WCIRB Mod Talks 2019 Experience Rating Plan Treatment of Exception Claims April 26, 2018

WCIRB Mod Talks 2019 Experience Rating Plan Treatment of Exception Claims April 26, 2018 Dave Bellusci EVP & Chief Actuary Rod Libbe Quality Assurance Director The Webinar Will Begin Shortly

+Your Presenters Dave Bellusci EVP & Chief Actuary Rod Libbe Quality Assurance Director dbellusci@wcirb.com rlibbe@wcirb.com

Webinar Agenda NOTICE & COPYRIGHT This training presentation was developed by the Workers' Compensation Insurance Rating Bureau of California (WCIRB) for informational purposes only. The WCIRB shall not be liable for any damages of any kind, whether direct, indirect, incidental, punitive or consequential, arising from the use, inability to use, or reliance upon information provided in this presentation. 2018 Workers Compensation Insurance Rating Bureau of California. All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted by federal copyright law. No copyright is claimed in the test of statutes and regulations quoted within this work. Each WCIRB member company (Company) is authorized to reproduce any part of this work solely for the purpose of transacting workers compensation insurance. This reproduction right does not include the right to make any part of this work available on any website or on any form of social media. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Connect, WCIRB CompEssentials, X-Mod Direct, escad and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRB s prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies. WCIRB Mod Talks is a series of 30- to 45-minute webinar discussions on experience rating. Today s session summarizes the 2019 changes adopted last September by the Insurance Commissioner with a focus on the treatment of exception claims: 1. Background on Experience Rating in California 2. 2019 Experience Rating Changes - Why, What, How and When - How will Exception Claims be Treated 3. Treatment of Exception Claims 4. Questions and Answers To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the Workers Compensation Insurance Rating Bureau of California at customerservice@wcirb.com.

01 Background on Experience Rating in California

01. Background on Experience Rating in California What is Experience Rating?... a rating procedure utilizing past insurance experience of the individual policyholder to forecast future losses by measuring the policyholder s loss experience against the loss experience of policyholders in the same classification to produce a prospective premium credit, debit or unity modification. Section 11730 of the California Insurance Code 6

01. Background on Experience Rating in California What Does an Experience Modification Represent? An experience modification is a forecast of future losses - Not a recoupment program past experience is used only to the extent it is predictive of future experience - Not a proxy for safety safety is one of the factors that go into the X-Mod An experience modification is expressed as a percentage - Less than 100% means employer has better than average loss history - Over 100% means employer has worse than average loss history and experience rating is premium neutral on a statewide basis Experience rating is only one component of employer s premium determination - Loss experience and risk characteristics are also considerations 7

01. Background on Experience Rating in California What is the WCIRB s Role? A licensed rating organization and the California Insurance Commissioner s designated statistical agent Administers and proposes amendments to the Insurance Commissioner s workers compensation regulations - Uniform Statistical Reporting Plan - Experience Rating Plan - Miscellaneous Regulations 8

02 2019 Experience Rating Changes

02. 2019 Experience Rating Changes What s Changing in 2019? Excluding first $250 of each loss from formula - Addresses potential underreporting of first aid claims - Modest impact on most employers X-Mods Simplify Formula - Eliminate credibility terms - No impact on X-Mods - Changes experience rating form 10

02. 2019 Experience Rating Changes 2019 Change to X-Mod Formula When? What to Expect July 2018 Mod Talks Session 3 Proposed Rating Values & How to Use X-Mod Estimator September 2018 Earliest issuance of January 2019 X-Mods October 2018 Mod Talks Session 4 How the New Plan is Working 11

02. 2019 Experience Rating Changes 2019 Change to X-Mod Formula Why? 2015 2017 2019 WCIRB established broad working group on non-reporting of small First Aid claims Working group findings & recommendations Non-reporting of claims is a significant issue affecting workers access to benefits, fairness & insurer s ability to manage claims Clarify reporting requirements Remove disincentive to report small claims by eliminating the use of these claims in X-Mod formula Reporting requirements clarified - all claims with medical treatment costs must be reported Claims less than $250 not used in X-Mod formula (includes 2017 claims) Objective Get all workers comp claims into the system Also take opportunity to simplify the formula 12

