WCIRB Unveils 2003 Summary

California’s Workers Compensation Insurance Rating Bureau (WCIRB) just released its its initial review of Dec. 31, 2003 experience submitted by insurers. The full report with exhibits is available at www.wcirbonline.org.

The summary is based on data reported to the WCIRB by insurers who wrote approximately 98 percent of the statewide market, based on 2002 premium levels.

In reviewing this information, the following should be noted:

1. Some of the figures and ratios shown are based on WCIRB actuarial projections of future claim payments based on information reported through Dec. 31, 2003. Although the actuarial methodologies upon which these projections are predicated are comprehensively and regularly tested and the underlying assumptions verified, the actual costs that will ultimately emerge could differ from the amounts projected. Many of these projections will be updated regularly by the WCIRB as more mature information on these claims is reported in
subsequent quarters.

2. The amounts and ratios shown represent statewide totals based on the amounts reported by all insurers writing workers’ compensation insurance in California. The results for any individual insurer can differ significantly from the statewide average. An individual insurer’s results are related to its underwriting book of business, claims and reserving practices, as well as the nature of its reinsurance arrangements.

3. Insurer-reported losses, which, in Exhibit 9, are compared to WCIRB’s estimates of ultimate losses, include estimates of insurers’ incurred but not reported (IBNR) losses by line of business, state, and accident year, and are on a basis that does not reflect anticipated reinsurance recoveries or employer-paid deductibles. As a result, the amounts shown in Exhibit 9 do not necessarily equate to specific estimates of the adequacy of insurers’ unpaid losses.

4. Some of the medical cost-related provisions of Assembly Bill No. 227 (AB 227) and Senate Bill No. 228 (SB 228) are effective on a date-of-service basis and, therefore, affect the cost of unpaid medical losses on claims incurred prior to the Jan. 1, 2004 effective date of the
legislation. Projections of ultimate losses and ultimate loss severities have been adjusted to reflect the impact of AB 227 and SB 228 on unpaid medical losses as estimated by the

Exhibits 1 through 9 (see www.wcirbonline.org), which summarize the WCIRB’s review of reported Dec. 31, 2003 experience, reflect the following information:

• California written premium (gross of deductible credits) reported for calendar year 2003 is estimated at $21.3 billion (Exhibit 1). This is 37% above the written premium reported for calendar year 2002 and three times the premium written in 1999.

• The average insurer rate (final insurer rates reflecting all rating plan adjustments except deductible credits, retrospective rating plan adjustments, and policyholder dividends) per $100 of payroll for policies written in the second six months of 2003 is $6.39 (Exhibit 2).
This is 12% above the average rate charged for the first six months of 2003 and 28% above the rates charged for the second half of 2002.

• Including the estimated impact of AB 227 and SB 228 on unpaid medical losses, the WCIRB’s initial estimate of ultimate accident year losses for 2003 is projected by the WCIRB to be $12.6 billion.2 This amount is approximately the same level as for 2002 (Exhibit 3).

• After reflecting the estimated impact of AB 227 and SB 228 on unpaid medical losses, the WCIRB projects ultimate accident year loss ratios of 134%, 120%, 106%, 85% and 64% for the 1999, 2000, 2001, 2002 and 2003 accident years, respectively (Exhibit 4). The estimated loss ratios prior to the impact of AB 227 and SB 228 on unpaid medical losses range from 139% in 1999 to 70% for 2003.

• After reflecting the estimated impact of AB 227 and SB 228 on unpaid medical losses, the ultimate accident year 2003 combined loss and expense ratio is estimated by the WCIRB to be 94% (Exhibit 5). This is the lowest combined ratio projected by the WCIRB since the inception of competitive rating.

• The calendar year 2003 loss ratio reported by insurers (gross of any reinsurance or deductible adjustments) is 81%, which is the lowest calendar year ratio reported since 1997 (Exhibit 6).

1 The WCIRB’s estimate of the cost impact of AB 227 and SB 228 on 2004 policy year costs, as submitted to the California insurance commissioner on Nov. 3, 2003, reflected a range of the likely potential effect. The effect of the legislation on unpaid medical losses, as reflected in this summary of Dec. 31, 2003 experience, is based
on the average of the estimated impact of the legislation on each year’s medical losses computed in accordance with the methodology underlying the WCIRB’s estimate of the upper end of the range and that computed in accordance with the methodology underlying the WCIRB’s estimate of the lower end of the range.

2 The 2003 accident year losses are projected based on reported loss amounts through only 12 months (i.e., Dec. 31, 2003). Due to the relative immaturity of accident year losses valued as of 12 months, there is significant uncertainty in this initial projection for accident year 2003.

• Indemnity claim frequency for 2003 is estimated to be 3% lower than for 2002. Currently, 2003 indemnity claim frequency is estimated at approximately 55% of its all-time high in 1991 (Exhibit 7).

• After reflecting the estimated impact of AB 227 and SB 228 on unpaid medical losses, the WCIRB projects the average cost of a 2003 indemnity claim will be approximately $54,000, which is almost 7% greater than the average cost of a 2002 indemnity claim and more than twice the average cost of a 1994 indemnity claim (Exhibit 8, Sheet 1). This represents an annual growth rate since 1994 of approximately 12%, which is well above the level of general and medical inflation. In particular, medical claim costs have shown significant increases (Exhibit 8, Sheet 3).

• After reflecting the estimated impact of AB 227 and SB 228 on unpaid medical losses, the WCIRB’s current estimate of ultimate losses on all injuries that occurred on or before Dec. 31, 2003 exceeds the amount reported by insurers for those injuries by $8.4 billion (Exhibit 9, Sheet 1). Of this $8.4 billion difference over all accident years as of Dec. 31, 2003, $1.1 billion is on accidents occurring in 2003, $1.8 billion is on accidents occurring in 2002 and $1.4 billion is on accidents occurring in 2001 (Exhibit 9, Sheet 2).

3 The indicated annual changes in frequency from 1999 to 2001 appear to be statistical anomalies, not an accurate reflection of the annual changes.