2020 State of the Line Guide

Posted Date: May 12, 2020  


Introduction

NCCI’s annual State of the Line presentation provides an exclusive review of trends, cost drivers, and significant developments shaping the workers compensation (WC) industry. This State of the Line Guide provides a slide-by-slide examination of the key takeaways, data sources, and formulas underlying the State of the Line presentation.

As you review the information contained in this Guide, it may be useful to keep in mind the following market indicators and trends that were highlighted in NCCI’s 2020 State of the Line presentation:

  • The workers compensation Calendar Year 2019 combined ratio for private carriers was 85%. This is the sixth consecutive year that the workers compensation line of business has posted an underwriting gain.
  • NCCI estimates that, as of year-end 2019, the overall reserve position for private carriers is a $10 billion redundancy.
  • Average lost-time claim frequency across NCCI states declined by 4% in 2019, on a preliminary basis.
  • In NCCI states, the preliminary Accident Year 2019 average indemnity claim severity increased by 4% relative to the corresponding 2018 value. Medical lost-time claim severity increased by 3%.
  • The workers compensation Residual Market Pool premium volume was approximately $1 billion during 2019, representing a residual market share of about 7%.

We hope you find the 2020 State of the Line Guide both a beneficial and informative resource.

WC Results

Combined Ratio

Key Takeaways

  • The 2019 private carrier combined ratio of 85% marks the third consecutive year of results under 90%
  • The 2018 and 2019 results are the lowest workers compensation combined ratio since the 1930s

Background

The calendar year net combined ratios in this slide measure the overall performance of workers compensation, prior to the consideration of investment and other income. A combined ratio is the sum of the loss ratio, loss adjustment expense (LAE) ratio, dividend ratio, and underwriting expense ratio. The loss, LAE, and dividend ratios are calculated as ratios to net earned premium. The underwriting expense ratio is calculated as a ratio to net written premium to provide a better match of the timing of the numerator and denominator.

Data

  • National Association of Insurance Commissioners (NAIC’s) Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Combined ratios in the underlying table are in percentages. Information for state funds is included for informational purposes.

Combined Ratio by Component

Key Takeaways

  • Relative to 2018, the components of the combined ratios remained stable during 2019—with only slight increases observed in the underlying loss and LAE ratios
  • The 2018 and 2019 loss ratios are the lowest seen in at least the most recent 30 years

Background

This slide shows the components of the workers compensation calendar year net combined ratios. The loss ratios in this slide compare net incurred losses to net earned premium. The loss ratio is the largest component of the combined ratio. The loss adjustment expense (LAE) ratio compares net incurred LAE to net earned premium. LAE includes both defense and cost containment expenses (DCCE) plus adjusting and other expenses. The underwriting expense ratio compares the costs associated with writing insurance to net written premium. The underwriting expenses included in the ratio are:

  • Commission and brokerage expenses
  • Taxes, licenses, and fees
  • Other acquisition expenses
  • General expenses

Policyholder dividends are the smallest component of the combined ratio and are compared to net earned premium.

Data

  • NAIC’s Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Values in the underlying table are in percentages.

Investment Gain on Insurance Transactions

Key Takeaways

  • The WC investment gain on insurance transactions increased to 11% in 2019
  • This is below the long-term average of 12.6%

Background

The overall investment gain is allocated by line of business according to the NAIC-prescribed allocation procedure.

The WC investment gain on insurance transactions (IGIT) ratio measures investment performance by comparing investment income allocated to the WC line of business to WC earned premium.

Data

  • NAIC’s Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Investment gain ratios in the underlying table are in percentages.

Pretax Operating Gain

Key Takeaways

  • An 11-point investment gain on insurance transactions paired with a 15-point underwriting gain led to a 26-point pretax operating gain in 2019
  • Underwriting gains due to the improvement in the loss ratios have driven the above-average operating gains in recent years

Background

The pretax operating gain in this slide measures the overall financial performance of the workers compensation line, by considering both underwriting income and investment income. Pretax operating gain excludes direct changes to surplus, including, but not limited to, changes in:

  • Unrealized capital gains
  • Unrealized foreign exchange gain
  • Net deferred income tax
  • Nonadmitted assets
  • The provision for reinsurance
  • Surplus notes

Data

  • NAIC’s Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Pretax operating gains in the underlying table are in percentages. Data for state funds is included for informational purposes.

Net Combined Ratios—CY vs. AY As Reported

Key Takeaways

  • The Accident Year (AY) 2019 combined ratio is 99%
  • While the AY 2019 combined ratio is currently higher than the corresponding CY 2019 value, NCCI estimates that AY 2019 will develop favorably over time

Background

In this slide, the overall private carrier workers compensation net combined ratios are shown for the most recent 10 years on both CY and AY bases. Each AY combined ratio reflects the experience on accidents as of the latest data evaluation date. See the Background section of WC Combined Ratio for more information.

Data

  • NAIC’s Annual Statement, Schedule P, Part 1D
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The calendar year value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. The AY values will change as losses develop to an ultimate level.