02. 2019 Experience Rating Changes 2019 Change to X-Mod Formula Why $250? Most Claims Meeting California Definition of First Aid will be less than $250 in Value Higher Alternative Thresholds Reviewed had Significant Impact on Plan Accuracy, Loss-Free Credits and X-Mod Distribution WCIRB Will Regularly Review $250 Threshold and Adjust for Inflation as Needed 13

02. 2019 Experience Rating Changes 2019 Change to X-Mod Formula How Will it Work? Simplifying the X-Mod Formula Current formula: [(Ap Cp)+(Ep (1 Cp))] + [(Ae Ce)+(Ee (1 Ce))] E Ap = Actual Primary Losses Cp = Credibility Primary Value Ep = Expected Primary Losses Ae = Actual Excess Losses Ce = Credibility Excess Value Ee = Expected Excess Losses E = Expected Losses 14

02. 2019 Experience Rating Changes 2019 Change to X-Mod Formula How Will it Work? Simplifying the Experience Modification Formula With Cp = 1 and Ce = 0, the experience rating formula simplifies to: Ap = Actual Primary Losses Ee = Expected Excess Losses E = Expected Losses 15

02. 2019 Experience Rating Changes 2019 Change to X-Mod Formula How Will it Work? $250 Loss Exclusion? 2019 Change will: Apply to all claims not only medical share of claims Reduce each claim s primary losses by $250 Result in modified experience rating worksheet Show all claims individually (not only those over $2,000) Primary Losses: For Incurred Loss Amounts $250 or less: - Actual Primary Loss = 0 For Incurred Loss Amounts between $250 and primary threshold: - Actual Primary Loss = Actual Loss less $250 For Incurred Loss Amounts above primary threshold: - Actual Primary Loss = Primary Threshold less $250 16

02. 2019 Experience Rating Changes 2019 Change to X-Mod Formula How Will it Work? $250 Loss Exclusion Examples Primary losses with primary threshold: $10,000 $ For Incurred Loss of $200 Actual Primary Loss = 0 $ For Incurred Loss of $5,000 Actual Primary Loss = $4,750 $ For Incurred Loss of $10,000 Actual Primary Loss = $9,750 $ For Incurred Loss of $50,000 Actual Primary Loss = $9,750 17

02. 2019 Experience Rating Changes 2019 Change to X-Mod Formula How Will Employers Be Impacted? No Impact on any X-Mod from simplification of formula $250 Loss exclusion - No overall pure premium impact no significant impact on average X-Mod - Impact on individual employer X-Mod will depend on individual employer s claim and exposure history - Impacts generally modest more than 85% of X-Mods will be impacted by 2 points or less - Loss-free employers will generally see a small increase 18

<= -15% -14% -13% -12% -11% -10% -9% -8% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% >= +15% 02. 2019 Experience Rating Changes Share of Employers 2019 Change to X-Mod Formula How Will Employers Be Impacted? All Employers 35% 30% Estimated impact of change from variable split to variable split with $250 exclusion: Policy years 2010-2014 combined Statewide 25% 20% 15% 10% 5% 0% Experience Modification Changes from Variable Split to Variable Split with $250 per Claim Exclusion 19

02. 2019 Experience Rating Changes 2018 Workers Compensation Experience Rating Form Example 20

02. 2019 Experience Rating Changes 2018 Workers Compensation Experience Rating Form Example ( continued) Remove $250 Column goes away Group claims listed individually 21

02. 2019 Experience Rating Changes 2019 Workers Compensation Experience Rating Form Example 22

02. 2019 Experience Rating Changes 2018 vs 2019 Format Example 2018 Format vs. 2019 Format Remove $250 Column goes away Group claims listed individually Simplified Formula 23

03 Treatment of Exception Claims

03. Treatment of Exception Claims What are Exception Claims? Exception claims are claims that receive special treatment in experience rating including: Subrogation Claims A claim where an insurer received monetary reimbursement either in part or in whole under subrogation rights. Compromised Death Claims A closed death claim that has been compromised over the sole issue of the applicability of the workers compensation laws of California. Joint Coverage Claims A claim for which it has been determined by adjudication that the coverage furnished by other than the one policy for which experience is being reported is pertinent to a division of the total incurred loss which usually results from the injured party having co-employers, overlapping coverage on the same employer, or the injury developing over an extended period. Partially Fraudulent A claim where the Workers Compensation Appeals Board (WCAB) declares a portion of the claim costs invalid, unnecessary or excessive, such as, but not limited to, cases where medical liens are deemed excessive. Exception claims require the reporting of a Total Gross Incurred Amount, which is used to reduce their impact in the X-Mod calculation. 25

