Workers Compensation Insurance Rating Bureau of California. July 1, 2018 Pure Premium Rate Filing REG

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2 Workers Compensation Insurance Rating Bureau of California July 1, 2018 Pure Premium Rate Filing REG Submitted: April 9, 2018

3 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

4 Table of Contents Page Executive Summary 1 23 Section A Proposed Pure Premium Rates A-1 A-3 Section B Computation of Indicated Average Pure Premium Rate for Policies Incepting between July 1, 2018 and December 31, 2018 B-1 B-71 Appendix A Evaluation of New Drug Formulary B-72 B-74 i

5 Executive Summary Executive Summary A. Introduction Since the WCIRB s January 1, 2018 Pure Premium Rate Filing, six months of updated experience is available which has shown downward loss development, acceleration in claim settlement, lower than projected accident year 2017 losses and a sharp decline in lien filings following the implementation of Senate Bill No (SB 1160) and Assembly Bill No (AB 1244). In addition, a new drug formulary has been implemented pursuant to Assembly Bill No (AB 1124). As a result, the indicated pure premium rate level is lower. Consequently, 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 to be effective on policies with an effective date on or after July 1, The proposed July 1, 2018 advisory pure premium rates average $1.80 per $100 of payroll, which is 7.2% lower than the average of the approved January 1, 2018 advisory pure premium rates of $1.94 and 19.0% less than the industry average filed pure premium rate of $ as of January 1, This proposed July 1, 2018 decrease follows six consecutive decreases since early 2015 and, if approved, will result in an average decrease of approximately 35% from the January 1, 2015 advisory pure premium rates. 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. 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 2014 through October 2015). 1

6 Executive Summary B. Rate Information The proposed July 1, 2018 advisory pure premium rates average $1.80 per $100 of payroll, which is 19.0% lower than the industry average filed pure premium rate of $2.22 as of January 1, In the WCIRB s Amended January 1, 2018 Pure Premium Rate Filing, 2 the indicated average pure premium rate was $1.96 per $100 of payroll. The Insurance Commissioner approved advisory pure premium rates as of January 1, 2018 that averaged $1.94 per $100 of payroll. 3 Chart 1 shows (1) the average proposed July 1, 2018 advisory pure premium rate, (2) the industry average filed pure premium rate as of January 1, 2018, (3) the industry average filed manual rate as of January 1, 2018 and (4) the industry average charged rate for The methodologies used to compute the industry average filed rates shown in Chart 1 are consistent with those reflected in the July 1, 2017 Pure Premium Rate Filing and are described in Exhibit 1 of this Executive Summary. Exhibit 2 shows the advisory pure premium rate proposed by the WCIRB to be effective July 1, 2018 for each standard classification, the corresponding industry average filed pure premium rate as of January 1, 2018, and the difference between the two pure premium rates. 2 The WCIRB s Amended January 1, 2018 Pure Premium Rate Filing was submitted on September 8, 2017 and reflected amendments to the WCIRB s original January 1, 2018 Pure Premium Rate Filing based on recently available June 30, 2017 experience. 3 The Insurance Commissioner s Decision on the WCIRB s January 1, 2018 Pure Premium Rate Filing was based on the WCIRB s recommended actuarial methodologies with two exceptions. First, the Commissioner s Decision reflected assumed additional savings in reduced lien filings attributable to SB 1160 and AB 1244 based on third quarter 2017 lien filing information that was not available at the time of the WCIRB s filing. Second, the Commissioner s decision reflected a slightly higher provision for unallocated loss adjustment expenses due to additional information being collected by the WCIRB in 2018 for use in the January 1, 2019 Pure Premium Rate Filing that will likely generate a somewhat higher ULAE provision. 4 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