Combined ratios in the underlying table are in percentages.

Net Combined Ratios—NCCI’s AY Selections vs. As Reported

Key Takeaway

  • For the years shown on this chart, NCCI estimates that carrier-reported combined ratios for the most recent AYs will develop favorably over time

Background

In this slide, NCCI’s selected net combined ratios are compared to reported private carrier workers compensation net combined ratios. The values are shown for the most recent 10 years on an accident year (AY) basis. Each AY combined ratio reflects the experience on accidents as of the latest data evaluation date. See the Background section of WC Combined Ratio for more information.

Data

  • NAIC’s Annual Statement, Schedule P, Part 1D
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

Combined ratios in the underlying table are in percentages.

Net Loss and LAE Ratios—NCCI’s AY Selections vs. As Reported

Key Takeaways

  • The largest differences between NCCI’s Selections and the As Reported values are in the most recent few years
  • For almost every year displayed, NCCI believes the current booked AY results will improve over time and the more recent years will improve significantly

Background

The accident year (AY) net incurred loss and LAE ratio is calculated as a ratio of AY net losses and LAE to CY earned premium. The values in this slide compare NCCI selections to those reported at the latest evaluation by private carriers.

For a given AY, a deficiency is reflected where NCCI’s selected net loss and LAE ratio is higher than the reported value by carriers; a redundancy is reflected where NCCI’s selected net loss and LAE ratio is lower than the reported value by carriers.

Data

  • NAIC’s Annual Statement, Schedule P, Part 1D

Net loss and LAE ratios in the underlying table are in percentages.

Net Loss and LAE Reserve Adequacy

Key Takeaways

  • NCCI’s estimate of the year-end 2019 overall reserve position is a $10 billion redundancy, which is a $5 billion change from year-end 2018
  • NCCI considers all reserve discounts, both tabular and nontabular, to be deficient
  • Without the $3.9 billion tabular discount, there would be an even greater redundancy

Background

The net reserve deficiency is the dollar difference (in billions) between NCCI’s estimate of net loss and LAE reserves and the reported private carrier net loss and LAE reserves.

The overall workers compensation net reserve adequacy is calculated for all accident years combined at each year-end valuation.

A positive value on this slide indicates an overall reserve deficiency. A negative value on this slide indicates an overall reserve redundancy.

Data

  • NAIC’s Annual Statement, Schedule P, Part 1D

Redundancies and deficiencies in the underlying table are in billions of dollars.

P&C Results

Net Written Premium Growth

Key Takeaways

  • Total property and casualty (P&C) net written premium for private carriers increased by 3.2% to over $632 billion in 2019
  • During 2019, net written premium increased for all major lines of business except workers compensation

Background

The net written premium in this slide provides a measure of the size of each major line of business in the P&C insurance industry.

Data

  • NAIC’s Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Quarterly Average Premium Changes

Key Takeaways

  • Workers Compensation quarter-over-quarter premium changes have been consistent, ranging from approximately -2% to -3%
  • Commercial Auto has consistently experienced increases quarter over quarter, with a steep incline in 2019
  • General Liability and Umbrella have experienced sharp increases during the second half of 2019

Background

Survey respondents were asked to review recent renewals and determine how premium rates have changed over a specific period of time.

Each bar in the line-of-business group represents the premium change experienced by policies renewing in that quarter from 1Q 2018 to 4Q 2019.

These observations may be used to determine trends in pricing from one quarter to the next.

Data

  • The pricing survey was provided by The Council of Insurance Agents & Brokers

Net Combined Ratio

Key Takeaways

  • The total P&C combined ratio remained at 99 for private carriers in 2019
  • Combined ratios for Homeowners and Fire & Allied Lines notably improved and are now below 100
  • Workers Compensation continued to have the lowest combined ratio across all major P&C lines of business

Background

The calendar year net combined ratios in this slide measure the overall performance of each line of business and the P&C industry as a whole. See the Background section of WC Combined Ratio for more information.

Data

  • NAIC’s Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Net Combined Ratio (by Year)

Key Takeaways

  • Private carriers have produced an underwriting profit in 8 of the 21 years displayed, including 5 of the last 7
  • Underwriting appears to have contributed to these results during a period of relatively low investment returns

Background

This slide displays a longer history of the net combined ratios for the total P&C industry. See the Background section of WC Combined Ratio for more information.

Data

  • NAIC’s Annual Statement data: 1998–2008 and 2013–2019p
  • ISO: 2009–2012

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Combined ratios in the underlying table are in percentages.

WC Premium

Net Written Premium

Key Takeaways

  • The 2019 net written premium for private carriers is $42B
  • Once state fund premium is added in, the net written premium total is $47B, which is a slight decrease from 2018
  • The decrease in net written premium stems from a reduction in direct written premium and a small increase in ceded business

Background

This slide displays WC net written premium by year, separately for private carriers and state funds.

In the context of the State of the Line presentation, NCCI’s definition of state funds includes only those carriers that are both members of the American Association of State Compensation Insurance Funds and largely exempt from paying federal income taxes. All other carriers are included in the private carrier values.

