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Casualty Actuarial Society The Changing Insurance Market Workers’ Compensation Issues

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Casualty Actuarial Society The Changing Insurance Market Workers’ Compensation Issues

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  1. Casualty Actuarial SocietyThe Changing Insurance MarketWorkers’ Compensation Issues Monday, April 15, 2002 Barry I. Llewellyn, NCCI Harry Shuford, NCCI 1

  2. WHAT WE’LL COVER TODAYFinancial Overview of WC LineResidual Market ActivitySystem Cost DriversFrequency ResearchTerrorism Issues 2

  3. FINANCIAL OVERVIEW OF WC LINE 3

  4. WC Calendar Year Combined RatiosContinue To Deteriorate Combined Ratio 8% Due to Sept. 11 p Preliminary NCCI estimate Source: AM Best Aggregates & Averages 4

  5. WC Calendar Year 2001 Results Deteriorated, While Accident Year Results Remain SteadyCalendar Year vs. Ultimate Accident YearCountrywide—Private Carriers Combined Ratio 8% Due to Sept. 11 CY 2001p estimate from AM Best Review/Preview, January, 2002; AY 2001p estimate from NCCIAM Best Aggregates & Averages (Historical CY Ratios) Includes dividends to policyholders. Accident year data is evaluated as of 12/31/00 and developed to ultimate. 5

  6. Preliminary 2001 Results WC Pretax Operating Gain/Loss Ratio -5.1 8% Due to Sept. 11 p Preliminary. Investment gain includes investment income and realized gains. * Adjusted to include realized capital gains to be consistent with 1992 and after. 6

  7. Cumulative Rate/Loss Cost Departure, Schedule Rating, and Dividends NCCI States—Private Carriers Based on data through 12/31/2000 for the 37 states where NCCI provides ratemaking services. Rate states are: AZ, FL, ID, IL, IN, IA, NV, RI, TX, and WI. Dividend ratios are based on calendar year statistics. 7

  8. New Business Policies Experienced Greater Average Reported Rate Changes Compared to Renewals NCCI States Avg Reported Rate Chg 15% 13.6% 11.8% 11.5% 9.0% 10% 8.0% 7.5% 5.9% 5.8% 4.4% 4.9% 3.9% 4.1% 5% 3.5% 0.1% 0% Renewals -3.5% New Business -5% -4.1% 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 2000 2001 8

  9. Average Reported Rate Changes NCCI States 15.0% New Business 10.0% Renewals Percent Change to Prior Year 5.0% 0.0% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q -5.0% 2000 2001 9

  10. Following Six Years of Decreases, the Average Approved Bureau Rate/Loss Cost Changes Have Been Increases for the Last Three YearsHistory of Average Bureau Rate/Loss Cost Level Changes p Preliminary (states approved to date in 2002). Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization. 10

  11. RESIDUAL MARKET ACTIVITY 11

  12. Residual Market PremiumVolume on the Rise . . . as of 9/30/2001 $530,000 * Excludes Maine Residual Market Pool. ** Projected to ultimate. 12

  13. Residual Market Combined RatiosContinue to Growas of 9/30/2001 * Excludes Maine Residual Market Pool. ** Projected to ultimate. 13

  14. Residual Market Activity Four Quarters 2001 vs. Four Quarters 2000 • Number of applications assigned is up +35% (59,289 vs. 44,102) • Assigned premium is up +92% (333,670,974 vs. 173,993,838) 14

  15. Residual Market Total Applications Bound 2001 vs. 2002 9/11 All Plan States 15 Note: 9/11 Incident– WK36

  16. Residual Market Application Premium Bound 2000 vs. 2001 vs. 2002 16

  17. Residual Market Application Premium Bound 2001 vs. 2002 9/11 Note: 9/11 Incident – WK36 17

  18. Average Residual Market Premium Size YearSize 1999 $2,141 2000 $2,957 2001 $4,199 2002 (YTD) $5,691 18

  19. Residual Market PolicyholdersSize of Premium: $100,000 and Greater YearAmount 1999 247 2000 184 2001 1,232 19

  20. SYSTEM COST DRIVERS 20

  21. The Rate of Change in WC Indemnity Claim Costs Has Accelerated Since 1995 NCCI States - Private Carriers Indemnity Claim Cost (000s) CPS Index to 1990 1990-1995: -0.2% annual change 1995-2000: +6.8% annual change Based on data through 12/31/2000, developed to ultimate. CPS (Current Population Survey) Bureau of Labor Average Weekly Wages Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. 21

  22. WC Medical Claim Costs Have Also Continued Their Consistent Upward Trend NCCI States - Private Carriers Medical Claim Cost (000s) Medical CPI Index to 1990 1990-1995: +2.4% annual change 1995-2000: +7.6% annual change Based on data through 12/31/2000, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. 22

  23. The Frequency of Lost-Time ClaimsHas Continued to Fall Through 2000Cumulative Change in Frequency - Private Carriers Cumulative change of -35.5% since 1990 Based on data through 12/31/2000, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. 23

  24. FREQUENCY RESEARCH 24

  25. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990sUsing Data from the Bureau of Labor Statistics onWorkplace Injuries - 1992-1999 presentation to the Casualty Actuarial Society Seminar on The Changing Insurance Market April 15, 2002 25