7 Executive Summary C. System Cost Drivers The indicated average July 1, 2018 pure premium rate of $1.80 per $100 of payroll represents a decrease of $0.16, or 8.2%, from the WCIRB s indicated average January 1, 2018 pure premium rate of $1.96 reflected in the WCIRB s Amended January 1, 2018 Pure Premium Rate Filing. A number of factors have driven this decrease. Loss Development. With two quarters of additional data since the WCIRB s Amended January 1, 2018 Pure Premium Rate Filing, 5 both indemnity and medical loss development have improved significantly, thereby decreasing WCIRB estimates of 2016 and prior accident year ultimate losses. Chart 2 compares the WCIRB s projected ultimate indemnity loss ratios as of December 31, 2017 to those as of June 30, 2017 that were reflected in the WCIRB s Amended January 1, 2018 Pure Premium Rate Filing. Chart 3 shows similar information for projected medical loss ratios. As shown in Charts 2 and 3, both projected ultimate indemnity and medical loss ratios have decreased significantly in the last six months. 5 The WCIRB s Amended January 1, 2018 Pure Premium Rate Filing reflected experience through June 30,

8 Executive Summary Claim Settlement Rates. Since the implementation of Senate Bill No. 863 (SB 863) beginning in 2013, the rate at which indemnity claims are settling has been increasing. We believe SB 863 has accelerated the rate in which claims have settled as a result of quicker medical treatment resolution through the use of independent medical review (IMR), reduction in the volume of liens and a significant decrease in the number of spinal surgeries. A speed-up in claim settlement can affect both loss development and loss adjustment expenses. Chart 4 shows the continued increase in claim settlement rates since the implementation of SB 863 beginning in In particular, as shown in Chart 4, over the last year, claim settlement rates have accelerated sharply. 4

9 Executive Summary 2017 Accident Year Losses. The Amended January 1, 2018 Pure Premium Rate Filing reflected accident year experience through In the WCIRB s July 1, 2018 Pure Premium Rate Filing, accident year 2017 experience evaluated as of 12 months is now available. In part due to the downward indemnity and medical loss development discussed above, the 2017 accident year is emerging at cost levels comparable to recent prior accident years and significantly below the level projected in the Amended January 1, 2018 Pure Premium Rate Filing. Chart 5 shows the WCIRB projected ultimate combined indemnity and medical loss ratios valued as of December 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 on-level loss ratio projected for 2017 in the Amended January 1, 2018 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 (2016 and 2017) and, as a result, lower than projected loss experience for accident year 2017 has lowered the indicated July 1, 2018 average pure premium rate level. 5

10 Executive Summary Wage Inflation. Pure premium rates are expressed relative to payroll. As a result, growth in average wage levels can have a mitigating effect on inflation in loss and loss adjustment expense levels and reduce the pure premium rate level indication. For many years, the WCIRB s future wage level growth estimate in the pure premium rate projection has been based on economic forecasts by the UCLA Anderson School of Business. The forecasts in this filing reflect an average of the UCLA forecasts and those of the California Department of Finance. Chart 6 shows the changes in average California wage levels. As shown, the average of the latest UCLA and Department of Finance forecasts for 2018 and 2019 generally exceed recent prior year wage inflation and are also higher than the combined loss trends projected in this filing, thereby lowering the indicated July 1, 2018 pure premium rate level. 6

11 Executive Summary Lien Filings. The SB 863 lien reforms were one of the cornerstones of the Bill. The WCIRB has estimated that the SB 863 lien reforms reduced system costs by almost $500 million annually. 6 However, in 2015 and 2016 the volume of lien filings increased. In 2016, SB 1160 and AB 1244 were enacted to be effective January 1, 2017 with the intent of further reducing the number of lien filings. 7 Chart 7 shows the annual number of lien filings through calendar year 2017 based on data provided by the Division of Workers Compensation (DWC). As shown on Chart 7, after dramatic reductions in lien counts beginning in 2013, lien counts increased sharply in both 2015 and 2016 to a level more than twice that of (Some of the increase in lien filing in late 2016 is attributable to a speed-up in lien filings made prior to the January 1, 2017 effective date of SB 1160 and AB 1244.) In 2017, post-sb 1160 and AB 1244 lien volumes dropped sharply and has stabilized at about 15,000 liens filings per month. In the last several pure premium rate filings, the WCIRB has reflected an estimated 10% reduction in lien filings based on the provisions of SB 1160 and AB However, based on the updated lien filing counts shown in Chart 7, the WCIRB s July 1, 2018 Pure Premium Rate Filing projections of medical losses and allocated loss adjustment expenses reflect a 40% reduction in lien filings due to SB 1160 and AB Senate Bill No. 863 WCIRB Cost Monitoring Report 2016 Retrospective Evaluation, WCIRB, November 17, An estimated 0.6% reduction of total costs based on the estimated impact of SB 1160 and AB 1244 was reflected in the January 1, 2017, July 1, 2017 and Amended January 1, 2018 Pure Premium Rate Filings. 7