Data

  • NAIC’s Annual Statement data
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Premium values in the underlying table are in billions of dollars.

Residual Market Premium

Key Takeaway

  • Premium for the NCCI-serviced Residual Market Pools has been approximately $1 billion for the last several years, with small year-over-year declines since 2015

Background

Insureds that are unable to obtain coverage in the voluntary market can secure coverage through the Residual Market Pool in participating states. The estimated ultimate premium for all Residual Market Pools serviced by NCCI is displayed by policy year.

Data

  • Pool data for all NCCI-serviced WC Residual Market Pool states, valued as of 12/31/2019
  • Tennessee Reinsurance Mechanism premium is not included
  • NCCI’s Residual Market Quarterly Results

Residual market premium values in the underlying table are in billions of dollars.

Residual Market Share

Key Takeaway

  • The residual market share continued its recent decline in 2019, down to approximately 7% for the year

Background

Pool and direct assignment premium for all NCCI-serviced Residual Market Pool states as a percentage of total WC market premium is displayed by calendar year.

Data

  • Pool and direct assignment data for all NCCI-serviced WC Residual Market Pool states, valued as of 12/31/2019
  • NCCI’s Residual Market Management Summary

Residual market shares in the underlying table are in percentages.

Direct Written Premium Change—2019

Key Takeaway

  • While premium growth varies by individual jurisdiction, countrywide private carrier direct written premium decreased by 2.6%, on average, between 2018 and 2019

Background

Underlying the change in countrywide direct written premium volume are the changes in premium volume by individual jurisdiction. These percentage changes are based on private carrier data only and exclude monopolistic fund states. Blue represents premium volume increases, while orange represents premium volume decreases. The deeper colors represent larger magnitudes of change.

Data

  • NAIC’s Annual Statement Statutory Page 14 for calendar year written premium by state

Direct written premium changes in the underlying table are in percentages.

Direct Written Premium Change by Component

Key Takeaways

  • For NCCI states, private carrier direct written premium volume decreased by 1.3% between 2018 and 2019
  • Bureau loss cost level changes more than offset payroll growth during this time period

Background

This slide provides the major components impacting the overall change in private carrier direct written premium for all states where NCCI provides ratemaking services.

The Other Factors category may include changes in audit impacts, average experience mod, deductible credit types or amounts, mix of policy types, or mix between private carrier and either state fund or self-insured markets.

Data

  • Direct written premium change: NAIC’s Annual Statement Statutory Page 14
  • Components: NCCI’s Policy data

Change in Payroll by Component

Key Takeaways

  • The overall change in payroll (+5.3%) is driven by changes in average wage (+3.7%) and employment (+1.5%).
  • Average wages grew at an above-average rate for the Professional and Business Services; Trade, Transportation, and Utilities; Construction; Leisure and Hospitality; and All Other sectors.
  • Employment grew at an above-average rate for the Professional and Business Services; Education and Health Services; Financial Activities; Construction; and Leisure and Hospitality sectors. Construction continues to be the fastest-growing economic sector.
  • Professional and Business Services, the largest sector by total payroll, accounts for one-quarter of payroll growth.

Background

Since payroll is the major driver of premium growth, we can use Moody’s forecasts to help explain the underlying components of payroll growth.

The slide contains the changes in average wages and employment by economic sector. The sectors are listed by size of total payroll, with the largest sector shown at the top. The respective white lines represent the average growth rates for wages and employment.

Data

  • Moody’s Analytics
  • NCCI
  • All Other includes the three smallest sectors: Natural Resources and Mining, Information, and Other Services

Forecasted values in the underlying table are in percentages.

Approved Changes in Bureau Premium Level

Key Takeaways

  • NCCI’s annual filings capture the latest workers compensation experience in each state, which can be impacted by several factors including changes in claim frequency and severity, the economy, cost containment initiatives, legislative reforms, and judicial decisions
  • Written premiums are expected to decrease by an average of 7.2% from 2019 to 2020 as a result of approved NCCI filings

Background

The bureau premium level changes shown here reflect the approved changes in advisory rates, loss costs, and assigned risk rates as filed in jurisdictions where NCCI provides ratemaking services, as of May 8, 2020.

The percentage changes by state, which reflect the impact on written premium (from one year to the next) due to NCCI filing activity, are weighted using calendar year (CY) direct written premium as reported to the NAIC. Texas is included beginning with CY 2011 and West Virginia beginning with CY 2008.

This methodology reflects the effective date of each state’s filing when determining the impact on written premium from one year to the next.

Data

  • NAIC’s Annual Statement Statutory Page 14

The value for the most recent year is preliminary because there may be additional filing approvals with effective dates in 2020.

Approved changes in bureau premium level in the underlying table are in percentages.

Most Recent Changes in Bureau Premium Level

Key Takeaway

  • The most recent filings resulted in decreases for all but one NCCI jurisdiction

Background

This slide displays the most recent approved change (or filed and pending change) in voluntary market advisory rates or loss costs in each jurisdiction where NCCI provides ratemaking services as of May 8, 2020. Law-only filings are not included in this analysis.