03. Treatment of Exception Claims Gross Vs. Net Value Exception Claim Subrogation Claims Total Gross Incurred Amount The estimated cost of the total claim as if there had been no subrogation Net Incurred Amount The Gross Loss Value less the amount of the subrogation reimbursement that exceeds the expenses incurred to obtain the reimbursement Example Gross Net The total cost of a claim was $100,000, but the insurer was only liable for $50,000 as they received $50,000 in subrogation reimbursement. For subrogation claims, the ratio of net to gross makes a difference in the X-Mod. ( Net ) Gross ( $50,000 ) $100,000 = 0.50 26

03. Treatment of Exception Claims Gross (Less than Max. Loss) Vs. Net Value Pre 2019 Exception Claim Subrogation Claims Example X-Mod Calculation Primary Threshold $ 25,000 Gross $ 100,000 Net $ 50,000 Note: If Total Loss (Gross) amount is less than the Maximum Loss ($175,000) fx Actual Loss = Net = $50,000 fx =( Net ) Actual Primary Loss x Primary of the Gross Loss Value Gross = ($50,000 / $100,000) x Primary of $100,000 = 0.50 x $25,000 = $12,500 By discounting the claim using the Net/Gross ratio, the X-Mod uses $12,500 rather than $25,000 for the Actual Primary Loss value. 27

03. Treatment of Exception Claims Gross (Less than Max. Loss) Vs. Net Value Removing First $250 2019 Exception Claim Subrogation Claims Example X-Mod Calculation Primary Threshold $ 25,000 Gross $ 100,000 Net $ 50,000 Note: If Total Loss (Gross) amount is less than the Maximum Loss ($175,000) fx Actual Loss = Net = $50,000 fx (( Net ) Actual Primary Loss = x Primary of the Gross Loss Value - $250 Gross = (($50,000 / $100,000) x Primary of $100,000) - $250 = (0.50 x $25,000) - $250 = $12,500 - $250 = $12,250 ( By discounting the claim using the Net/Gross ratio, the X-Mod uses $12,250 rather than $24,750 for the Actual Primary Loss value. 28

03. Treatment of Exception Claims Gross (Greater than/equal to Max. Loss) Vs. Net Value Pre 2019 Exception Claim Subrogation Claims Example X-Mod Calculation Primary Threshold $ 25,000 Gross $ 200,000 Net $ 100,000 If Total Loss (Gross) amount is greater than or equal to the Maximum Loss ($175,000) fx Actual Loss = ( Net ) Gross x Maximum Loss = ($100,000 / $200,000) x $175,000 = 0.50 x $175,000 = $87,500 fx Actual ( Net ) Primary Loss = x Primary Threshold of the Maximum Loss Value Gross = ($100,000 / $200,000) x Primary Threshold of $175,000 = 0.50 x $25,000 = $12,500 By discounting the claim using the Net/Gross ratio, the X-Mod calculation uses $87,500 rather than the Maximum Loss amount ($175,000) for the Actual Loss and $12,500 for the Actual Primary Loss value. 29

03. Treatment of Exception Claims Gross (Greater than/equal to Max. Loss) Vs. Net Value Removing First $250 2019 Exception Claim Subrogation Claims Example X-Mod Calculation Primary Threshold $ 25,000 Gross $ 200,000 Net $ 100,000 If Total Loss (Gross) amount is greater than or equal to the Maximum Loss ($175,000) fx Actual Loss = ( Net ) Gross x Maximum Loss = ($100,000 / $200,000) x $175,000 = 0.50 x $175,000 = $87,500 fx Actual (( Net ) ) Primary Loss = x Primary Threshold of the Maximum Loss Value - $250 Gross = (($100,000 / $200,000) x Primary Threshold of $175,000) - $250 = (0.50 x $25,000) - $250 = $12,250 By discounting the claim using the Net/Gross ratio, the X-Mod calculation uses $87,500 rather than the Maximum Loss amount ($175,000) for the Actual Loss and $12,250 for the Actual Primary Loss value. 30