12 Executive Summary New Drug Formulary. AB 1124, which was enacted into law in 2015, directs the DWC to adopt an evidenced-based drug formulary for the California workers compensation system. The DWC adopted the new drug formulary linked to the California Medical Treatment Utilization Schedule effective January 1, The WCIRB has reviewed the impact of the new drug formulary on the costs of the losses and loss adjustment expenses (LAE). In total, the WCIRB estimates an overall 0.5% reduction in the losses and LAE incurred against policies incepting between July 1, 2018 and December 31, 2018 resulting from the new drug formulary. Section B, Appendix A of this filing summarizes the WCIRB s analysis of the potential cost impact of the new formulary. As discussed, downward loss development, acceleration in claim settlement, lower than projected accident year 2017 experience, increases in projected wage growth, declining lien filings and implementation of the new drug formulary have significantly lowered the indicated average advisory pure premium rate. However, several areas of concern warrant continued monitoring. Cumulative Injury Claims. Although overall indemnity claim frequency has been flat to declining in California, the frequency of cumulative injury claims has increased. Cumulative injury claims often involve multiple injuries, are very frequently litigated, are filed disproportionately in the Los Angeles Basin and often are filed on a post-termination basis. 8 Chart 8 shows the proportion of indemnity claims that involve cumulative injury. As shown on Chart 8, the proportion of indemnity claims involving cumulative injury has increased from approximately 8% in 2005 and 2006 to almost 18% in Increases in the number of cumulative injury claims are impacting the loss development, frequency and loss adjustment expense components of the pure premium rate projection included in this filing. 8 For the WCIRB s latest information on indemnity claim frequency, see Analysis of Changes in Indemnity Claim Frequency January 2016 Update Report, WCIRB, January 7,

13 Executive Summary Medical Inflation. Recent advisory pure premium rate reductions have been largely driven by medical severities emerging at significantly lower than projected levels as the various reform provisions in SB 863 have reduced the utilization of medical services. 9 Comparatively, the projected ultimate accident year 2015 average medical cost on indemnity claims is 17% below that of accident year Chart 9 shows the estimated ultimate medical loss per indemnity claim by accident year. As shown in Chart 9, after seven years of relatively flat or declining medical severities, the average medical per indemnity claim increased by almost 6% for accident year It is not clear whether this increase in medical severity is an aberration that may moderate as accident year 2017 matures, resulting in medical losses continuing to develop downward or, alternatively, is indicative of increasing medical inflation that has historically followed after other periods of reform. 9 In the WCIRB s November 2016 retrospective evaluation of SB 863, approximately $2 billion a year in annual savings were attributed to the medical-related reforms of SB

14 Executive Summary 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 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). Chart 10 shows the estimated ultimate ALAE per reported indemnity claim by accident year for private insurers. 10 As shown in Chart 10, rather than decreasing with the implementation of SB 863, the average estimated ultimate ALAE per indemnity claim has increased by 19% since In particular, the accident year 2017 estimated ultimate ALAE per indemnity claim shows a sharp increase. 10 For a number of years, private insurer ULAE and ALAE have formed the basis of the WCIRB s LAE projections in pure premium rate filings. 10