  26. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990sUsing Data from the Bureau of Labor Statistics onWorkplace Injuries - 1992-1999 Outline Key Findings Back Injuries – Great Improvement Everywhere; Room for More A Long-term View - Trends and Cycles in Frequency The Special Case of the 1990s – Less Cycle, More Down Trend Board-based Movements – It’s Everywhere – Industries & Occupations Board-based Movements – It’s Everywhere – Injury Characteristics Board-based Movements – It’s Everywhere – Age, Gender, Job Tenure 26

  27. Searching for the Factors Driving the Change in FrequencyLooking at Three Decades of Experience The key findings include: Frequency changes are cyclical around a long-term tendency to decline. Over long periods of time the relative importance of these two factors varies considerably. 27

  28. Searching for the Factors Driving the Change in FrequencyLooking at Three Decades of Experience The key findings include: Swings in the business cycle, especially as reflected in changes in employment, are associated with similar swings in frequency – downward pressure in recession upward pressure during periods of robust growth. 28

  29. Searching for the Factors Driving the Change in FrequencyLooking at Three Decades of Experience The key findings include: The 1990s diverge from earlier periods; the business cycle effects were present but were overcome by changes in the workplace as reflected by marked improvements in productivity. 29

  30. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990sUsing Data from the Bureau of Labor Statistics onWorkplace Injuries - 1992-1999 • What Happened in the 1990s? • Can It Continue? • The Approach – Compare Areas with Dramatic Declines vs. Those with Limited Declines and Increases – Identify Key Underlying Differences • It Didn’t Get Us Very Far! 30

  31. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s The key findings include: The decline is broad-based – across industries and occupations and across virtually all injury “demographics” including age, gender, event, source, body part injured, Tenure with employer. 31

  32. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s The key findings include: In spite of the dramatic declines there is virtually no change in the relative position of industries and occupations. In general the most risky remain the most risky; the safest are still the safest. 32

  33. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s The key findings include: In spite of the diverse nature of the decline at least one clear factor stands out the dramatic decline in back injuries outstrips the declines in all other injury categories. 33

  34. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s Check Out the Decline in Back Injuries This Seems to be the Most Dramatic Feature of the Improvement in the 1990s 34

  35. Reduction in Back Injuries is SignificantAll IndustriesDown 32% vs. 22% for All Other 35

  36. Reduction in Back Injuries is Significantfor All Major Industry Groups 36

  37. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s Check Out the Decline in Back Injuries More on This Later – First the Longer Term View 37

  38. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s Trends and Cycles in Frequency 38

  39. The Rate of Work Related Injuries Has Trended DownwardSlowly since the 1920s 39

  40. OrThe Rate of Work Related Injuries Has Trended Downward Dramatically since the 1920s 40

  41. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s What can explain this tendency for frequency to decline over extended periods of time? • According to the Federal Reserve Bank of Dallas – Competitive labor markets require continuing improvement in working conditions and productivity Source: “Have a Nice Day”, Annual Report 2000, Federal Reserve Bank of Dallas • Reflected in technological advances 41

  42. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s What can explain this tendency for frequency to decline over extended periods of time? Technological advances - Key concepts: • Robotics • Modular design and construction • Power assisted processes • Ergonomic design • Cordless tools • Stronger, lighter weight materials (e.g. fiber glass rather than wooden ladders) • More and better training 42

  43. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s Technological advances - Examples: Manufacturing – Robotics Warehouse, trucking, garbage collection, etc. Power assisted – fork lifts, Power tail gates Transportation Bigger trucks, Power assisted handling Repair service – auto, appliance, etc. Power tools, Snap-in modular parts Communications Head sets vs. hand held Construction Modular units and offsite prefabrication Clerical support Computer assisted typing, calculating, filing Food service Microwaves and prepared frozen meals in place of hot surfaces and open flames   Disposable plates and utensils vs washing 43

  44. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s OK – the Long Term Decline Makes Sense How about Short Term Movements? ________________________________ Frequency Typically Tracks with the Business Cycle 44

  45. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s What’s This about Frequency and the Business Cycle Moving Together? Surely Frequency Will Start Rising Now that the Strong Economic Growth of the 1990s Has Eased. 45

  46. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s Possibly but Probably Not ________________________________________ Frequency Tracks with the Business Cycle Looking at Forty Years of History 46

  47. Frequency Typically Falls During RecessionsbutSeems to Increase during Strong Recovery and Expansion__________Changes in Direction Track with Peaks and Troughs in Economic Cycles 47

  48. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s Frequency Tracks with the Business Cycle Probably the Cost of Inexperienced Workers but The Decline in the 1990s Seems to be Different 48

  49. The Year-to-Year Changes in Injury Rates Have Tracked Closely with Year-to-Year Economic Changes- Are the 1990s an Exception?(% changes in injury rates, GDP, and Employment - Private Sector) 49

  50. Searching for the Factors Driving the Change in Frequencywith Special Interest in the Decline of the 1990s The 1990s May Seem Different but Frequency Still Tracks with the Business Cycle when Combined with a Powerful (Linear) Downtrend ___________________________________________________ A Regression Analysis 50