The Effects of

Major Reformson

Workers’ Compensation Ratesin California

CHSWCFebruary 9, 2006

Gregory Trout, MPA and Mark Priven, FCAS, MAAA,Bickmore Risk Services

Malcolm Dodge, Octagon Risk Services

Conditions Leading to Reforms

• Open Rating: 1995• Claims Cost Increases• Premium Increases• Insolvencies

Conditions Leading to ReformsCalifornia Workers' Compensation - Indicated Average Rates

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WCIRB Estimated Pure Premium Charged Premium Rate

BRS Study of Reforms

• Authorized by SB 899 • Initiated by DWC • No Cost to Taxpayers (insurance industry

assessment) • Scope: Impact of Reforms on Claims Costs

– Charged Premiums– Insurance Company Surplus– Marketplace/Competition– WCIRB/CDI Estimates

Scope of Study

Reforms Focused on:• AB 749 (2002) • AB227/SB228 (2003)• SB 899 (2004)

BRS Study of ReformsI. Background Leading to Workers’

Compensation Reforms

II. Scope and Approach

III. Claims Savings Generated by Reforms

IV. Effect of Reforms on Insurance Rates

V. Effects of the Reforms on Insurance Industry Surplus and Solvency

VI. Insurance Markets and Competition

VII. Adequacy and Accuracy of Workers’Compensation Insurance Bureau and California Department of Insurance Rates

VIII. Evaluation of Reforms in Other States

IX. Evaluation of Regulatory Structure

X. Areas of Further Research

Limitations of Study

• Fairness of Benefit Levels and Medical Fees

• Quality of and Access to Medical Care

• Effects on Self-Insurers• Long Term Effects of

Reforms

Retrospective Impact of Reforms

•Overall Savings

Exhibit V.1. Impact of Reforms on Insurance Industry Reserves (2003 & Prior): ($Billions)

Reform Savings Active Insurers

Savings All Insurers

Medical Fees $2.3-$2.6 $2.8-$3.1

Evidence-Based Medicine $2.9-$4.0 $3.4-$4.7

Permanent Disability $0.2-$2.8 $0.2-$2.9

Total $5.4-$9.4 $6.4-$10.7

Retrospective Impact of Reforms

•Historical Evaluations

Evaluation YearSource: WCIRB Quarterly Report at September 30, 2005

$1.6$2.3

$3.6$4.4

$5.9

$7.8

$9.8

$11.4

$12.9

$0.5

$11.2

$6.3

$-

$2

$4

$6

$8

$10

$12

$14

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Exhibit V.3. Estimated Ultimate Losses Less Reported Losses at Successive December 31 Evaluations

(After Reflecting the Estimated Impact of AB 227, SB 228, & SB 899 on Unpaid Losses)

In Billions

As of 9/30/2005

Prospective Impact of Reforms•Claims Costs

Exhibit III.3. Projected Average CDI Pure Premium Rates Absent Reforms

2.522.81 2.64 2.57 2.57

3.04 3.353.69

4.064.49

4.81

4.10 3.81 3.733.06

2.59

5.39 5.66 5.936.22

6.52

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Filed Rates (adjusted for mix) Projected ex Reforms

•Claims Costs: Dollars

Prospective Impact of Reforms

Prospective Impact of Reforms•Claims Costs: Percent

Exhibit III.3. Projected Average CDI Pure Premium Rates Absent Reforms

2.522.81 2.64 2.57 2.57

3.04 3.353.69

4.064.49

4.81

4.10 3.81 3.733.06

2.59

5.39 5.66 5.93 6.226.52

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Filed Rates (adjusted for mix) Projected ex Reforms

Prospective Impact of Reforms

•Claims Costs by Major Component

Prospective Impact of Reforms

•Insurance Company RatesExhibit IV.1. California Workers' Compensation - Indicated Average Rates

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WCIRB Estimated Pure Premium Manual Premium Rate Charged Premium Rate

Exhibit IV.1. California Workers' Compensation - Indicated Average Rates

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WCIRB Estimated Pure Premium Manual Premium Rate Charged Premium Rate

Prospective Impact of Reforms•Insurance Industry Return to Profit

Prospective Impact of Reforms•Insurance Company Market Share

California vs. Other States

•Loss Rate ComparisonExhibit IV.9. Pure Premium Relationship to California – Percentage Higher or Lower

Approved Pure Premiums at January 1, 2006 Excluding Loss Adjustment Expense

Higher than California Lower than California-

More than 25% Higher

Less than 25% Higher

Less than 25% Lower

More than 25% Lower

Florida Alaska Minnesota Arizona

Montana Texas Colorado

Hawaii

Massachusetts

Michigan

Nevada

New York

Oregon

Wisconsin

Note: Approved Pure Premiums in California have declined by more than 40% since July 2003.

Uncertainties Remain

Future and Retroactive Cost Savings will be impacted by:

• Changes due to Legal Decisions• Legislative Changes• Regulatory Changes• Changes to System through Voter

Initiatives

Study Availability

• The Study can be downloaded on the internet from:

• BRSrisk.com• dir.ca.gov/DWC• Or by requesting a CD from

BRS or DWC