP to reflect the most current experience and an amendment to ERP rules to provide that the WCIRB will provide a copy of the experience rating worksheet, at no charge, to employers upon request. The WCIRB s proposed ERP changes to be effective January 1, 2012 were developed in response to the recommendation of the Experience Rating Task Force 2 and include changes intended to simplify the experience rating formula and worksheet. CHANGES TO WCIRB ADVISORY PLANS (PART C) The changes to the advisory California Retrospective Rating Plan and the California Large Risk Deductible Plan were adopted by the WCIRB to be effective January 1, The changes to rating values were adopted to reflect the most current available information. 2 At the directive of the CDI, the WCIRB formed a task force consisting of representatives of the WCIRB, the CDI, employer groups, labor organizations, insurers, insurance agents and brokers, and the Commission on Health and Safety and Workers Compensation. The Task Force s final report was issued on July 8,

12 Exhibit 1 WCIRB Ratemaking Methodology and Process Enhancements as Reflected in the WCIRB s January 1, 2011 Pure Premium Rate Filing A. General Enhancements 1. Formed a Claims Subcommittee of individuals with expertise in claims and legal issues to meet on a quarterly basis to advise the WCIRB s Actuarial Committee on emerging claimsrelated issues that could impact the cost levels underlying pure premium rates. 2. Created an to the filing that is intended to provide non-actuaries with a high-level summary of the most critical components of the filing. B. Loss Development Methodology Enhancements 1. Updated the WCIRB s study on the impact of reforms of 2002 through 2004 on loss development patterns to reflect the most recent information in the WCIRB s loss development projections (Impact of Recent Reform Legislation on Loss Development Patterns 2008 Update, published by the WCIRB on April 2, 2008). 2. Working through a special multi-discipline committee formed in 2009, developed a broad range of loss development diagnostic measures that are reviewed by the WCIRB Actuarial Committee and Claims Subcommittee twice a year in preparation for the WCIRB s pure premium rate filing. 3. Using a comprehensive Towers Perrin study of the WCIRB s loss development methodologies, implemented a loss development methodology that was identified in the Towers Perrin study to be responsive to the slowing pattern of claim settlement that also reflected the impact of the reforms of 2002 through 2004 (Part A, Section B, Appendix B, Exhibits through and Exhibits through 2.4.6). 4. Prepared an analysis of the stability of loss development projections across a number of alternative loss development methodologies (Part A, Section B, Appendix B, Exhibits 12.1 through 12.6). 5. Completed an analysis comparing variability of paid development across insurers with that of incurred development (Item AC of the WCIRB Actuarial Committee meeting of June 24, 2009). 6. Augmented the series of loss development diagnostic statistics regularly presented in WCIRB pure premium rate filings with new diagnostic measures. The new loss development measures presented include accident year frequency and severity distributions by type of injury (Part A, Section B, Appendix B, Exhibits 8.1 and 8.2). 7. Augmented the series of alternative loss development projections regularly presented in WCIRB pure premium rate filings to include projections based on incurred patterns adjusted for changes in case reserve adequacy levels (Part A, Section B, Appendix B, Exhibits 15.1 through 15.11). 8. Augmented the series of alternative loss development projections regularly presented in WCIRB pure premium rate filings to include projections based on paid patterns adjusted for changes in the claims settlement pattern (Part A, Section B, Appendix B, Exhibits 20.1 through 20.11). 9. Augmented the series of alternative loss development projections regularly presented in WCIRB pure premium rate filings to include projections based on incurred and paid development patterns adjusted for changes in the market composition of insurers (Part A, Section B, Appendix B, Exhibits 16.1 through 16.3 and 21.1 through 21.3). 8

