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Articles from CompMetrics.com

California’s Proposed Pure Premium Rates July 01, 2012: It’s a Mixed Bag

The California Workers' Compensation Insurance Rating Bureau (WCIRB) has made a mid-year filing to change Pure Premium Rates, due to an increase in the cost of claims. It appears that CARRIERS are contributing most to this increase due to their rising cost of managing claims.

California's WCIRB has proposed a mid-year rate filing for the Pure Premium Advisory Rates. If there is no change after the Public Hearing (April 26, 2012) and the Insurance Commissioner approves them, they will become effective July 1, 2012.

This year is the first time in several years that the WCIRB has made a mid-year filing to change the Pure Premium Rates. The stated reason for the filing is the increase in costs of claims over the past few years and the estimated increases over the next few years – more on that later.

MIXED BAG FOR EMPLOYERS

The rate filing is a mixed-bag for employers. Some employers will be pleasantly surprised to find the rates have declined – some significantly. However, other employers will not be as pleased.

Chart 1 (below) shows the percentage of change from the January 01, 2012 Pure Premium Filing.

Chart 1: Proposed Pure Premium Rates – July 01 2012       (Data & statistics are from WCIRB)

The chart shows the dispersion of the percentage of change – from -42% to +41%. There are slightly more increases ( 241 vs. 232) overall. There are 16 class codes with no change.

According to the WCIRB, the overall effect will be to change rates by 4.1% from $4.41 to $4.51 per $100 of estimated payroll.

REASONS FOR THE INCREASE

According to the rate filing, the primary reason for the overall increase is the anticipated rise in the Estimated Ultimate Cost of an indemnity claim.

Figure1 (below) shows the following data:

  • The average annual increase in Ultimate Costs for an indemnity claim was 9.7% from 2005 to 2009. Average Wage Levels increased 3.1% during the same time.
  • From 2009 to 2011 Ultimate Costs for an Indemnity claim rose by 1.3%. Average Wage Levels grew by 3.5% - almost three times as fast.
  • The WCIRB projects (emphasis on 'projects') an increase of 5.9% in Indemnity costs over the next two years while projecting only 1.6% in the Wage Level.

Figure 1: Cost and Wage Index (Data & Statistics are from WCIRB)

INVESTMENT INCOME

Another area where carriers are concerned about their profits comes from the other side of the equation – investment income. Figure 2 (below) shows investment income as a percentage of net worth has dropped significantly in the past few years.

  • The double-digit returns during the years 2004 through 2007 allowed the carriers to make huge profits during those years – particularly given that the Combined Loss Ratios were very low (see Chart 4 below)
  • Even with investment income yielding 5.2%, the carriers will still be very profitable. According to the WCIRB, the combined loss ratio for AY 2011 was 126%. Given the 'long tail' of work comp insurance, for every $1 of premium a carrier collects, they will still have 41₵ left after 30 years and 33₵ after all claims are closed for that accident year are paid (see Chart 2 below).

Figure 2: Return on Calendar Year Net Worth as Reported by the NAIC (Data & Statistics are from WCIRB)

Chart 2: Percentage Payout and Premium Residual (Data & Statistics are from WCIRB)

RISING COST OF INDEMNITY CLAIMS

One reason cited by the WCIRB for the need to increase rates is the rising cost of indemnity claims. The three charts below show the cost trends for Medical, Indemnity, and ALAE expenses. The charts begin with AY 2005 – the first full year after the reform legislation.

Medical Costs:

  • From AY 2005 to AY 2011, the average annual growth was 6.4%.
  • The steepest increase was from AY 2005 to AY 2008 – an average annual growth of 11.3%.
  • Medical costs leveled off after AY 2008 – an average annual growth of 1.7% through AY 2011.

Chart 3a: Medical Costs per Indemnity Claim (Data & Statistics are from WCIRB)

Indemnity Costs:

  • From AY 2005 to AY 2011, the average annual growth was 5.6%.
  • The steepest increase was from AY 2005 to AY 2008 – an average annual growth of 10.2%.
  • Medical costs leveled off after AY 2008 – an average annual growth of 1.1% through AY 2011.

Chart 3b: Indemnity Costs per Indemnity Claim (Data & Statistics are from WCIRB)

ALAE Costs:

  • From AY 2005 to AY 2011, the average annual growth was 11.9%.
  • The steepest increase was from AY 2005 to AY 2008 – an average annual growth of 12.7%.
  • Medical costs leveled off after AY 2008 – an average annual growth of 11.1% through AY 2011.

Chart 3c: ALAE Costs per Indemnity Claim (Data & Statistics are from WCIRB)

The cost of an indemnity claim has grown since the reform legislation of 2004. However, medical and indemnity costs have risen only slightly – well below the national average of other health care costs.

The ALAE costs (what the carriers spend to administer the claims) has risen significantly over the years with an average percentage increase in the double digits.

COMBINED LOSS RATIOS

  • The Combined Loss Ratio had been falling steadily since 1999 - even before the reform legislation.
  • By AY 2003, the ratio was below 100% (80%).
  • The ratios continued to fall after the reform, dropping to 56%, 56%, 70%, and 92% for years 2004, 2005, 2006, and 2007, respectively.
  • Beginning in AY 2008, the ratios once again climbed above 100% increasing to 133% in AY 2010 before dropping slightly to 126% in AY 2011.
  • During the six years the ratio was below 100% (2003 to 2007), the employers saw decreases in premiums for most of the years. However, those years were extremely profitable for the carriers – something the WCIRB doesn't mention in their reports.
  • Chart 5 (below) shows that ALAE expenses, as a percentage of combined costs, grew from 23% in 2004 to 46% in 2011 – doubling as a percentage of total costs. For the last three years (2009, 2010, and 2011), the costs of ALAE have been over 40% (45%, 46%,and 46%, respectively).

Chart 4: Combined Loss Ratios (Data & Statistics are from WCIRB)

Chart 5: ALAE Costs as a percentage of Total Costs (Data & Statistics are from WCIRB)

CONCLUSION

Once all the numbers are examined, it is clear that the costs of an Indemnity claim are going up. This has a significant impact on the overall costs. Indemnity claims account for approximately 21% of all workplace injuries, yet they account for 93% of the costs.

The numbers do indicate that an increase in rates is called for – although, perhaps not twice in one year and not at the increases called for.

By looking at the cost of a claim (medical and indemnity) and the ALAE expenses, it appears, more than anything, it is the carriers and their rising cost of managing the claims that is contributing most to the increase. Perhaps, someone should ask them to look at their own operations for cost savings rather than passing the costs of their inefficiencies on to employers.

{jacomment on}

Comments   

Dave Risse
0 # BrokerDave Risse 2012-05-21 17:29
Bill,

This is great information!! I can see why carriers weigh heavy on indemnity claims... .93%. OUCH!

Thanks for all your help!!

David RIsse
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