Significant Reductions in Workers’ Compensation Pure Premium Rates for California
Greg Fears

Significant Reductions in Workers’ Compensation Pure Premium Rates for California

Another big California workers’ compensation rate reduction is coming, effective mid-year 2018. This will be the seventh straight decrease, with the last reduction taken January 1, 2018. 

This past week, the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) approved and released the pure premium rate filing, effective July 1, 2018. 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). For the 7/1/18-12/31/18 policy period, the WCIRB estimates the ALAE ratio is 22.5% of losses, and ULAE is 11.4%. 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 seven major components leading to the rate reduction: 

  1. Less loss development than expected
  2. Acceleration in rate at which claims are being settled 
  3. Accident year 2017 loss experience coming in much better than expected
  4. Increases in the projected growth in average weekly wages (i.e., exposure)
  5. Moderate medical cost inflation
  6. Declines in lien filings
  7. Higher anticipated savings from the new drug formulary

Loss Development

Two more quarters of loss development (i.e., the last six months of calendar year 2017) indicate that loss development for 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 settlement of indemnity claims. According to the WCIRB, claims are settling more quickly as a result of:

  1. Faster resolution of claims via Independent medical reviews (IMR)
  2. Lower lien volume
  3. Fewer spinal surgeries

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 to be effective 1/1/2018 had projected the AY 2017 loss ratio at approximately 63%; the most current data indicates a loss ratio of 61%.

Wage Inflation

The exposure underlying the workers’ compensation system is payroll. Given the 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 & 2019 calendar years are forecasted to be in the 3.6% to 4.0% range -well above the 1.9% and 2.9% growth in average weekly wages in 2016 & 2017, respectively.

Medical Inflation

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. A significant contributor to this phenomenon are the reform provisions of SB 863. 

Preliminary indicators for 2017 are an increase above 2016, but still below costs levels of 2012. In the pure premium rate filing the WCIRB relies on a medical claim severity trend rate of 3.0% annually.

Lien Filings

The WCIRB estimates the reduction in lien filings associated with SB 863 have contributed to annual savings to the workers’ compensation system of $500 million. However, lien filings surged in 2014 and 2015, leading to reforms embedded in AB 1160 and AB 1244. Subsequently, lien filings dropped dramatically.

In the past few pure premium rate filings, the WCIRB had estimated 10% reductions in lien filings, but have modified that assumption with this most current filing effective 7/1/18 to a 40% reduction in lien filings due to AB 1160 and AB 1244.

Drug Formulary

The reform provisions of AB 1124 – enacted into law in 2015 – directed the Division of Workers’ Compensation (DWC) adopt an evidence-based drug formulary. The latest pure premium rate filing reflects an anticipated 0.5% reduction for the impact of the new drug formulary linked to the California Medical Treatment Utilization Schedule, which went into effect 1/1/2018.

Trend Assumptions

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 -1.1% in this filing.

Conclusion

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 indicated 7.2% reduction in the average pure premium rates effective 7/1/2018 should contribute to a healthy, vibrant and competitive market there.

Greg Fears is a Consulting Actuary with Pinnacle Actuarial Resources, Inc. in the Bloomington, Illinois, office and has over 15 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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