13 Exhibit Augmented the series of alternative loss development projections regularly presented in WCIRB pure premium rate filings to include projections based on incremental paid losses by period (Part A, Section B, Appendix B, Exhibits 22.1 through 22.4, 23.1 through 23.2, and 24.1 through 24.7). C. Loss Trending Methodology Enhancements 1. Contracted with the California Workers Compensation Institute (CWCI) to undertake an analysis of the CWCI s transactional level claims database to help explain recent trends in medical severities that became evident based on the WCIRB s aggregate accident year experience (Item AC of the WCIRB Actuarial Committee meeting of April 1, 2010). 2. Working through a special multi-discipline committee formed in 2009, developed a broad range of trending diagnostic measures that are reviewed by the WCIRB Actuarial Committee and Claims Subcommittee twice a year in preparation for the WCIRB s pure premium rate filing. 3. Based on the input of the WCIRB s Claims Subcommittee and a wide range of data from WCIRB, Division of Workers Compensation and the Disability Evaluation Unit on costs emerging subsequent to the Ogilvie and Almaraz/Guzman Workers Compensation Appeals Board (WCAB) decisions, reassessed the appropriateness of adjustments previously reflected in WCIRB pure premium rate filings for the impact of the WCAB decisions (Item AC of the WCIRB Actuarial Committee meeting of August 4, 2010). 4. Reassessed the historical benefit adjustment factors reflected in the filing based on the most recent data available pertaining to the specific legislative, regulatory or judicial action (Item AC of the WCIRB Actuarial Committee meeting of April 1, 2010). 5. Augmented the series of trending diagnostic statistics regularly presented in WCIRB pure premium rate filings with new diagnostic measures. The new measures presented include average paid indemnity per indemnity claim and average paid medical per claim (Part A, Section B, Appendix C, Exhibits 2.1 and 2.2), average paid medical per active indemnity claim (Part A, Section B, Appendix C, Exhibits 2.3 and 2.4) and overall severity changes controlled for changes in mix of claim types (Part A, Section B, Appendix B, Exhibits 8.1 and 8.2). 6. Augmented the on-leveling exhibits included in the pure premium rate projection to separately show the estimated historical impacts of legislative, regulatory and judicial action on claim frequency and claim severity (Part A, Section B, Appendix A, Exhibits 4.1 through 4.4). 7. Augmented the medical on-leveling exhibits included in the pure premium rate projection to separately show the estimated historical impacts on medical costs of fee schedule changes, general medical inflation and the impact of legislative changes on historical medical costs (Part A, Section B, Appendix A, Exhibits 4.2 and 4.3). 8. Updated the benefit level adjustments reflecting the cost impact of the 2002 through 2004 reforms included in the pure premium rate projection to reflect the WCIRB s most current retrospective estimate of the impact of those reforms (Part A, Section B, Appendix A, Exhibits 4.1 and 4.3). 9. Augmented the on-leveling exhibits included in the pure premium rate projection to separately show the historical impact on premium of changes in approved pure premium rate levels and the relationship between the statewide average ratio of premium at insurer rate level to premium at the pure premium rate level (Part A, Section B, Appendix A, Exhibit 5.2). 9