15 Executive Summary D. Computation of Indicated Average July 1, 2018 Pure Premium Rate The proposed July 1, 2018 advisory pure premium rates and the methodologies used to compute these pure premium rates are presented in Sections A and B. The indicated average July 1, 2018 advisory pure premium rate of $1.80 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, 2018 and December 31, 2018 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, ALAE, and premium experience through December 31, 2017 and ULAE experience through calendar year (Calendar year 2017 ULAE is reported to the WCIRB in May 2018 and will be reflected in the WCIRB s January 1, 2019 Pure Premium Rate Filing.) The loss development, on-leveling, trending and loss adjustment expense projection methodologies used to determine the indicated July 1, 2018 average pure premium rate are summarized in Section B and are consistent with the methodologies used in the WCIRB s Amended January 1, 2018 Pure Premium Rate Filing. Loss Development Methodology The proposed pure premium rates applicable to the July 1, 2018 through December 31, 2018 policy period are intended to reflect the estimated final, or ultimate, cost of losses and LAE on all accidents that arise on policies incepting during that period. 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 ultimate cost of all accidents that occurred during that year. This process is known as loss development. 11

16 Executive Summary Consistent with recent WCIRB pure premium rate filings and corresponding Insurance Commissioner decisions, the WCIRB again recommends projecting the statewide losses paid for each accident year as of December 31, 2017 through 240 months based on historical development patterns of losses paid as the claims mature. Based on a 2014 WCIRB analysis of long-term loss development, 11 the WCIRB continues to recommend that development beyond 240 months be based on historical incurred loss development patterns, which are less affected by the fundamental shift in payment pattern that occurred following the 1996 Minniear decision. 12 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 for evaluations 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 developed a number of adjustments to correct for the impact of SB 863 on paid loss patterns. 13 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 and reflect the most current available information on emerging post-sb 863 costs. 14 As discussed, SB 1160 and AB 1244 included a number of provisions related to lien filings. Many of these provisions affected liens that had already been filed prior to the effective date of SB 1160 and AB 1244 in addition to new lien filings. In particular, SB 1160 provided that all outstanding liens filed after January 1, 2013 must have a declaration under penalty of perjury filed with the DWC stating that the lien is not subject to independent medical review (IMR) or independent bill review (IBR) and that it satisfies one of a number of other criteria. In July 2017, the DWC dismissed approximately 292,000 liens for which no declarations had been filed. Earlier this year, the WCIRB analyzed the potential impact of the DWC lien dismissals on medical loss development patterns and found that the dismissed liens should have a significant impact on paid medical development emerging after July As with other reforms impacting claims on a date of service basis, if not adjusted, paid medical development emerging in the third quarter of 2017 and later may be distorted as the numerator of the age-to-age paid medical development factor will contain a different volume of lien payments than the denominator. In order to correct for this potential distortion, the WCIRB is recommending that pre-july 1, 2017 medical payments be adjusted to reflect the impact of the DWC lien dismissals in a similar manner to how the adjustments for SB 863 are being reflected. The WCIRB is also recommending in this filing an additional adjustment to reflect the impact of the 40% reduction in new lien filings following the implementation SB 1160 and AB 1244 on medical loss development patterns. 15 Since the implementation of SB 863, the rate at which claims have settled in California has accelerated. Changing settlement rates can distort projections based on historical paid loss development. As a result, as in the last several 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 See Item AC of the June 11, 2014 WCIRB Actuarial Committee Agenda for a complete discussion of this analysis. 12 Minniear v. Mount San Antonio Community College District (1996) 61 Cal. Comp. Cases 1055 (Appeals Board en banc opinion). 13 Impact of Senate Bill No. 863 on Loss Development Patterns, WCIRB, August 13, Senate Bill No. 863 WCIRB Cost Monitoring Report 2016 Retrospective Evaluation, WCIRB, November 17, See Item AC of the March 19, 2018 WCIRB Actuarial Committee Agenda for a complete discussion of this analysis. 16 See Item AC of the WCIRB March 21, 2017 Actuarial Committee Agenda for a discussion of the methodology used to adjust loss development projections for the impact of changing claim settlement rates. 12