03. Treatment of Exception Claims Gross Vs. Net Value Exception Claim Compromised Death Claims Total Gross Incurred Amount The estimated cost of the death claim if it had not been compromised, typically the statutory death benefit Net Incurred Amount The amount of the claim attributed to workers compensation Example Gross The statutory death benefit was $200,000. The insurer and claimant agree to settle for $50,000. The Average Death Value is $175,000. Net For compromised death claims, the ratio of net to gross makes a difference in the X-Mod. ( Net ) Actual Loss = Average Death Value x Gross ( Net ) Actual Primary Loss = Primary Threshold of Average Death Value x Gross 31

03. Treatment of Exception Claims Gross Vs. Net Value Pre 2019 Exception Claim Compromised Death Claims Example X-Mod Calculation Primary Threshold $ 25,000 Gross $ 200,000 Net $ 50,000 fx Actual Loss = ( Net ) Gross x Average Death Value = ($50,000 / $200,000) x $175,000 = 0.25 x $175,000 = $43,750 fx Actual Primary Loss = ( Net ) Gross x Primary Threshold of Average Death Value = ($50,000 / $200,000) x Primary Threshold of $175,000 = 0.25 x $25,000 = $6,250 By discounting the claim using the Net/Gross ratio, the X-Mod calculation uses $43,750 rather than the Avg. Death value ($175,000) for the Actual Loss and $6,250 for the Actual Primary Loss value. 32

03. Treatment of Exception Claims Gross Vs. Net Value Removing First $250 2019 Exception Claim Compromised Death Claims Example X-Mod Calculation Primary Threshold $ 25,000 Gross $ 200,000 Net $ 50,000 fx Actual Loss = ( Net ) Gross x Average Death Value = ($50,000 / $200,000) x $175,000 = 0.25 x $175,000 = $43,750 fx Actual (( Net ) ) Primary Loss = x Primary Threshold of Average Death Value - $250 Gross = (($50,000 / $200,000) x Primary Threshold of $175,000) - $250 = (0.25 x $25,000) - $250 = $6,000 By discounting the claim using the Net/Gross ratio, the X-Mod calculation uses $43,750 rather than the Avg. Death value ($175,000) for the Actual Loss and $6,000 for the Actual Primary Loss value. 33

03. Treatment of Exception Claims Joint Coverage Claims Exception Claim Joint Coverage Claims While the cost is shared among several insurers, the benefits to the injured worker do not change. The X-Mod treats joint claims associated with a single injury as though they are a single claim. Example If the liability for one $100,000 claim is shared by 3 insurers. All 3 insurers will report the claim separately, reporting their portion of responsibility for the claim. When reviewed in aggregate, these 3 claims should total the same as a single $100,000 claim in the calculation of the X-Mod. 40% 20% 40% Insurer 1 Insurer 2 Insurer 3 34

03. Treatment of Exception Claims Joint Coverage Claims Removing First $250 2019 Exception Claim Joint Coverage Claims Example If the employer s Primary Threshold is $25,000, the Actual Primary Loss value would be the Primary Threshold less $250 or $24,750. Single Claim = $100,000 Actual Primary Losses = $24,750 If all 3 insurers report the claim separately with no special handling. Actual Actual Primary Losses Insurer 1 20% Liability = $ 20,000 $ 19,750 Insurer 2 40% Liability = $ 40,000 $ 24,750 Insurer 3 40% Liability = $ 40,000 $ 24,750 Total = $100,000 $ 69,250 35

03. Treatment of Exception Claims Gross vs. Net Value Exception Claim Joint Coverage Claims Total Gross Incurred Amount The estimated cost of the total claim Net Incurred Amount The amount for which the reporting insurer is liable Example For joint coverage claims, the ratio of the net to gross is how the X-Mod calculation proportions the Actual Primary Losses. Total Incurred Claim Value $100,000 Insurer 1 20% Liability Gross = $100,000 Net $20,000 Insurer 2 40% Liability Gross = $100,000 Net $40,000 Insurer 3 40% Liability Gross = $100,000 Net $40,000 36

03. Treatment of Exception Claims Gross (Less than Max. Loss) vs. Net Value (Insurer 3) Pre 2019 Exception Claim Joint Coverage Claims Example X-Mod Calculation 40% Liability Primary Threshold $ 25,000 Gross $ 100,000 Net $ 40,000 fx Actual Loss = Net = $40,000 Insurer 3 Note: If Total Loss (Gross) amount is less than the Maximum Loss ($175,000) fx Actual Primary Loss = ( Net ) Gross x Primary Threshold of the Gross Loss Value = ($40,000 / $100,000) x Primary of $100,000 = 0.40 x $25,000 = $10,000 By discounting the claim using the Net / Gross ratio, the X-Mod calculation uses $10,000 rather than $25,000 for the Actual Primary Loss value. The same for the claim from insurer 2 with 40% liability. 37

