The Workers’ Compensation Insurance Rating Bureau of California has completed its report summarizing insurer loss and premium experience through March 31, 2006, which suggested legislative reforms are working.
“This report provides a high level view of the workers’ compensation market and may be helpful to agents when working with their clients,” said Jack Hannan, communications director for WCIRB.
After reflecting the estimated impact of workers’ comp reform Assembly Bill 227, Senate Bill 228 and SB 899 on unpaid losses, the WCIRB projected ultimate accident year loss ratios of 142 percent in 1999, 125 percent in 2000, 107 percent in 2001, 84 percent in 2002, 53 percent in 2003, 33 percent in 2004 and 34 percent in 2005.
The report noted 2005 as the third consecutive accident year with combined ratios estimated to be at 80 percent or below, after eight consecutive years of combined ratios well in excess of 100 percent. Indemnity claim frequency, for the first quarter of 2006, was estimated to be 13 percent lower than the first quarter of 2005.
Currently, 2006 indemnity claim frequency is estimated at approximately one-third of its all-time high in 1991.
After contemplating the estimated impact of AB 227, SB 228 and SB 899 on unpaid losses, the WCIRB projected that the average cost of a 2005 indemnity claim was approximately $43,000.
Insurer losses, expenses and profits
Calendar year 2005 earned premium (prior to the impact of deductible credits) totaled $21.4 billion, compared to $23.2 billion in 2004. Of that, $8.2 billion, or 38 percent went to paid losses.
Combining insurer paid losses with a $4 billion increase in total insurer loss reserves resulted in a total insurer incurred losses of $11.8 billion, or 55 percent of the premium earned in 2005. In 2004, total insurer paid losses equaled 37 percent of earned premium, and total insurer incurred losses were $14 billion, or 61 percent of total insurer earned premium, which included a $5.4 billion increase in insurer loss reserves.
Incurred loss adjustment expenses in 2005 was $2.3 billion, or 11 percent of earned premium, including the full cost to insurers of administering, adjudicating and settling claims and defense attorney expenses which added to around $550 milliontotaling about $5.3 billion in expenses, or 25 percent of 2005 earned premium.
In 2004, incurred loss adjustment expenses were $2.4 billion, or 10 percent of earned premium, including $418 million in defense expenses, resulting in total expenses incurred of about $5.6 billion, or 24 percent of earned premium.
Incurred losses and expenses in 2005 amounted to $17.1 billion, or 80 percent of earned premium. Based on insurer statutory annual statement information, the WCIRB estimated policyholder dividends incurred in 2005 to equal 0.1 percent of 2005 earned premium, resulting in an underwriting gain of $4.3 billion, or 20 percent of premiums. In 2004, the underwriting gain was about 15 percent of earned premium.
Hospital, physician and legal costs
The rating bureau indicated that in 2005, $3.8 billion, or 47 percent of total loss payments went toward medical services, down from 2004 when they equaled $4.6 billion, or 49 percent.
Physicians accounted for a reported $1.9 billion in total medical losses ($2.4 billion in 2004), hospitals $1 billion ($1.3 billion in 2004), pharmacies $436 million ($478 million in 2004), medical legal evaluations $184 million ($160 million in 2004) and injured workers $149 million ($145 million in 2004).
The most expensive medical specialty went to “clinics” in 2005 with 24.4 percent. “General surgery” ranked lowest at 5.6 percent.
The principal medical-legal evaluation in terms of volume was orthopedic evaluations in 2005, accounting for 69 percent of the cost of all medical-legal evaluations. The average cost of one of these evaluations was $881. Psychiatric evaluations were the most expensive — $1,713 on average.
Indemnity benefits, including vocational rehabilitation, in 2005, accounted for $4.4 billion, or 53 percent of total payments ($4.8 billion, or 51 percent in 2004). Permanent partial disability benefits, 46 percent, and temporary disability benefits, 38 percent, comprised the vast majority of indemnity benifits payments.
Vocational rehabilitation benefits
Insurers paid about $471 million in vocational rehabilitation benefits in 2005 (10.8 percent of all indemnity payments, and 5.7 percent of all benefit payments). Vocational rehabilitation maintenance allowance payments equaled 40 percent of the total amount of paid vocational rehabilitation benefits — 20 percent to evaluations, 29 percent to education and training, and 11 percent to vocational rehabilitation settlements.
In 2004, vocational rehabilitation benefits paid $586 million, or 12.3 percent of all indemnity payments, of which 44 percent went to maintenance allowance, 22 percent to evaluations, 33 percent to education and training, and 2 percent to vocational rehabilitation settlements.
Fees paid to applicant attorneys
Attorneys’ fees were part of incurred indemnity losses, not to be considered expenses said the WCIRB. A reported $346 million was paid to applicant attorneys in 2005, up from $342 million in 2004.
Pushing through 2006
California written premium gross of deductible credits reported for the first quarter of 2006 was $4.8 billion, approximately 19 percent below the written premium reported for the first quarter of 2005, according to the rating bureau’s elementary review of the 2006 insurer experience.
The average statewide insurer rate per $100 of payroll for policies written in the first quarter of 2006 was $3.75 — 16 percent below the average rate charged in the second six months of 2005, and 42 percent below the average rate charged in the second six months of 2003.
Hannan said the most notable difference between the 2006 and 2005 periods was the rate drop.
“The 19 percent reduction in written premium for the first quarter of ’06 compared with the first quarter of ’05 is the result of two rate decreases since the beginning of 2005. There was an 18 percent decrease in pure premium rates as of July 1, 2005, and another 15.3 percent decrease in pure premium rates effective Jan. 1, 2006.
Insurers have been reducing their rates in California as a result of the workers’ compensation reforms contained in AB 227, SB 228 and SB 899,” Hannan said.
For the entire reports visit www.wcirbonline.org.