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Another big California workers’ compensation rate reduction is coming, effective at the start of 2019. This will be the eighth straight decrease, with the last reduction taken July 1, 2018.
This past week, the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) approved and released the pure premium rate filing, effective January 1, 2019, representing a 4.5% reduction from current rates. This rate reduction has not yet been approved by the California Department of Insurance, and is open to a public comment period and hearing.
Pure premium rates are the cost to pay indemnity & medical benefits (loss) and the cost to administer those benefits (LAE) per $100 of payroll (or wages). LAE is further split into claims overhead expenses (ULAE) and claims handling expenses attributed to individual claims (ALAE). Note these pure premium rates do not include general expenses, acquisition, brokerage, commission, taxes, licenses, fees or underwriting profit.
Pure premium rates are developed using a series of assumptions regarding future costs and the impact of prior legislative changes. These factors include (but are not limited to) the expected frequency of claims, average severity per claim, inflation, impacts of legislated changes, the impact of previous rate changes, loss development patterns and exposure growth.
There are five major components leading to the rate reduction:
Loss development through March 31, 2018 has continued to improve. Both medical and indemnity losses are emerging less than expected. This led the WCIRB to lower its estimates of prior-year ultimate losses.
Claim Settlement Rates
The implementation of the reform provisions of Senate Bill No. 863 (SB 863) beginning in 2013 has led to faster claims settlement. According to the WCIRB, claims are settling more quickly as a result of:
Accident Year 2017
The actual loss experience for accident year (AY) 2017 is developing significantly less than expected from prior pure premium rate filings. In fact, the amended pure premium rate filing effective 1/1/2018 had projected the AY 2017 loss ratio at approximately 65.5%; the most current data indicates a 58.4% loss ratio.
The exposure underlying the workers’ compensation system is payroll. Given that pure premium rates reflect losses relative to payroll, projections of the denominator of that value have a significant impact on the expected future costs.
Wage level growth for the 2018 through 2020 calendar years is forecasted to be in the 3.2% to 4.2% range –well above the 1.9% and 2.7% growth in average weekly wages in 2016 & 2017, respectively.
The average medical cost per indemnity claim in California has trended downward by 17% in the five years from 2011 to 2015, and was flat in 2016. The reform provisions of SB 863 are significant contributors to this phenomenon.
The 2017 costs are higher than 2016 costs, but still below 2012 cost levels. In the pure premium rate filing, the WCIRB relies on an annual medical claim severity trend rate of +2.5%.
The WCIRB estimates the reduction in lien filings associated with SB 863 have contributed to $500 million in annual savings to the workers’ compensation system. However, lien filings surged in 2015 and 2016, leading to reforms embedded in SB 1160 and AB 1244. Subsequently, lien filings dropped dramatically.
In previous pure premium rate filings, the WCIRB had estimated 10% reductions in lien filings, but modified that assumption with the 7/1/18 filing to a 40% reduction. This filing reflects a 40% reduction in lien filings due to SB 1160 and AB 1244.
An important component in any pure premium rate calculation is expected future cost trends and the methods used to derive these values. The forecasted change in future claim frequency is -1.2% in this filing.
Reforms to the California workers’ compensation system implemented over the past few years have led to moderating trends in both claim frequency and claim severity. The upward trend expected in future average wage levels is also serving to lower pure premium rates. Given the relative stability in costs over the past several years, the reduction in the average pure premium rates should contribute to a healthy, vibrant and competitive market.
Greg Fears is a Consulting Actuary with Pinnacle Actuarial Resources, Inc. in the Bloomington, Illinois, office and has over 17 years of experience in the property/casualty industry. He has considerable experience in assignments involving loss reserving, funding studies, loss cost projections, captive feasibility studies, risk margin calculations, simulation methods, deductible analysis, cost allocation mechanisms, financial analysis of insurance companies, commercial lines ratemaking and competitive analysis. Greg is an Associate of the Casualty Actuarial Society, a Member of the American Academy of Actuaries and an Associate in Risk Management.
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