California Work Comp Board: 2013 Losses to Hit 11-year High

May 5, 2014

California workers’ compensation losses and loss adjustment expenses on insured claims injuries and illnesses are projected to hit an 11-year high for 2013, according to the Workers’ Compensation Insurance Rating Bureau.

However, the growth in premium rates in 2012 and 2013 may cause the ultimate combined loss and expense ratio to fall to 113 percent of premium, and that’s the lowest level since 2007, WCIRB said.

Based on experience through the end of last year and WCIRB’s summary of losses, expenses and premium, WCIRB estimates that ultimate losses and allocated loss adjustment expenses for accident year 2013 claims will jump to $12.5 billion, up $800 million from 2012 and up $2.8 billion from the five-year low estimated for 2009.

Statewide direct written premium rose 18 percent in calendar year 2013 to $14.8 billion, but after applying deductible credits, total premium rose from $9.1 billion in 2012 to $10.9 billion in 2013, WCIRB said.

After reviewing the mix of offsetting positive and negative results noted in the 2013 analysis, earlier this month the insurer and public members of the WCIRB Governing Committee voted unanimously to forego a mid-year rate filing for new and renewal policies as of July 1.

Charged rates on 2013 policies averaged $2.85 per $100 of payroll, up about 10 percent from $2.60 per $100 of payroll for the last half of 2012, and up 36 percent since premium rates bottomed out at an average of $2.10 in 2009, WCIRB said.

The average rate in 2013 was still less than half of the all-time high of $6.29 per $100 of premium in the second half of 2003, according to WCIRB.

With the recent growth in premium, WCIRB’s preliminary estimate is that insured losses will decline to 70 percent of premium for accident year 2013. That compares to loss ratios of 78 percent in 2012, 85 percent in 2011 and 95 percent in 2010.

In addition to loss costs, WCIRB estimates loss adjustment expenses will fall from 25 percent of premium for accident year 2012 to 23 percent of premium for 2013, while other expenses will remain at about 20 percent of premium, putting insurers’ ultimate combined ratio of losses plus expenses for 2013 at 113 percent.

For California workers’ comp insurers that translates to $1.13 in benefit payments and expenses for every $1 in premium they took in 2013. While that combined ratio is the best result since accident year 2007, the latest results indicate that the industry’s combined ratio remains well above 100 percent of premium during a period in which interest rates remain low, making it more difficult for insurers to make up the difference in the investment markets, WCIRB said.

WCIRB projects that insured losses and allocated loss adjustment expenses for accident year 2013 will ultimately hit $12.5 billion, $800 million more than 2012 and the highest level in more than a decade.

At least some of this increase is due to an increase in indemnity claim frequency last year, which WCIRB estimates was 4.7 percent above the accident 2012 level and 6.6 percent above the 2011 level. The initial analysis of 2013 insurer experience attributes the recent increase in claim frequency to a rise in the number of cumulative injury claims, permanent disability claims, claims involving multiple body parts and claims from Los Angeles and the surrounding regions, WCIRB saiid.

Even though indemnity claim frequency remains about 30 percent below the levels noted prior to the 2002-2004 workers’ comp reforms, 2013 marked the third time in the last four years that frequency increased. At the same time, ultimate claim severity (average indemnity claim cost) for 2013 is expected to edge up 1.4 percent from the 2012 level, as a slight decline in average indemnity is expected to be more than offset by increases in medical and allocated loss adjustment expenses.

WCIRB pegs the ultimate average cost of an accident year 2013 indemnity claim at $86,946 – $24,926 indemnity, $50,466 medical and $11,554 for allocated loss adjustment expense. The increase in claim severity in 2013 continues an uptrend that began eight years ago, so the projected average loss for a California workers’ comp indemnity claim has now risen roughly $32,000 from the post-workers’ comp reforms (SB 899) low recorded in 2005.

“The Rating Bureau projects that insured losses on all injuries that occurred prior to 2014 will exceed the amounts already reported by insurers for those injuries by $5.1 billion, which is about the same as in the two prior years,” WCIRB stated. “After reviewing the mix of offsetting positive and negative results noted in the 2013 analysis, earlier this month the insurer and public members of the WCIRB Governing Committee voted unanimously to forego a mid-year rate filing for new and renewal policies as of July 1.”

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