In the slide, orange represents premium level decreases. The deeper colors represent larger magnitudes of change.

Data

  • NAIC’s Annual Statement Statutory Page 14

Changes in bureau premium level in the underlying table are in percentages.

WC Loss Drivers

Lost-Time Claim Frequency

Key Takeaways

  • NCCI estimates that lost-time claim frequency for Accident Year 2019 will be 4% lower than that for Accident Year 2018
  • The Accident Year 2019 change is in line with the long-term average frequency change of -3.8%

Background

This slide displays changes in frequency (lost-time claims per million dollars of pure premium) for all jurisdictions where NCCI provides ratemaking services. The year-to-year changes are based on data for matched states.

Frequency is defined as lost-time claim counts (developed to an ultimate basis) per million dollars of premium. Premium is adjusted to current wage and voluntary pure premium levels. Data is valued as of 12/31/2018. However, Accident Year 2019 is based on preliminary data valued as of 12/31/2019. Accident Years 2010 and 2011 show adjusted values, primarily due to significant changes in audit activity due to the Great Recession. High-deductible policies are excluded from all years.

Data

  • NCCI’s Financial Call data

Values in the underlying table are in percentages.

Lost-Time Claim Frequency by Nature of Injury

Key Takeaways

  • Lost-time claim frequency has declined, on average, across all of the major nature-of-injury groups.
  • Frequency declines for Sprain and Strain averaged 5.4%. Together they represent about 40% of lost-time claims.

Background

The average annual changes in lost-time claim frequency (lost-time claims at first report per million dollars of pure premium) between AYs 2013 and 2018 (based on an exponential fit) are displayed by nature-of-injury group. Data is included for all jurisdictions where NCCI provides ratemaking services. Large-deductible policies are excluded from all years.

Data

  • NCCI’s Statistical Plan data

Lost-Time Claim Frequency by Part of Body

Key Takeaways

  • Back injuries have seen the greatest decline in frequency over this time period, with an average annual change of -7.4%. Back injuries represent about 13% of lost-time claims.
  • Head/Brain/Face frequency has been generally increasing over time. These claims account for approximately 6% of lost-time claims.

Background

The average annual changes in lost-time claim frequency (lost-time claims at first report per million dollars of pure premium) between AYs 2013 and 2018 (based on an exponential fit) are displayed by part-of-body group. Data is included for all jurisdictions where NCCI provides ratemaking services. Large-deductible policies are excluded from all years.

Data

  • NCCI’s Statistical Plan data

Lost-Time Claim Frequency (Motor Vehicle Accidents)

Key Takeaways

  • Motor Vehicle Accident Frequency continues to deviate from All Claim Frequency. Motor Vehicle Accident Frequency increased by 5% from 2011 to 2018, while All Claim Frequency decreased by 20% over the same period.
  • Smartphone ownership continues to increase; by the end of 2018, approximately 80% of U.S. adults owned a smartphone—a significant increase from the corresponding 20% figure at the beginning of 2011.

Background

Frequency is calculated as undeveloped lost-time claims at first report per $1M of earned premium at current wage and NCCI pure loss cost level.

Both the Motor Vehicle Accident and All Claim Frequency curves have been indexed to 2011.

Data

  • NCCI’s Statistical Plan data
  • Pew Research Center
  • Comscore, Inc.

Indemnity Claim Severity

Key Takeaways

  • NCCI estimates that average indemnity claim severity for Accident Year 2019 will be 4% higher than that for Accident Year 2018
  • The severity change is in line with the projected countrywide average wage increase for 2019

Background

This slide displays average indemnity claim severity based on data for all jurisdictions where NCCI provides ratemaking services. Accident Years prior to 2009 exclude West Virginia, prior to 2005 exclude Texas, and prior to 2004 exclude Nevada. High-deductible policies are excluded from all years. Severity represents ultimate indemnity losses divided by ultimate lost-time claims. Data is valued as of 12/31/2018. However, Accident Year 2019 is based on preliminary data valued as of 12/31/2019.

Data

  • NCCI’s Financial Call data

Two indemnity severity values are shown in the underlying table for Accident Years 2004, 2005, and 2009. Accident Year 2004 is restated to exclude Nevada in order to match the states included in Accident Year 2003. Accident Year 2005 is restated to exclude Texas in order to match the states in Accident Year 2004. Accident Year 2009 is restated to exclude West Virginia in order to match the states in Accident Year 2008. This restatement ensures that each year’s severity change is based on the same group of states.

Indemnity Claim Severity vs. Wage Inflation

Key Takeaway

  • Since 1999, indemnity claim severity increased by 85%. This is consistent with the cumulative growth in wages of 78% over the same period.

Background

This slide compares the growth in average indemnity claim severity with the growth in average weekly wages.

Average weekly wages between 2008 and 2011 were adjusted to compensate for exceptional volatility in bonuses for the financial sector during these years. The year-to-year severity changes are based on data for unmatched states. The year a state is first included in the data, the countrywide severity change from the prior year may be influenced by the newly-added state’s severity.

