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2010 Proposed Rate Discussion

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  1. 2010 Proposed Rate Discussion Workers’ Compensation Advisory Committee September 21, 2009

  2. Overview of Discussion • Refresher on How Indicated Rate is Determined • Balancing Costs and Revenues • Medical Aid Story • Accident Fund Story • Investment Income • Supplemental Pension Fund Story • 2010 Actuarially Indicated Rate • Pension Discussion • Factors Affecting Time-Loss Duration • Time-Loss Duration Index Discussion • Cost Driver Analysis • Contingency Reserve • 2010 Proposed Rate (handout) 2

  3. Establishing the indicated rate requires balancing costs and revenues for the 2010 Accident Year 3

  4. Cost components explained • Discounted benefits incurred • Estimated benefit liabilities for the lifetime cost of the claims that occur in 2010, discounted at the following rates: • Pension benefits (6.5%) • Non-pension benefits (2.5%) • Claims Administration Expenses • Variable costs associated with the lifetime provision of benefits (claims management, medical cost and policy management, vocational rehabilitation services, etc.) • Other Administration Expenses • Fixed costs for 2010 associated with other services including premium collection (account management), fraud prevention services, DOSH, SHARP, UW, etc. 4

  5. Revenue components explained • 2010 premiums (estimated at 2009 rate levels) • Revenue we expect to receive based on 2010 estimated hours at 2009 rates • Net of retro refunds • Revenues are decreased based on expected 2010 retro refunds due to better performance of retro employers • Extra investment income, gains and other income • Investment yield in excess of our discount rate • 2010 indicated rate • The rate change necessary to balance costs and revenues 5

  6. 6

  7. Loss ratios are critical to our ratemaking process • Loss ratio is the ratio of incurred benefits to premiums • Loss is another term for benefits • Used in the insurance industry as a measure of profitability • Rough measure of how adequate premiums were for a given year • Past loss ratios are used to estimate future loss ratios after some adjustments are made 7

  8. Caution: You cannot simply use past loss ratios to estimate 2010 loss ratios • Loss ratios are distorted by changes in: • Past rates • Past benefit levels • Trends of claim frequency and claim severity 8

  9. In order to estimate 2010 accident fund benefits we determine how much past claims would cost if they occurred in 2010 • Factors adjust past benefits so that we have an estimate of the costs to be incurred in 2010 • The two most recent quarters are not used as they are not mature 9

  10. Medical Aid Fund Benefits Incurred • In order to estimate 2010 medical aid benefits we determine how much past claims would cost if they occurred in 2010 • Factors adjust past benefits to 2010 benefit levels • The two most recent quarters are not used as they are not mature 10

  11. Historical losses adjusted to 2010 benefit levels • Once benefits are adjusted to 2010 levels, the underlying trends become more apparent 11

  12. 12

  13. Claims Administration Expenses • These variable costs are a percentage of the estimated benefit cost • Costs associated with services provided by the following programs that support the provision of benefits for the life of the claim • Claims & Claims Support Units • Health Service Analysis and • the Office of the Medical Director • Legal Services & AAGs (Claims) • Vocational Rehabilitation Other Administrative Expenses • Fixed costs for 2010 associated with other services Premium Administration Employer Services Collections Field Audit Field Services Retro Legal Services & AAG (Firms) General Insurance SHARP DOSH Consultation Risk Management Non-Insurance Board of Industrial Insurance Appeals DOSH Compliance UW Department of Environ & Occ Health Sciences Apprenticeship Employment Standards Note: Groupings are consistent with statutory accounting principles 13

  14. Convert budgeted fiscal year administrative expenses to calendar year expenses ? ? ? 14

  15. Convert budgeted fiscal year administrative expenses to calendar year expenses ? ? 15

  16. 16

  17. In order to estimate 2010 premiums we adjust past premiums to 2009 rate levels • The insurance exposure is the premiums at 2009 rate levels • The adjusted premium trends look similar for both funds 17

  18. Insurance exposure and premiums have declined as a result of the economic downturn 18

  19. Forecasting current recession to be as bad as the combined economic recessions of 1979 and 1982 19

  20. To forecast 2010 loss ratios, we consider trends over the most recent 5 years 20

  21. Caution: the most recent year has the least amount of loss information 21

  22. Actuaries usually choose an average that is between one and three years 22

  23. 23

  24. Past performance is used to estimate future retro refunds • We look at the loss ratios for retro and non-retro employers to determine the average loss ratio difference • The difference in the loss ratios determines the amount of the size of the retro refund pool • The difference in loss ratios is estimated at 16.8% 24

