WCIRB Summary of March 31, 2004 Insurer Experience

The Workers’ Compensation Insurance Rating Bureau of California (WCIRB) completed its initial review of March 31, 2004 experience submitted by insurers. This summary is based on data reported to the WCIRB by insurers who wrote approximately 98 percent of the statewide market, based on 2003 premium levels.

In reviewing this information, the following should be noted: Some of the figures and ratios shown are based on WCIRB actuarial projections of future claim payments based on information reported through March 31, 2004.

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.

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.

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.

Some of the provisions of Assembly Bill 227, Senate Bill 228 and Senate Bill 899 affect the cost of claims incurred prior to the effective date of the legislation. Projections of ultimate losses and ultimate loss severities have been adjusted to reflect the impact of AB 227, SB 228 and SB 899 on unpaid losses as estimated by the WCIRB’s Actuarial Committee.

California written premium (gross of deductible credits) reported for the first quarter of 2004 is $6.4 billion. This is approximately 25 percent above the written premium reported for the first quarter of 2003 (Exhibit 1).

The average statewide 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 first quarter of 2004 is $5.89 (Exhibit 2). This is 8 percent below the average rate charged for the second six months of 2003 and 17 percent below the average rates that would have been charged in the first quarter of 2004 if average statewide rates had increased by the 12 percent increase in advisory pure premium rates proposed by the WCIRB prior to the enactment of AB 227, SB 228 and SB 899.

After reflecting the estimated impact of AB 227, SB 228 and SB 899 on unpaid losses, the WCIRB projects ultimate accident year loss ratios of 137 percent, 122 percent, 105 percent, 86 percent and 59 percent for the 1999, 2000, 2001, 2002 and 2003 accident years, respectively (Exhibit 4).

After reflecting the estimated impact of AB 227, SB 228 and SB 899 on unpaid losses, the ultimate accident year 2003 combined loss and expense ratio is estimated by the WCIRB to be 88 percent (Exhibit 5). This reflects a continuing decrease in combined ratios since they peaked in 1999 at an estimated 181 percent and is the lowest combined ratio projected by the WCIRB since 1993.

The calendar period loss ratio reported for the first quarter of 2004 is 56 percent. This ratio is 24 percent below the first quarter loss ratio reported for calendar year 2003 and is the lowest reported first quarter loss ratio since 1997 (Exhibit 6).

Indemnity claim frequency for the first quarter of 2004 is estimated to be 5 percent lower than for the first quarter of 2003. Currently, 2004 indemnity claim frequency is estimated at approximately one half of its all-time high in 1991 (Exhibit 7).

After reflecting the estimated impact of AB 227, SB 228 and SB 899 on unpaid losses, the WCIRB projects the average cost of a 2003 indemnity claim will be approximately $55,000, which is almost 8 percent greater than the average cost of a 2002 indemnity claim and approximately 160 percent greater than the average cost of a 1994 indemnity claim (Exhibit 8, Sheet 1).

This represents an annual growth rate since 1994 of approximately 11 percent, 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, SB 228 and SB 899 on unpaid 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 $7.1 billion (Exhibit 9, Sheet 1).

As shown, this represents a significant decrease from the differences currently estimated for the immediately preceding three years. Of this $7.1 billion difference over all accident years as of Dec. 31, 2003, $0.1 billion is on accidents occurring in 2003, $1.7 billion is on accidents occurring in 2002 and $1.3 billion is on accidents occurring in 2001 (Exhibit 9, Sheet 2).