Both the WC average indemnity claim severity and average weekly wage trend lines have been indexed to 1999. High-deductible policies are excluded from all years.

Data

  • Indemnity severity is from NCCI’s Financial Call data
  • US Average Weekly Wage is based on:
    1. Quarterly Census of Employment and Wages (QCEW) data from the US Bureau of Labor Statistics (BLS) for 1999–2007 and 2012–2018
    2. QCEW and average weekly earnings data from the BLS for 2008–2011; 2019p is estimated by NCCI using forecasts from Moody’s Analytics

Values in the underlying table are in percentages.

Medical Lost-Time Claim Severity

Key Takeaway

  • NCCI estimates that average medical lost-time claim severity for Accident Year 2019 will be 3% higher than that for Accident Year 2018

Background

This slide displays average medical lost-time claim severity based on data for all jurisdictions where NCCI provides ratemaking services. Accident Years prior to 2009 exclude West Virginia, prior to 2005 exclude Texas, and prior to 2004 exclude Nevada. High-deductible policies are excluded from all years. Severity represents ultimate medical losses divided by ultimate lost-time claim counts. Data is valued as of 12/31/2018.

However, Accident Year 2019 is based on preliminary data valued as of 12/31/2019, and Accident Year 2018 was revised based upon 12/31/2019 data to reflect emerged development in 2019, which differed from expected.

Data

  • NCCI’s Financial Call data

Two medical lost-time claim severity values are shown in the underlying table for Accident Years 2004, 2005, and 2009. Accident Year 2004 is restated to exclude Nevada in order to match the states included in Accident Year 2003. Accident Year 2005 is restated to exclude Texas in order to match the states in Accident Year 2004. Accident Year 2009 is restated to exclude West Virginia in order to match the states in Accident Year 2008. This restatement ensures that each year’s severity change is based on the same group of states.

Medical Lost-Time Claim Severity vs. Price Inflation

Key Takeaway

  • Medical lost-time claim severity has outpaced medical care price inflation over the time period shown

Background

This slide compares the growth in average medical lost-time claim severity with the growth in the Personal Health Care Chain-Weighted Price Index (PHC). The PHC is a proxy for medical care price inflation that responds to changes in the blend of different medical services over time.

The year-to-year severity changes are based on data for unmatched states. The year a state is first included in the data, the countrywide severity change from the prior year may be influenced by the newly-added state’s severity.

Both the WC average medical lost-time claim severity and PHC trend lines have been indexed to 1999. High-deductible policies are excluded from all years.

Data

  • Medical lost-time claim severity is from NCCI’s Financial Call data
  • PHC Chain-Weighted Price Index is from the Centers for Medicare & Medicaid Services

Values in the underlying table are in percentages.

WC and COVID-19

COVID-19 and Employment

Key Takeaways

  • COVID-19 immediately caused job declines in leisure, hospitality, and travel-related industries. Manufacturing and distributors of durable goods also experienced a reduction in jobs due to a decrease in customer demand for many products.
  • While strong job growth occurred in healthcare, grocery stores, and home delivery businesses, these new jobs may be temporary.
  • The ability to effectively telecommute has helped to maintain employment stability in the professional services sector.

Background

The slide shows how COVID-19 may impact employment across several industry segments.

COVID-19 and Premium

Key Takeaways

  • COVID-19 will likely push premium volume lower in 2020 as a result of higher unemployment levels and fewer available work hours for those who remain employed.
  • Small businesses have been especially impacted by the pandemic. This may cause premium to fall even faster than overall employment.
  • Mid-term premium adjustments and/or negative premium audits after policy expiration may result in reduced exposure.

Background

The slide shows how COVID-19 may influence premium.

COVID-19 and Claim Frequency

Key Takeaways

  • If access to care is limited, there may be a deferral in the number of claim filings for nonacute injuries and those for which treatment may be postponed, for example
  • Higher unemployment levels may also put downward pressure on claim frequency, as employees may be reluctant to file a workers compensation claim
  • The broadening of workers compensation coverage has the potential to increase claim frequency
  • While less driving and more telecommuting may reduce the number of motor vehicle accidents, more ergonomic injuries may be expected as a larger percentage of the workforce is working remotely in areas not primarily designed for that purpose

Background

The slide displays how COVID-19 may influence claim frequency.

COVID-19 and Claim Severity

Key Takeaways

  • The deferral of elective treatments and medical care for other nonacute conditions may extend claim duration and put upward pressure on costs
  • During the pandemic fewer return-to-work opportunities may be available and light-duty programs may be used less often, which could increase claim duration
  • Increased use of telehealth may put downward pressure on workers compensation average claim severity

Background

The slide displays how COVID-19 may influence claim severity.

What Could a COVID-19 Claim Look Like?