17 Executive Summary Trending Methodology The pure premium rates effective for the July 1, 2018 through December 31, 2018 policy period are intended to reflect the cost of losses and LAE incurred on all accidents that arise on policies incepting during that period. 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 the July 1, 2018 through December 31, 2018 period. 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, SB 1160 and AB 1244 have been updated from those included in prior pure premium rate filings to reflect the most current post-reform information available. 17 As with accident year losses, each historical year s earned premium is adjusted to an on-level basis 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 July 1, 2018 through December 31, 2018 policy period loss ratio at the industry average filed pure premium rate level as of January 1, As in the last several pure premium rate filings and Insurance Commissioner decisions, the WCIRB projected future loss trends based on separate projections of indemnity claim frequency and claim severity. The WCIRB forecasts frequency changes 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 claimsrelated factors. 18 After a period of steady long-term frequency decline, indemnity claim frequency increased sharply in 2010 and for a number of subsequent years had generally continued to increase or remain relatively flat rather than returning to the typical long-term rate of decline. The WCIRB s frequency forecast reflects a balance between long-term and shorter-term trends. The frequency change projected in this filing averages approximately -1.1% annually for the 2017 through 2019 period. Until 2017, recent accident year claim severities had not increased at rates consistent with historical trends and trends in most other states. Chart 11 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. As shown in Chart 11, projected on-level medical costs per indemnity claim declined between accident years 2011 through 2015, even after adjusting for the WCIRB s estimated impact of SB 863. In 2016, the average on-level medical severity increased by 0.5% and the initial indicated growth for 2017 is 5.7%. As discussed in prior pure premium rate filings, the WCIRB believes that this declining rate of on-level medical severity growth through 2015 is largely attributable to the many SB 863 provisions impacting medical costs. While concerned with the sharp upswing in average medical severity in 2017, given the relative immaturity of the 2017 accident year as of December 31, 2017, we continue to believe a trending approach that balances recent experience with longer-term trends is appropriate. As in the WCIRB s Amended January 1, 2018 Pure Premium Rate Filing, the WCIRB projects a medical severity trend rate of 3.0%, which is generally consistent with long-term medical on-level severity growth and the average rate of growth indicated as of December 31, 2017 for the two post-sb 863 period accident years. 17 See Items AC of the December 6, 2017 and AC of the March 19, 2018 WCIRB Actuarial Committee meetings for a discussion of the latest evaluation of the impacts of these reforms. 18 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, Brooks, Ward, 1999, pp

18 Executive Summary Loss Adjustment Expense Projection The LAE provision reflected in the indicated average July 1, 2018 pure premium rate was computed using the same methodologies as in the WCIRB s Amended January 1, 2018 Pure Premium Rate Filing. The ALAE provision was based on private insurer accident year ALAE data through accident year 2017 evaluated as of December 31, 2017 and a methodology that reflected estimated ultimate private insurer ALAE per indemnity claim. The ALAE provision also includes adjustment to reflect the estimated impact of the 40% reduction in lien filings resulting from SB 1160 and AB 1244 that was reflected in the medical loss projection. The provision for the cost of medical cost containment programs was computed separately from the provision for other ALAE costs. The projected July 1, 2018 through December 31, 2018 policy period ALAE ratio including the cost of medical cost containment programs is 22.5% of losses. Reported ULAE experience for calendar year 2017 is not yet available. As a result, the ULAE provision reflected in the indicated average July 1, 2018 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, 2018 Pure Premium Rate Filing (experience through calendar year 2016). The projected July 1, 2018 through December 31, 2018 policy period ULAE ratio projected on this basis is 11.4% of losses. In total, the WCIRB projects a 33.9% ratio of LAE to loss for the July 1, 2018 through December 31, 2018 policy period. 14

19 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, 2017 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 2015 policies 3 (reported payroll) for each standard 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, 2017 as reflected in the WCIRB January 1, 2018 Pure Premium Rate Filing. 4. The industry average filed manual rate as of January 1, 2018 was determined by adjusting the July 1, 2017 industry filed manual rate by the average change in filed manual rates by insurer from July 1, 2017 through January 1, 2018 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, 2017 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, 2017 as reflected in the WCIRB s January 1, 2018 Pure Premium Rate Filing. 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 2014 through October 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. 15