03. Treatment of Exception Claims Gross (Less than Max. Loss) vs. Net Value (Insurer 1) Pre 2019 Exception Claim Joint Coverage Claims Example X-Mod Calculation 20% Liability Primary Threshold $ 25,000 Gross $ 100,000 Net $ 20,000 fx Actual Loss = Net = $20,000 Insurer 1 Note: If Total Loss (Gross) amount is less than the Maximum Loss ($175,000) fx Actual Primary Loss = ( Net ) Gross x Primary Threshold of the Gross Loss Value = ($20,000 / $100,000) x Primary of $100,000 = 0.20 x $25,000 = $5,000 By discounting the claim using the Net / Gross ratio, the X-Mod calculation uses $5,000 rather than $25,000 for the Actual Primary Loss value. 38

03. Treatment of Exception Claims Gross (Less than Max. Loss) vs. Net Value Pre 2019 Exception Claim Joint Coverage Claims Example Primary Loss Value Insurer 1 = $5,000 Insurer 2 = $10,000 Insurer 3 = $10,000 Total = $25,000 By adding together the Actual Primary Loss values from all three claims ($10,000 + $10,000 + $5,000 = $25,000) the total equals what the Actual Primary Loss value would have been from a single $100,000 claim. 39

03. Treatment of Exception Claims Joint Coverage Claims Exception Claim Joint Coverage Claims Example Since joint claims are treated as a single claim for experience rating, the $250 reduction in the Actual Primary Losses must also be proportioned between the joint claim in the same percentage as their liability. Insurer 1 20% Liability 20% of 250 = $50 Insurer 2 40% Liability 40% of $250 = $100 Insurer 3 40% Liability 40% of $250 = $100 Total = $250 This proration is achieved by subtracting $250 from the Primary Threshold of the Gross Loss before applying the ratio of the Net/Gross. 40

03. Treatment of Exception Claims Gross (Less than Max. Loss) vs. Net Value (Insurer 2) Removing First $250 2019 Exception Claim Joint Coverage Claims Example X-Mod Calculation 40% Liability Primary Threshold $ 25,000 Gross $ 100,000 Net $ 40,000 fx Actual Loss = Net = $40,000 Insurer 2 Note: If Total Loss (Gross) amount is less than the Maximum Loss ($175,000) fx Actual Primary Loss = ( Net ) ( ) x Primary Threshold of Gross Loss Value - $250 Gross = ($40,000 / $100,000) x (Primary Threshold of $100,000 - $250) = 0.40 x ($25,000 - $250) = $9,900 By discounting the claim using the Net/Gross ratio, the X-Mod calculation uses $9,900 rather than $24,750 for the Actual Primary Loss value. The same for the claim from insurer 3 with 40% liability. 41

03. Treatment of Exception Claims Gross (Less than Max. Loss) vs. Net Value (Insurer 1) Removing First $250 2019 Exception Claim Joint Coverage Claims Example X-Mod Calculation 20% Liability Primary Threshold $ 25,000 Gross $ 100,000 Net $ 20,000 fx Actual Loss = Net = $20,000 Insurer 1 Note: If Total Loss (Gross) amount is less than the Maximum Loss ($175,000) ( ) ( ) Actual Net fx Primary Loss = x Primary Threshold of Gross Loss Value - $250 Gross = ($20,000 / $100,000) x (Primary Threshold of $100,000 - $250) = 0.20 x ($25,000 - $250) = $4,950 By discounting the claim using the Net/Gross ratio, the X-Mod calculation uses $4,950 rather than $24,750 for the Actual Primary Loss value. 42

03. Treatment of Exception Claims Gross (Less than Max. Loss) vs. Net Value Removing First $250 2019 Exception Claim Joint Coverage Claims Example Primary Loss Value Insurer 1 = $4,900 Insurer 2 = $9,900 Insurer 3 = $9,900 Total = $24,750 By adding together the Actual Primary Loss values from all three claims ($9,900 + $9,900 + $4,950 = $24,750) the total equals what the Actual Primary Loss value would have been from a single $100,000 claim. 43

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