Key Takeaways

  • Indemnity benefits vary based on one’s time away from work
  • Medical costs will be impacted by the severity of treatment, which may include low-cost medical care to treat mild symptoms, hospital stays, and/or an extended period of rehabilitation
  • A COVID-19 claim may involve a mental component and could require temporary or long-term care

Background

Possible COVID-19 claim characteristics are shown on the slide.

2020 State of the Line Addendum


P&C Industry Results

Investment Gain Ratio

Key Takeaway

  • The investment gain ratio held steady in 2019 at approximately 11%

Background

The investment gain ratio includes both realized capital gains and net investment income.

The investment gain ratio measures the investment performance of the P&C industry by comparing investment income to earned premium, the primary source of investment funds for insurance carriers.

Data

  • NAIC’s Annual Statement data: 1999–2008 and 2014–2019p
  • ISO: 2009–2013

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Values in the underlying table are in percentages.

After-Tax Return on Surplus

Key Takeaways

  • After-tax return on surplus, one of the best statutory measures of the property and casualty industry’s success, was 8% for 2019
  • This ratio exceeded the long-term average of 7.1%

Background

The after-tax return on surplus compares net income generated from all sources to policyholder surplus. Since surplus varies throughout the year as income is earned, the return is calculated as the ratio of net income to the average of the surplus at the beginning of the year and end of the year.

Data

  • NAIC’s Annual Statement data: 1999–2008 and 2014–2019p
  • ISO: 2009–2013

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Values in the underlying table are in percentages.

Net Premium-to-Surplus Ratio

Key Takeaways

  • Property and casualty private carrier surplus rose to $869 billion in 2019, driven by unrealized capital gains on common stock
  • The increase in surplus, paired with the modest rise in net written premium, resulted in a 0.73 premium-to-surplus ratio for 2019

Background

The net premium-to-surplus ratio is one measure that can be used to help determine whether there is sufficient policyholder surplus to support the P&C insurance industry’s writings.

Data

  • NAIC’s Annual Statement data: 1999–2008 and 2014–2019p
  • ISO: 2009–2013

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Surplus and premium values in the underlying table are in dollars.

WC Premium

Impact of Discounting on Premium

Key Takeaway

  • The overall estimated impact of carrier discounting was 1.9% in 2019

Background

This slide shows the combined impact of rate/loss cost departures, schedule rating, and dividends on policy year premium based on private carrier data for all jurisdictions where NCCI provides ratemaking services, excluding Texas. The rate/loss cost departure reflects carrier departures from the NCCI rate level, which excludes both a profit and contingency provision and an expense constant.

Data

  • NAIC’s Annual Statement Statutory Page 14
  • NCCI’s Financial Call data

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Values in the underlying table are in percentages.

Impact of Discounting on Premium by Component

Key Takeaways

  • Recent years have seen a mix of relatively small dividend payouts, moderate schedule rating credits, and rate and loss cost departures
  • Since 2002, the individual elements have been offsetting, which has contributed to a modest overall impact from discounting

Background

This slide shows the component impacts of rate/loss cost departures, schedule rating, and dividends on policy year premium based on private carrier data for all jurisdictions where NCCI provides ratemaking services, excluding Texas. The rate/loss cost departure reflects carrier departures from the NCCI rate level, which excludes both a profit and contingency provision and an expense constant.

Data

  • NAIC’s Annual Statement Statutory Page 14
  • NCCI’s Financial Call data

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

WC Loss Drivers

Lost-Time Claim Frequency by State

Key Takeaway

  • The average annual change in lost-time claim frequency across the NCCI jurisdictions was -4.6% from 2014 to 2018

Background

The average annual changes in lost-time claim frequency between Accident Years 2014–2018 (based on an exponential fit) are displayed in this map. Blue represents increases in average frequency, while orange represents decreases. The deeper colors represent larger magnitudes of change. Data is included for all jurisdictions where NCCI provides ratemaking services. High-deductible policies are excluded from all years.

Data

  • NCCI’s Financial Call data

Indemnity Claim Severity vs. Wage Inflation (Detail)

Key Takeaways

  • Prior to 2008, changes in indemnity claim severity outpaced wage inflation
  • Both wage inflation and indemnity severity growth have slowed in recent years
  • Since 2008, wage inflation has outpaced changes in indemnity claim severity

Background

This slide compares the growth in indemnity claim severity to the growth in workers’ wages during the 1999–2008 and 2008–2019 time periods. High-deductible policies are excluded from all years.

Data

  • Indemnity severity is from NCCI’s Financial Call data
  • US Average Weekly Wage is based on:
    1. Quarterly Census of Employment and Wages (QCEW) data from the US Bureau of Labor Statistics (BLS) for 1999–2007 and 2012–2018
    2. QCEW and average weekly earnings data from the BLS for 2008–2011; 2019p is estimated by NCCI using forecasts from Moody’s Analytics

See the data table underlying Average Indemnity Claim Severity (and Wage Inflation) for annual percentage changes.

Indemnity Claim Severity by State

Key Takeaways

  • The average annual change in indemnity claim severity across the NCCI jurisdictions was +2.5% from 2014 to 2018.
  • Large claim activity was a contributing factor to some of the jurisdictions in deeper shades of orange and blue. In addition, legislative changes that increased in indemnity benefits on behalf of injured workers also contributed to some of the darker shades of blue shown on the map.

