Workers Compensation UpdateRecent reforms and notable issues for

reinsurers

Gerald T. Yeung

May 2007

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Table of Contents

California – Impact of Reform 3

California - Industry Results 4

California - Legislative / Regulatory Update 8

California – Excess Loss Factors 9

New York - Industry Results 10

New York – The Case for Reform 12

New York - Legislative Update 13

Catastrophe Risk Management 14

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CaliforniaImpact of Reform

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California Industry Results

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California Industry Results

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California Industry Results

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California Industry Results

Industry Reserve Deficiency (Redundancy) Based on WCIRB Estimated Ultimate Losses

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California Legislative / Regulatory Update

Legislative activity

AB 1212 would direct DWC to increase PD benefits based on empirical studies

AB 644 introduces stricter rules for medical utilization review

AB 1073 eases caps on chiropractic, physical and occupational therapy

SB 942 provides more causes of action against employers who discriminate against workers comp claimants

Regulatory activity

Pressure on Division of WC to raise “future earnings capacity” multiplier

Stiffer medical utilization review penalties

Governor’s initiative for 24-hour medical care

Court Cases

Appeals Board reverses earlier adverse decisions regarding applicability of the old Permanent Disability schedule

Apportionment decision pending

Ratings under the new schedule may be rebutted by expert testimony

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California Excess Loss Factors

Current loss elimination ratios are as of 7/1/03

Update using same methodology

Stochastic loss development

On-level for impact of legislative changes on severity only

Fitted severities above $2M per accident limit

Proposed loss elimination ratios effective 7/1/07 are higher than current above $75,000 per accident limit

Large claims do not appear to benefit as much from reform

Hazard groups not updated with this change

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New York Industry Results

Rate Change History

The New York Insurance Department disapproved a filed increase of +7.5% proposed to be effective October 1, 2006.

Source: New York Insurance Department

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New York Industry Results

Loss & LAE Ratios

Source: Industry Annual Statement

Year Direct Premiums Written ($000) Loss & LAE Ratio

2001 2,012,166150.1%

2002 3,384,234 77.8%

2003 3,394,215 80.4%

2004 3,430,756 83.6%

2005 3,752,558 86.3%

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New York The Case for Reform

Second highest average workers compensation costs in the country

Lower than average benefits

Last increase in weekly benefits was in 1992

High permanent partial costs

Lifetime benefits

12% of cases but 73% of costs

High incidence of fraud in the system

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New York Legislative Update

Increase maximum weekly disability benefit from $400 per week to $600 per week by 2009 and index it to two-thirds of the State Average Weekly Wage thereafter

Raise the minimum weekly benefit from $40 to $100

Increase maximum weekly death benefit from $600 per week to $900 per week by 2009 and index it to the State Average Weekly Wage thereafter

Impose a cap on permanent partial disabilities from 225 weeks to 525 weeks depending on degree of loss of wage-earning capacity

Allow claimants to petition to raise the cap in cases where their disability is 80% or greater

Eliminate the Special Disability (Second Injury) Fund

Increase civil and criminal penalties to combat workers compensation fraud

Mandate fee schedules to manage costs for pharmaceuticals and durable goods

Modify and review the role of the New York Compensation Insurance Rating Board (NYCIRB)

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Catastrophe Risk Management Considerations

Multi-claimant occurrences associated with industrial classifications (e.g. explosions, auto accidents)

Get different views on catastrophic risk

Models differ in casualty rates, frequency assumptions

Do severities need adjustment? (e.g. medical inflation)

Evaluate your data

Employee count, construction, number of stories

Required data granularity depends on peril insured (e.g. terrorism vs. earthquake)