14 Exhibit Included a separate projection of future indemnity claim frequency changes based on the WCIRB s econometric model that projects changes in indemnity claim frequency as a function of a number of economic and claims-related variables (Part A, Section B, Appendix B, Exhibit 6.1). 11. Adjusted the WCIRB s econometric projections of future indemnity claim frequency changes to exclude the impact of anticipated changes due to shifting classification mix (Part A, Section B, Appendix B, Exhibit 6.1). 12. Reviewed the impact of shifting industrial mix on premium, claim frequency and claim severity to assess whether additional adjustment to the ratemaking projection should be made (Item AC of the WCIRB Actuarial Committee meetings of June 11, 2010 and August 4, 2010). 13. Augmented the series of alternative trend projections regularly presented in WCIRB pure premium rate filings to include projections based on several alternative assumptions regarding the latest year s claim frequency (Part A, Section B, Appendix C, Exhibits 8.1 through 8.2 and 9.1 through 9.2). 14. Augmented the series of alternative trend projections regularly presented in WCIRB pure premium rate filings to include separate projections of claim frequency and claim severity based on several alternative severity assumptions (Part A, Section B, Appendix C, Exhibits 10.1 through 10.2 and 11.1 through 11.2). D. Loss Adjustment Expense (LAE) Methodology Enhancements 1. Completed an analysis of the recent loss adjustment expense (LAE) trends that addressed the impact of the reforms on LAE, and recommended consideration of alternative LAE projection methodologies intended to be more reflective of the post-reform environment (Analysis of Loss Adjustment Expense Trends, published by the WCIRB on April 3, 2008). 2. Working through a special multi-discipline committee formed in 2009, developed a broad range of LAE diagnostic measures that are reviewed by the WCIRB Actuarial Committee and Claims Subcommittee twice a year in preparation for the WCIRB s pure premium rate filing. 3. Reviewed the on-level adjustments made to LAE and adopted a new index for adjusting allocated LAE paid amounts per indemnity claim that is California-specific. (Part A, Section D, Exhibits 12.3 and 13.3). 4. Augmented the series of LAE diagnostic statistics regularly presented in WCIRB pure premium rate filings with new diagnostic measures. The new measures presented include LAE ratios by type of insurer (Part A, Section B, Appendix D, Exhibit 1) and LAE paid and incurred per claim (Part A, Section B, Appendix D, Exhibits 2.1, 2.2, 3.1 and 3.2). 5. Prepared alternative projections of allocated loss adjustment expenses (ALAE) and unallocated loss adjustment expenses (ULAE) both including and excluding the experience of State Fund (Part A, Section B, Appendix D, Exhibits 4.1 through 31.4). 6. Prepared alternative projections of ALAE and ULAE based on exposure bases other than losses such as claims open at the beginning of the year and claims opened during the year (Part A, Section B, Appendix D, Exhibits 4.1 through 4.5, 6.1 through 6.5, 8, 9, and 12.1 through 13.3). 7. Prepared alternative projections of ALAE based on several alternative methods of using incremental paid ALAE by accident year (Part A, Section B, Appendix D, Exhibits 22.1 through 31.4). 10

15 Exhibit 2 Projected Policy Year 2011 Loss Ratios and Indicated Pure Premium Rate Level Changes Based on Alternative Loss Development Methodologies Loss Development Projection Methodologies January 1, 2011 Filing Methodology Latest Year Paid Adjusted for Reform and Changes in Claim Settlement Rate Indemnity Loss Ratio Medical Loss Ratio Total Loss Ratio Indicated Pure Premium Rate Level Change % Alternative Methodologies Incurred Loss Development Methods 3-Year Average (Unadjusted) % Latest Year (Unadjusted) % Latest Year Adjusted for Changes to Reserve Adequacy Level Latest Year Adjusted for Changes in Insurer Mix Paid Loss Development Methods % % 3-Year Average (Unadjusted) % Latest Year (Unadjusted) % Latest Year Reform-Adjusted % Latest Year Average Adjusted for Changes in Claim Settlement Rate Latest Year Adjusted for Changes in Insurer Mix 3-Year Average Incremental Paid to Exposure % % % Latest Year Incremental Paid to Exposure % Latest Year Incremental Multiplicative Paid % 1 Projected rate level change using specified loss development methodology, the trending methodology reflected in Part A, Section B, Appendix A, Exhibits 7.1 and 7.3, and the LAE provision (21.1%) computed in Part A, Section B, Appendix D. 11