Background

The average annual change in indemnity claim severity by state between 2014 and 2018 (based on an exponential fit) is displayed in this map. Blue represents increases in average severity, while orange represents decreases. The deeper colors represent larger magnitudes of change.

The average indemnity claim severity includes data for all jurisdictions where NCCI provides ratemaking services. High-deductible policies are excluded from all years. Severity represents ultimate indemnity losses divided by ultimate lost-time claim counts. Data is valued as of 12/31/2018.

The displayed changes in severity are defined differently from those used in ratemaking. The most significant difference is that these values are not adjusted to current benefit level or wage-adjusted.

Data

  • NCCI’s Financial Call data

Medical Lost-Time Claim Severity vs. Price Inflation (Detail)

Key Takeaways

  • Prior to 2008, changes in medical lost-time claim severity outpaced the Personal Health Care (PHC) index
  • Since 2008, medical lost-time claim severity and medical care prices have increased at similar rates

Background

This slide compares the growth in medical lost-time claim severity to the growth in the Personal Health Care (PHC) index during the 1999–2008 and 2008–2019 time periods. High-deductible policies are excluded from all years.

Data

  • Medical lost-time claim severity is derived from NCCI’s Financial Call data
  • PHC Chain-Weighted Price Index is from the Centers for Medicare & Medicaid Services

See the data table underlying Average Medical Lost-Time Claim Severity (and Price Inflation) for annual percentage changes.

Medical Lost-Time Claim Severity by State

Key Takeaways

  • The average annual change in medical lost-time claim severity across the NCCI jurisdictions was +2.9% from 2014 to 2018
  • Large claim activity was a contributing factor to the jurisdictions in deeper shades of orange and blue

Background

The average annual change in medical lost-time claim severity by state between 2014 and 2018 (based on an exponential fit) is displayed in this map. Blue represents increases in average severity, while orange represents decreases. The deeper colors represent larger magnitudes of change.

The average medical lost-time claim severity includes data for all jurisdictions where NCCI provides ratemaking services. High-deductible policies are excluded from all years. Severity represents ultimate medical losses divided by ultimate lost-time claim counts. Data is valued as of 12/31/2018.

The displayed changes in severity are defined differently from those used in ratemaking. The most significant difference is that these values are not adjusted to current benefit level or wage-adjusted.

Data

  • NCCI’s Financial Call data

Appendices

Appendix A—Definitions

Accident Year (AY)—A loss accounting term for experience that is summarized by the calendar year in which an accident occurred.

Adjusting and Other Expenses (AOE) Incurred—Loss adjustment expenses, other than those categorized as Defense and Cost Containment Expense. Examples:

  • Fees of adjusters and settling agents (but not if engaged in a contentious defense)
  • Attorney fees incurred in the determination of coverage, including litigation between the insurer and the policyholder

Assigned Carrier—The insurer assigned to provide residual market coverage to an eligible employer that has applied for workers compensation insurance under NCCI’s Workers Compensation Insurance Plan. An assigned carrier can be either a servicing carrier or direct assignment carrier.

Calendar Year (CY)—A method of accounting that includes all financial transactions occurring during a 12-month period, beginning January 1.

Carrier Discounting—Combined impact on premium due to rate/loss cost departures, schedule rating, and dividends.

Commissions and Brokerage Expenses Incurred—Fees paid to producers.

Defense and Cost Containment Expense (DCCE) Incurred—Expenses for defense by the insurer in contentious situations (whether a first-party or third-party claim) for litigation involving a claim and for cost containment expense. Examples:

  • Surveillance expenses
  • Fixed amounts for cost containment expenses
  • Case management expenses for managing the overall cost of a claim
  • Litigation management expenses
  • Fees or salaries for appraisers, private investigators, hearing representatives, reinspectors, and fraud investigators, if working in defense of a claim
  • Attorney fees incurred owing to a duty to defend
  • Cost of engaging experts

Direct Assignment—Assigned risk business written and serviced directly by an insurance company that has been authorized by the Insurance Department to write such business. These insureds are written without reinsurance through the National Workers Compensation Reinsurance Pooling Mechanism or other reinsurance pool.

Dividends to Policyholders—When actual costs and expenses are less than anticipated costs and expenses, carriers may opt to return the difference to policyholders in the form of a dividend.

Earned Premium—Proportional share of each policy’s written premium applicable to the expired part of the policy. Derived by subtracting the change in the unearned premium reserve from the written premium.

Estimated Annual Premium—Premium charged by an insurance company, at the time the policy is issued, for coverage provided by an insurance contract for a period of time. Estimated premium is reported before endorsements or audits.

Experience Mod—A factor calculated from actual case loss experience used to adjust an insured’s manual premiums (up or down) based on the insured’s loss experience relative to the average underlying the manual premiums. It compares the insured’s experience to the average class experience.