  25. 25

  26. Actuaries estimate the investment income in excess of discount rates • Excess yield rates are 1.16% in the Accident and Pension Fund and 2.38% in the Medical Aid Fund (these yields are a percentage of invested assets) • These excess yield rates are restated as a percent of premium to determine how much of the cost of insurance will be offset by returns • These percentages have declined over the past three years 26

  27. 27

  28. Medical Aid Fund Story • Report card of Loss Ratios shows we overestimated past years’ loss ratios as medical growth decreased. We don’t expect this to continue as medical growth has recently increased. • Medical costs are higher than were projected • Recent medical growth has been above 8% annually • Medical growth for long duration claims is the most expensive group with the highest rate of growth 28

  29. 29

  30. Actuaries estimate an additional $119M of premium is needed in the Medical Aid Fund 30

  31. Accident Fund Story • Time-loss claims are staying in the system longer • More claims are becoming pensions • Timeloss duration has grown by more than 10% in Fiscal Year 2009 31

  32. 32

  33. Actuaries estimate an additional $151M of premium is needed in the Accident Fund 33

  34. Investment Income Target Investment Allocation Accident and Pension Funds Current Prior TIPS 10% 0% Equities 10% 10% Medical Aid Fund Current Prior TIPS 20% 0% Equities 15% 30% By adding TIPS and reducing equity exposure, the current investment portfolio is both less risky and better able to absorb the risk of unexpected high inflation. Investment income is decreasing in all funds. Assumption re: Extra investment income in excess of the discount rate Accident & Medical Pension Aid Last year 17.6% 18.4% This year 12.9% 17.6% Reduction 4.7% 0.8% 34

  35. Actuaries estimate an additional $270M of premium is needed in the Accident and Medical Aid Fund combined 35

  36. Supplemental Pension Fund Story • Pay as you go (no reserves maintained) • Wage inflation for FY2010 benefits was 3.4%, which is higher than projections • Hours are projected to be 7% less in 2009 and an additional 3% less in 2010 • Invested assetswill be about $20M at year end, much less than one quarter’s losses ($100M) 36

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  38. 38

  39. Factors leading to high indicated rate 39

  40. Frequency of pensions is increasing • Last year, the pension frequency trend had leveled off • More recent data shows the frequency continuing to rise • More than 5% of time-loss claims become pensions (up from a steady rate of about 2% from 1971 to 1996) 40

  41. Increasing duration of claims is causing an increase in estimated future pensions 41

  42. 6/30/2008 6/30/2009 Chance Chance of TPD of TPD Increased Age (Years) Pension Pension Probability 11% 13% 2.8% 0 to 0.99 29% 32% 3.0% 1 to 1.99 44% 48% 3.9% 2 to 2.99 58% 62% 3.8% 3 to 3.99 68% 74% 6.0% 4 to 4.99 77% 80% 3.5% 5 to 5.99 82% 84% 1.8% 6 to 6.99 88% 88% -0.3% 7 to 7.99 88% 89% 0.2% 8 to 8.99 93% 91% -1.1% 9 to 9.99 96% 95% -1.2% 10 to 10.99 99% 97% -1.4% 11 to 11.99 99% 98% -0.3% 12 to 12.99 100% 100% -0.3% 13 and over Total 36% 41% 4.5% • The increasing probability of active time-loss claims becoming a pension has lead to more estimated pensions 42

  43. Pension frequency has doubled for both the State Fund and for Self-Insurers 43

  44. (From June WCAC) Factors Affecting Time-loss Duration We are researching how the following characteristics of claims may influence duration : • Permanent partial, permanent total and temporary disability • Specific diagnoses – carpal tunnel, back injury, soft-tissue disorders, • psychological, occupational disease, etc. • Diagnosis mix and number per claim • Utilization of prescription drugs for chronic pain • Administrative delays • Need for voc rehab services • Re-openings • Impact of economy on RTW and KOS opportunities • Variation by industry sector • Duration/cost by provider type 44

  45. Time-loss duration index has continued to increase since June WCAC (257 days) and is now at 266 days 45

  46. Time-Loss Duration Index • Very simple • Very straight-forward Time-Loss Duration = the number of time-loss days paid (divided by) the count of ultimate time-loss claims for each accident quarter (includes LEP & KOS claims also) 46

  47. Simple and robust measure of changes in time-loss duration Time-Loss Duration Index 47

  48. Analysis of possible index distortion concluded the following: • Formula is extremely simple (Days of Time-loss Paid/ Total Time-loss Claims) • Quarterly numbers in both numerator and denominator are very large – thus significant deviations are required to create distortion • Index is an accurate and effective actuarial assessment of time-loss duration that is being reviewed by our actuarial auditors (Tillinghast) 48

  49. Median duration is substantially lower than the average (mean) duration 49

  50. Insurance exposure has declined to 2004 levels The Impact of the Economic Downturn 50