Florida 1/1/2016 Workers Compensation Rate Filing Kirt Dooley, FCAS, MAAA October 21, 2015 1
$ Billions 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Florida s Workers Compensation Premium Volume 2.368 0.765 0.034 Direct Written Premium 2.486 0.649 0.043 2.863 0.790 0.060 1.569 1.794 2.013 3.210 0.834 0.079 2.297 3.552 0.921 0.094 2.537 2010 2011 2012 2013 2014p Private Carriers Group Self-Insureds Individual Self-Insureds p Preliminary Source for Private Carriers: NAIC Annual Statement data, state page, line 16 Workers Compensation 2
Florida s Historical Rate Changes Percent 25.0 15.0 Emma Murray-Related 5.0 No Filing 0.0 6.4 7.8 8.9 6.1 0.7-5.0-5.1-6.0-6.8-4.2-0.7-5.2-1.9-15.0-14.0-13.5-15.7-18.4-18.6-25.0-35.0 Cumulative 10/2003 1/2016: -59.1% Calendar Year *Pending 3
Current Average Voluntary Pure Loss Costs Using Florida s Payroll Distribution Pure Loss Cost All Classes 3 2 1 2.62 1.69 1.30 1.04 1.09 1.08 1.22 1.05 0.99 1.02 1.41 0.87 0 FL AL GA NC SC TN State 2003 2015 Based on the latest NCCI approved rates and loss costs in the various states 4
Workers Compensation Premium Rate Ranking Premium Rate Index per $100 of Payroll 3.48 3.0 FL Ranking 24th lowest (out of 51) 2.0 1.82 1.0 0.88 0.0 ND IN AR MA VA NV UT DC WV OR CO KY KS MS AZ TX MD MI OH GA WY NE AL FL HI NC SD IA WI TN MO NM RI MN WA SC PA ID ME NH MT LA DE VT IL OK AK NY NJ CT CA Source: 2014 Oregon Workers Compensation Premium Rate Ranking Summary Indexes based on rates in effect on January 1, 2014 5
Florida January 1, 2016 Workers Compensation Filing Summary of Proposed Rate Change Component Impact Change in Loss Experience 3.4% Change in Trend 1.2% Change in Benefits 0.0% Change in Production & General Expenses +0.6% Change in Loss Adjustment Expense 0.3% Change in Profit & Contingencies +2.2% Change in Taxes and Assessments 0.0% Offset for the Change in Expense Constant +0.3% Total Average Rate Change 1.9% 6
Florida January 1, 2016 Workers Compensation Filing Changes by Industry Group Proposed Change 1/1/2016 Cumulative Change* 10/1/2003 1/1/2016 Manufacturing 4.7% 58.6% Contracting +1.0% 59.6% Office & Clerical 5.1% 62.0% Goods & Services 1.6% 57.5% Miscellaneous 1.8% 57.2% Overall Average 1.9% 59.1% *Cumulative changes assume full approval of 1/1/2016 filing 7
Florida January 1, 2016 Workers Compensation Filing Summary of Proposed Rate Change Component Impact Change in Loss Experience 3.4% Change in Trend 1.2% Change in Benefits 0.0% Change in Production & General Expenses +0.6% Change in Loss Adjustment Expense 0.3% Change in Profit & Contingencies +2.2% Change in Taxes and Assessments 0.0% Offset for the Change in Expense Constant +0.3% Total Average Rate Change 1.9% 8
Experience Period Two policy years are again used as the experience base in this year s filing This is consistent with the last four filings Policy year data reflects a more accurate matching of losses and premium Use of two calendar-accident years would have resulted in a change of 2.0% 9
Loss Development No changes to methodology Average of paid and paid + case loss development Consistent with previous Florida filings Neither method clearly superior to the other Makes use of all available information Three-year average development factors Consistent with last five Florida filings Loss development factors relatively stable 10
Florida January 1, 2016 Workers Compensation Filing Summary of Proposed Rate Change Component Impact Change in Loss Experience 3.4% Change in Trend 1.2% Change in Benefits 0.0% Change in Production & General Expenses +0.6% Change in Loss Adjustment Expense 0.3% Change in Profit & Contingencies +2.2% Change in Taxes and Assessments 0.0% Offset for the Change in Expense Constant +0.3% Total Average Rate Change 1.9% 11
Trend Summary The selected trends are based, in part, on a review of observed loss ratios for policies effective after 2003. Exponential Trend Fits to Historical Data Indemnity Loss Ratio Medical Loss Ratio 5-point (PY 2009-2013) 3.6% 1.3% 6-point (PY 2008-2013) 2.8% 0.1% 7-point (PY 2007-2013) 2.0% +0.2% 8-point (PY 2006-2013) 1.3% +0.5% 9-point (PY 2005-2013) 2.0% 0.5% 10-point (PY 2004-2013) 2.8% 1.4% Current approved trend 2.0% +0.5% Proposed trend 2.0% 0.0% 12
Exponential Trend Fits 1% 0% -1% -2% 6-point 7-point 8-point 9-point Selected -3% Indemnity Loss Ratio Medical Loss Ratio 13
Florida s Indemnity Loss Ratio Standard Coverage 0.5 Average of Paid and Paid+Case 0.4 Loss Ratio 0.3 0.2 0.1 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Policy Year Based on NCCI s financial data developed to ultimate and adjusted to the current level. 14
Florida s Indemnity Loss Ratio Standard Coverage 0.4 Average of Paid and Paid+Case 0.3 Loss Ratio 0.2 0.1 Projected 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Policy Year Based on NCCI s financial data developed to ultimate and adjusted to the current level. 15
