Update: California Workers Compensation System Loss Costs Fall

Update: California Workers Compensation System Loss Costs Fall

Multiple September 09, 2019 Posted in: Blog Posts, News, Workers’ Compensation

Pinnacle Actuarial Resources is dedicated to keeping our clients up-to-date on relevant regulatory, administrative and economic conditions that impact their businesses.

Recently, the Workers Compensation Insurance Rating Bureau (WCIRB) of California issued guidance regarding lower-than-anticipated workers compensation (WC) system loss costs. On September 5, the insurance commissioner of California approved all of the WCIRB’s proposed changes.

The most current pure premium WCIRB filing, dated August 20, 2019 recommended a 5.4% decrease in average advisory loss costs, effective January 1, 2020. WCIRB’s cited reasons for its proposed reductions included:

  • Less-than-expected loss development
  • Faster claim settlement rates due to legislative reforms in Senate Bill 863
    • quicker medical treatment dispute resolution resulting from independent medical review (IMR)
    • reduced opioid use
    • anti-fraud efforts 
    • dramatic reductions in lien filings
  • Continued reduction in pharmaceutical costs 
    • Note: There has been an 80% reduction in the cost of pharmaceuticals in the past five years. The phenomenon has been a major contributor to the decline in average medical claim severities through 2016 and has moderated increases in subsequent years. See table A below. According to the WCIRB, factors for the year-over-year reduction include anti-fraud efforts, upper limit pricing levels, response to the opioid epidemic among others.
  • Continued wage inflation of 3.5% to 4.2% in 2017 through present. Increases of 3.9%, 3.6% and 3.5% are forecasted for 2019 – 2021, respectively.

Table A: Change in Pharmaceutical Costs per Claim by Service Year (Courtesy: Workers’ Compensation Insurance Rating Bureau of California)

Table A: Change in Pharmaceutical Costs per Claim by Service Year (Courtesy: Workers’ Compensation Insurance Rating Bureau of California)


It is very important to note, however, that two significant forces may be pushing costs up in the next few years: 1) average indemnity costs per claim spiked in 2018; and, 2) loss adjustment expenses are rising significantly. This may indicate that the lower-costs trend California had experienced for the last four years may be coming to an end, with 2020 being a potential inflection point.

On August 27, the WCIRB communicated claim experience for California’s WC system through the first quarter of 2019. Notable details include:

  • Accident year (AY) loss and LAE ratios bottomed at approximately 57% in 2016 and trended up to 65% in AY 2018. 
  • Corresponding combined ratios were 81% in AY 2016 and 91% in AY 2018. 
  • Indemnity claim frequencies continued flat or slightly downward for the past seven years. 
  • Average medical claim severities reached a high of $36,581 in AY 2010 but dropped the next six years to approximately $29,000 in AY 2016. That number has trended upward very slowly in the subsequent two years.
  • Average ALAE costs per claim jumped considerably to $11,500 in AY 2018 after being fairly flat at approximately $10,500 in the prior nine years.
  • The annual change in pharmaceutical costs per claim averaged -26.6% from 2014 -18.

Please reach out to Pinnacle if you would like to hear more insights about this or any other matter impacting your business. We would love to hear from you.


Joe Herbers is Pinnacle’s Managing Principal and a Consulting Actuary with over 30 years’ experience. His practice focuses on providing loss reserving and funding studies for a wide variety of entities – both traditional insurers and alternative markets. Joe’s specialties include policyholder-owned group captives, large-deductible and/or self-insured entities, lawyers’ professional liability carriers, Florida property writers and non-standard auto writers in the state of Illinois. Joe is an Associate of the Casualty Actuarial Society (ACAS), a Member of the American Academy of Actuaries (MAAA) and Chartered Enterprise Risk Analyst (CERA). He served as long-time member and Chair of the American Academy of Actuaries Committee on Property Liability Financial Reporting (COPLFR) as well as several other professional committees. He is a regular speaker at industry events.

Greg Fears is a Consulting Actuary with Pinnacle Actuarial Resources, Inc. in the Bloomington, Illinois, office and has over 18 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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