16 WCIRB January 1, 2011Pure Premium Rate Filing Exhibit 3 Projected Policy Year 2011 Loss Ratios and Indicated Pure Premium Rate Level Changes Based on Alternative Trending Methodologies Trending Methodologies Indemnity Loss Ratio Medical Loss Ratio Total Loss Ratio Indicated Pure Premium Rate Level Change 1 January 1, 2011 Filing Methodology Separate Projection of Frequency and Severity with 6% Indemnity and 9% Medical Severity Trends Applied to 2009 On-Level Loss Ratio % Alternative Methodologies Separate Projections of Frequency and Severity Applied to the Average of the Latest Two Years On-Level Ratios 6% Indemnity and 9% Medical Severity Trends % 7.2% Indemnity and 13% Medical Severity Trends 7.2% Indemnity and 11% Medical Severity Trends +3.5% Frequency Change for 2009, 6% Indemnity & 9% Medical Severity Trends 4.7% Frequency Change for 2009, 6% Indemnity & 9% Medical Severity Trends % % % % Separate Projections of Frequency and Severity Applied to the 2009 On-Level Ratios Severity with Severity Based on Post- Reform Rate of Growth Severity with Severity Based on Long-term Pre-Reform Rate of Growth Five-Year Exponential Trend Applied to On- Level Loss Ratios % % % 1 Projected rate level change using the loss development methodology reflected in Part A, Section B, Appendix A, Exhibit 3, the specified trending methodology, and the LAE provision (21.1%) computed in Part A, Section B, Appendix D. 12

17 Exhibit 4.1 Alternative Policy Year 2011 ULAE to Loss Projections Based on Statewide and Private Insurer Experience ULAE Projection Methodologies January 1, 2011 Filing Methodology Statewide ULAE Ratio Private Insurer ULAE Ratio Private Insurer & State Fund ULAE Ratios Combined at Current Weights Tempered 50% 1 Open Indemnity Claim-Based Projection 10.9% 7.0% 8.8% Paid Loss-Based Projection 12.3% 7.8% 9.7% Average of Indemnity Claim- and Paid Loss- Based Projections Alternative Methodologies 11.6% 7.4% 9.3% Weighted Indemnity Claim-Based Projection 11.1% 7.0% 8.9% Weighted Loss Dollar-Based Projection 12.7% 7.8% 10.0% Latest Calendar Year Ratio 14.8% 8.9% 11.8% Average of Latest Two Calendar Year Ratios 14.5% 8.6% 11.1% 1 Using 87%/13% private insurer/state Fund split based on accident year 2009 estimated ultimate losses with State Fund s projected ULAE ratio reflected at 50% of its actual weight. 13

18 Exhibit 4.2 Alternative Policy Year 2011 ALAE to Loss Projections Based on Statewide and Private Insurer Experience ALAE Projection Methodologies January 1, 2011 Filing Methodology Latest Year Paid ALAE Development; Trend Based on Growth in ALAE per Indemnity Claim Statewide ALAE Ratio Private Insurer ALAE Ratio Private Insurer & State Fund ALAE Ratios Combined at Current Weights Tempered 50% % 12.4% 11.8% Alternative Methodologies Paid ALAE Development Methods Latest Year Development Trend Based on Latest Year 13.3% 15.0% N/A Latest Year Development Trend Based on Latest 3 Years 12.1% 14.1% N/A 3-Year Average Development Trend Based on Latest Year 13.3% 15.6% N/A 3-Year Average Development Trend Based on Latest 3 Years 12.2% 14.5% N/A Paid ALAE to Paid Indemnity Development Methods Latest Year Development Trend Based on Latest Year 12.4% 13.4% N/A Latest Year Development Trend Based on Latest 3 Years 10.9% 12.3% N/A 3-Year Average Development Trend Based on Latest Year 12.6% 13.9% N/A 3-Year Average Development Trend Based on Latest 3 Years 11.1% 12.6% N/A Incremental Paid ALAE to Exposure Methods Average of Latest 3 Years 10.5% 11.9% N/A Latest Year 10.4% 11.6% N/A Incremental Paid ALAE to Paid Indemnity Loss Methods Average of Latest 3 Years 10.7% 13.2% N/A Latest Year 10.3% 12.2% N/A Incremental Paid ALAE to Open Indemnity Claims Method 10.3% 13.0% N/A 1 Using 87%/13% private insurer/state Fund split based on accident year 2009 estimated ultimate losses with State Fund s projected ALAE ratio reflected at 50% of its actual weight. 14