Florida s Medical Loss Ratio Standard Coverage 0.7 Average of Paid and Paid+Case 0.6 Loss Ratio 0.5 0.4 0.3 0.2 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Policy Year Based on NCCI s financial data developed to ultimate and adjusted to the current level. 16
Florida s Medical Loss Ratio Standard Coverage 0.7 Average of Paid and Paid+Case 0.6 Loss Ratio 0.5 0.4 Projected 0.3 0.2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Policy Year Based on NCCI s financial data developed to ultimate and adjusted to the current level. 17
Florida s Total Loss Ratio (Excl. LAE) Standard Coverage 0.9 Average of Paid and Paid+Case Loss Ratio 0.8 0.7 0.6 The proposed rates assume that future loss experience will improve 0.5 0.4 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Policy Year Based on NCCI s financial data developed to ultimate and adjusted to the current level. 18
Florida January 1, 2016 Workers Compensation Filing Summary of Proposed Rate Change Component Impact Change in Loss Experience 3.4% Change in Trend 1.2% Change in Benefits 0.0% Change in Production & General Expenses +0.6% Change in Loss Adjustment Expense 0.3% Change in Profit & Contingencies +2.2% Change in Taxes and Assessments 0.0% Offset for the Change in Expense Constant +0.3% Total Average Rate Change 1.9% 19
Florida January 1, 2016 Workers Compensation Filing Summary of Proposed Rate Change Component Impact Change in Loss Experience 3.4% Change in Trend 1.2% Change in Benefits 0.0% Change in Production & General Expenses +0.6% Change in Loss Adjustment Expense 0.3% Change in Profit & Contingencies +2.2% Change in Taxes and Assessments 0.0% Offset for the Change in Expense Constant +0.3% Total Average Rate Change 1.9% 20
Florida January 1, 2016 Workers Compensation Filing Summary of Proposed Rate Change Component Impact Change in Loss Experience 3.4% Change in Trend 1.2% Change in Benefits 0.0% Change in Production & General Expenses +0.6% Change in Loss Adjustment Expense 0.3% Change in Profit & Contingencies +2.2% Change in Taxes and Assessments 0.0% Offset for the Change in Expense Constant +0.3% Total Average Rate Change 1.9% 21
Florida January 1, 2016 Workers Compensation Filing Summary of Proposed Rate Change Component Impact Change in Loss Experience 3.4% Change in Trend 1.2% Change in Benefits 0.0% Change in Production & General Expenses +0.6% Change in Loss Adjustment Expense 0.3% Change in Profit & Contingencies +2.2% Change in Taxes and Assessments 0.0% Offset for the Change in Expense Constant +0.3% Total Average Rate Change 1.9% 22
Profit & Contingencies Provision Unprecedented economic conditions have caused interest rates to remain near historic lows for an extended period This is expected to negatively impact the insurance industry s investment income for the foreseeable future A higher profit & contingencies (P&C) provision is clearly justified by an internal rate of return analysis 23
Internal Rate of Return Model The internal rate of return model estimates the P&C provision necessary to generate a total rate of return commensurate with the cost of capital Two key inputs, the cost of capital and return on investment, rely on assumptions about future interest rates Model revisions provide multiple indications based on alternative sets of assumptions Static: interest rates remain level Dynamic: interest rates change as forecasted 24
Profit & Contingencies Provision Internal Rate of Return Model Indications Indicated P&C Provision Static interest rates 4.8% Dynamic interest rates 2.6% Dynamic interest rates, with one-year lag 3.8% Current approved 2.5% Proposed 4.0% Values do not include a provision for anticipated policyholder dividends. 25
Florida January 1, 2016 Workers Compensation Filing Summary of Proposed Rate Change Component Impact Change in Loss Experience 3.4% Change in Trend 1.2% Change in Benefits 0.0% Change in Production & General Expenses +0.6% Change in Loss Adjustment Expense 0.3% Change in Profit & Contingencies +2.2% Change in Taxes and Assessments 0.0% Offset for the Change in Expense Constant +0.3% Total Average Rate Change 1.9% 26
Florida January 1, 2016 Workers Compensation Filing Summary of Proposed Rate Change Component Impact Change in Loss Experience 3.4% Change in Trend 1.2% Change in Benefits 0.0% Change in Production & General Expenses +0.6% Change in Loss Adjustment Expense 0.3% Change in Profit & Contingencies +2.2% Change in Taxes and Assessments 0.0% Offset for the Change in Expense Constant +0.3% Total Average Rate Change 1.9% 27
Florida January 1, 2016 Workers Compensation Filing Summary Over the past several years, total loss experience has been relatively stable A stable system still requires minor periodic adjustments to the average rate level Full approval is important to help maintain stable rates going forward 28