20 Executive Summary Exhibit 1 4. The industry average filed pure premium rate as of January 1, 2018 was determined by adjusting the July 1, 2017 industry average filed pure premium rate by the average change in filed pure premium rates by insurer from July 1, 2017 through January 1, 2018 provided by the CDI. C. Computation of Proposed Average July 1, 2018 Pure Premium Rate The industry average filed pure premium rate as of January 1, 2018 derived as described in Section B, paragraph 4 above, is adjusted by the Indicated Difference from Industry Average Filed Pure Premium Rate per $100 of Payroll as of January 1, 2018 (line 6 of Section B, Exhibit 8) to produce the proposed average pure premium rate per $100 of payroll for policies incepting in the July 1, 2018 through December 31, 2018 period. 16

21 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2018 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2018 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, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. 17

22 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2018 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2018 (continued) Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. 18

23 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2018 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2018 (continued) Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % 5129* 1.01 N/A N/A % 5130* 1.31 N/A N/A % % % % % % % % % % % % % % % % % % % % % % % 5193* 1.66 N/A N/A % % % % Rates are per $100 of payroll unless otherwise noted. * This classification is newly established effective January 1, 2018; therefore there is no reported payroll for this classification for policy year 2015 to derive an industry average filed pure premium rate. 19

24 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2018 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2018 (continued) Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % 5610* 3.79 N/A N/A % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. * This classification is newly established effective January 1, 2017; therefore there is no reported payroll for this classification for policy year 2013 and policy year 2014 to derive an industry average filed pure premium rate. 20

25 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2018 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2018 (continued) Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference % % % % % % % % % % % % % % % % % % % % 7707** % % % % % % 7722*** N/A N/A % % % % % % % % 8278**** % % % % % % % % % % % % % % % % % % 8370* 3.08 N/A N/A % % % % % % % % % % % % % % % % % % % % % % % 8631**** % % % Rates are per $100 of payroll unless otherwise noted. * This classification is newly established effective January 1, 2018; therefore there is no reported payroll for this classification for policy year 2015 to derive an industry average filed pure premium rate. ** The rate for Classification 7707 is per capita. *** The rate for Classification 7722 is per capita. There is no reported payroll for this classification for policy year 2015 to derive an industry average filed pure premium rate. **** The rate for classification 8278 is per race. The rate for classification 8631 is per occupied stall day effective January 1,

26 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2018 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2018 (continued) Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference % % % % % 8870* 1.01 N/A N/A % % % % 8744* 0.42 N/A N/A % % % 8746* 0.42 N/A N/A % % % % % % % % % % % % % % % % % % % % 9054* 3.79 N/A N/A % % 8811* 0.32 N/A N/A % 8812* 0.32 N/A N/A % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Rates are per $100 of payroll unless otherwise noted. * This classification is newly established effective January 1, 2018; therefore there is no reported payroll for this classification for policy year 2015 to derive an industry average filed pure premium rate. 22

27 Executive Summary Exhibit 2 Comparison of Proposed July 1, 2018 Advisory Pure Premium Rates with Industry Average Filed Pure Premium Rates as of January 1, 2018 (continued) Class Code Proposed July 1, 2018 Advisory Pure Premium Rates Industry Average Filed Pure Premium Rates as of January 1, 2018 Difference % % % % % % % % % % % % % % % % 9531* 3.47 N/A N/A % % % % % Rates are per $100 of payroll unless otherwise noted. * This classification is newly established effective January 1, 2018; therefore there is no reported payroll for this classification for policy year 2015 to derive an industry average filed pure premium rate. 23

28 Section A Section A Proposed Pure Premium Rates This section summarizes the calculation of the proposed pure premium rates to be effective for workers compensation policies with an effective date 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 Section B. As shown on Section B, Exhibit 8, the indicated average pure premium rate, based on aggregate loss, loss adjustment expense and premium experience valued as of December 31, 2017 and the methodologies described in Section B, is $1.80 per $100 of payroll. The proposed July 1, 2018 pure premium rate for each classification was determined by multiplying the January 1, 2018 advisory pure premium rate for the classification by the ratio of $1.80 to the average approved January 1, 2018 advisory pure premium rate of $1.94 per $100 of payroll as reflected in the California Department of Insurance Decision on the WCIRB s January 1, 2018 Pure Premium Rate Filing. A-1