Exposure Accident Year (EAY):

  • Claims/Losses–Are on an accident year basis
  • Earned Premium–Final audited premium for each policy is allocated to the appropriate calendar year based on the period of exposure

General Expenses Incurred—Overhead expenses incurred in the insurer’s operations, other than those included in the other expense categories. Examples:

  • Salaries
  • Rent and rent items
  • Equipment

Net Written Premium—The gross premium income adjusted for additional or return premiums, including any additions for reinsurance assumed and deductions for reinsurance ceded.

Other Acquisitions, Field Supervision, and Collection Expenses Incurred—Expenses incurred in obtaining insurance business. Examples:

  • Salaries
  • Equipment
  • Advertising
  • Employee relations and welfare
  • Allowance to managers and agents
  • Postage, telephone, and express
  • Rent and rent items

Policy Year (PY)—The year of the effective date of the policy. Policy year financial results summarize experience for all policies with effective dates in a given calendar year period.

Pure Premium—Portion of bureau level premium that provides for indemnity and medical loss payments.

Residual Market Pool—A financial agreement among participating insurers to share in the experience of certain assigned risks. This reduces both administrative costs and annual fluctuations in the liability of participating insurers resulting from the operation of state insurance plans.

Servicing Carrier—An insurer, other than a direct assignment carrier, authorized to receive Plan assignments and provide coverage to eligible employers on behalf of insurance company members of the National Workers Compensation Reinsurance Association NFP (NWCRA)—or participants in other reinsurance pooling mechanisms—incorporated as a part of the Plan in a state.

Servicing Carrier Allowance—The ceding commission retained by a servicing carrier as compensation for the expenses of servicing an employer under a Workers Compensation Insurance Plan or similar program.

Taxes, Licenses, and Fees Incurred—State taxes, assessments, and miscellaneous fees. Examples:

  • Premium taxes
  • Second Injury Fund assessments
  • General administration funds
  • Guaranty funds

Unearned Premium Reserve—Proportional share of each policy’s written premium applicable to the unexpired part of the policy.

Workers Compensation Insurance Plan (WCIP or Plan)—A program established and maintained by NCCI and approved by state insurance regulatory authorities whereby workers compensation insurance may be secured by eligible employers unable to secure such coverage in the voluntary market.

Appendix B—Formulas

After-Tax Return on Surplus \[ =\frac{\small\text{Net Income}}{\small\text{Average Surplus}} \]

Average Surplus \[ =\small\text{0.5 x (Surplus as regards policyholders, December 31 current year} \\ \small\text{ + Surplus as regards policyholders, December 31 prior year)} \]

Combined Ratio \[ =\small\text{Loss Ratio + LAE Ratio + Dividend Ratio + Underwriting Expense Ratio} \] Combined Ratio (Residual Market Slides) \[ =\frac{\small\text{Losses}}{\small\text{Earned Premium}} + \frac{\small\text{Expenses and Allowances}}{\small\text{Written Premium}} \]

Dividend Ratio \[ =\frac{\small\text{Dividends to Policyholders}}{\small\text{Earned Premium}} \]

Indicated Net Loss & LAE Reserves \[ =\small\text{Ultimate Net Loss & LAE – Net Loss & LAE Payments} \]

Investment Gain on Insurance Transactions Ratio \[ =\frac{\small\text{Investment Gain on Funds Attributable to Insurance Transactions + Other Income Less Other Expenses}}{\small\text{Earned Premium}} \]

Investment Gain Ratio \[ =\frac{\small\text{Net Investment Gain (Loss)}}{\small\text{Earned Premium}} \]

Loss Adjustment Expense (LAE) Ratio \[ =\frac{\small\text{DCCE Incurred + AOE Incurred}}{\small\text{Earned Premium}} \]

Loss & LAE Ratio \[ =\frac{\small\text{Incurred Loss + DCCE Incurred + AOE Incurred}}{\small\text{Earned Premium}} \]

Loss Ratio \[ =\frac{\small\text{Incurred Loss}}{\small\text{Earned Premium}} \]

Net Earned Premium \[ =\small\text{Net Written Premium + Change in Unearned Premium Reserve} \]

Net Reserve Adequacy \[ =\small\text{NCCI Indicated Net Loss & LAE Reserves – Private Carrier Net Loss & LAE Reserves As Reported} \]

Premium-to-Surplus Ratio \[ =\frac{\small\text{Net Written Premium}}{\small\text{Surplus as regards policyholders}} \]

Pretax Operating Gain \[ =\small\text{1 – (Combined Ratio – Investment Gain on Insurance Transactions Ratio)} \]

Underwriting Expense Ratio \[ =\frac{ \begin{bmatrix} \begin{align} & \small\text{Commissions and Brokerage Expenses Incurred} \\ & \small\text{+ Taxes, Licenses, and Fees Incurred} \\ & \small\text{+ Other Acquisitions, Field Supervision, and Collection Expenses Incurred} \\ & \small\text{+ General Expenses Incurred} & \end{align} \end{bmatrix} } {\small\text{Written Premium}} \]