Post on 16-Jan-2016
Workers Compensation Large Deductible Issues
Matt Hayden, FCAS, MAAALiberty Mutual
Holmes Gwynn, ACAS, MAAATexas Department of Insurance
September 12,2005
Introductory Comments
Why High Deductible WC is a Topic Large Deductible Study by the NAIC/IAIABC
Joint Working Group Regulatory Concerns The Liberty Mutual Approach
Why is this a Topic
In 2001 37% of “manual-equivalent premium” was written using a deductible of $100,000 or greater.
In Texas the percentage was 52%. The insurer has responsibility for first dollar
losses if the policyholder fails to meet obligations.
Chain of Security for First Dollar Losses
The Policyholder/Employer The Employers Estate
The Insurer writing the deductible policy Guaranty Funds
Employer Insolvency
Employer bankruptcy triggers: Automatic stay of adjudication
preventing/delaying reimbursements to insurer. Chapter 11 requires the employer to keep
appropriate workers comp coverage. Insurance policy persists after bankruptcy. Even if the insurer has collateral, access to that
collateral may require litigation in the bankruptcy court given that such collateral is an asset of the estate.
Insurer Risk - Financial
First dollar loss can become the responsibility of the insurer with very little premium to cover those losses.
Some large companies have had to face up to the problem of: Questionable underwriting, Lack of securitization.
Insurer Risk – Claims Handling
Degree of self adjusting of claims Degree of coordination and reporting with
primary insurer TPAs are often in the middle.
Insurer Insolvency Considerations
Should reimbursements for claims paid by guaranty fund go back to guaranty fund or assets of the estate.
Equity Issues Relating to Taxation & Funding of Residual Markets
Taxes for a states general revenue are usually a % of direct written premium.
Assessments to support Second Injury Funds,
Support of Residual Markets.
Regulatory Concerns
Policies leverage a high volume of claims to a small premium, i.e. credit risk traded for underwriting risk.
An insurer insolvency will produce uncertainties about the status of recoverables.
Current knowledge of claims and claim practices are uncertain when & if intervention is needed.
Texas Administrative CodeTitle 28, Part 1, Chapter 8, Subchapter A, Rule 8.4 Hazardous Condition Rule Related to High
Deductible Workers’ Comp Policies
Web-site is: http://info.sos.state.tx.us/pls/pub/
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Regulatory Enforcement (TX)
Hazardous Condition Rule so before enforcement, determination is made to see if the insurer is in hazardous condition.
Once determined hazardous, we have an exhibit for the insurer to fill out. Identifies the insured and the ultimate losses under that
contract. We expect collateral equal to the ultimate loss reserves. We expect annual actuarial certification of those reserves.
Financial Reporting of Large Deductible Data
Industry Reporting Reported to NCCI on a Unit Record basis after
policy expires. NCCI uses the data for classification ratemaking. Not used for rate level analysis.
Statutory Reporting Losses & Premiums reported net of deductible. Retro rated polices report losses and premiums.
Profesessional Employer Organizations (PEOs)
Employees are hired by the contractor or small businessman, who makes them employees of the PEO.
The PEO generally provide a range of services including payroll, health coverage, and workers comp coverage.
The PEO buys a high deductible policy, with the understanding that sub-accounts self insure for first dollar losses.
PEOs Continued
Chain of security now may dip down to sub account.
The losses occur and the contractor quits the PEO. Reimbursements are uncollectible.
The PEO can’t keep up with the loss reimbursements owed to the insurer.
Policy is cancelled. The insurer gets his actuarial opinion and is
in turn bankrupt.
Findings & Recommendations
Report makes 17 findings and/or recommendations to both the NAIC and/or the IAIABC.
Most deal with what needs to be done to increase consistency and solidify policy on the treatment of claims.
Two are directed to the Casualty Actuarial Task Force (CATF).
Of Consequence to Actuaries
14. “Annual Statement reporting should be amended to show worker’s compensation losses under the deductible threshold on a state-by-state basis.”
Columns showing: Paid, incurred, and unpaid deductible losses; Written, earned and perhaps unearned deductible
premiums.
More Actuarial Interest
15. “Further study should be done with regard to apparent “disconnects” in accounting requirements for loss recoveries under large deductible programs.”
More specifically the CATF should examine the reserving and booking of losses due to policyholder default so there is consistency in the handling of these losses.
Summary
Read the: Workers’ Compensation Large Deductible Study, latest version 6/8/2005, By the NAIC/IAIABC Joint Working Group
Alan Wickman of Nebraska was the principle author.
The CATF will be considering these recommendations at some point.
They will likely involve industry input through the Academy’s, COPLFR.
Writing Workers’ Compensation
Large Deductible Business
Casualty Loss Reserve SeminarSeptember 12, 2005
Boston, MAMatt Hayden, Liberty Mutual Group
Key Issues
Underwriting Considerations Pricing Systems Issues/Data Capture Loss Reserving
Underwriting Considerations
Accurate and Detailed Historical Loss and Exposure Information
Credit Analysis Quality of Security Reasons for LDD
Pricing
Loss forecast at deductible limit + exposure based excess pricing + table M aggregate.
If losses below deductible not credible or not available, may use experience modified manual rates.
How to incorporate experience in excess portion (primary mod or excess experience)?
Systems Issues/Data Capture
Do your systems have data capture capabilities consistent with pricing methodology?
NCCI unit reporting still required on this business.
Loss Reserving
Split between per occurrence and aggregate excess if data permits.
Exposure-based methods preferred but parameterization challenging.
Parameter estimates dependent on quality and volume of data.
May use individual account or book of business/average approach.
Loss ReservingBornhuetter-Ferguson Parameters
Expected Losses Ground-up loss estimates with ELPPF’s or
LER’s (per occurrence XS). Ratio of aggregate XS to ground-up losses
on mature years, judgment on newer years (aggregate XS).
Model output on individual accounts. Premium/payroll applied to loss ratios/rates.
Loss ReservingBornhuetter-Ferguson Parameters
Expected Loss Example – Per Occurrence
Ground-Up ExpectedYear Ultimate LER Net Loss2001 1,000 90% 100
2002 1,100 88% 132
2003 1,200 86% 168
2004 1,300 85% 195
Total 4,600 595
Loss ReservingBornhuetter-Ferguson Parameters
Loss Development Factors Use of actual, net loss triangles requires
more data than likely available. Can use excess experience for similar book
(per occurrence XS). Aggregate XS should behave like truncated,
limited ground-up.
Loss ReservingBornhuetter-Ferguson Parameters
LDF Example – Incurred Per Occurrence Excess % Excess %
WeightedYear 500k LDF 500k 1M LDF 1M LDF2001 2.000 50% 2.500 50% 2.222
2002 2.500 45% 3.500 55% 2.966
2003 3.000 40% 4.000 60% 3.529
2004 5.000 35% 6.000 65% 5.607
Loss ReservingBornhuetter-Ferguson
Total Example
Expected Weighted Actual Estimated Actual/Year Net Loss LDF Reported Ultimate
Expected2001 100 2.222 40 95 89%
2002 132 2.966 50 137 112%
2003 168 3.529 45 165 95%
2004 195 5.607 40 200 115%
Total 595 175 597 102%
Closing Thoughts
Deductible play trades credit risk for underwriting risk.
Data is king. In the past, soft market has grossly under-
priced excess, particularly aggregate excess.