Posted Date: May 14, 2019  


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 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 2019 State of the Line presentation:

  • The workers compensation Calendar Year 2018 combined ratio for private carriers was 83%. This is the fifth consecutive year that the workers compensation line of business has posted an underwriting gain.
  • NCCI estimates that, as of year-end 2018, the overall reserve position for private carriers is a $5 billion redundancy. A redundant workers compensation reserve position has not been observed in at least 25 years.
  • Average lost-time claim frequency across NCCI states declined by 1% in 2018, on a preliminary basis.
  • In NCCI states, the preliminary 2018 average indemnity accident year claim severity increased by 3% relative to the corresponding 2017 value. Medical lost-time claim severity increased by 1%.
  • The workers compensation Residual Market Pool premium volume was approximately $1 billion during 2018, representing a residual market share of about 7%.

We hope you find the 2019 State of the Line Guide both a beneficial and informative resource.

P&C Results

Net Written Premium Growth

Key Takeaways

  • Total property & casualty (P&C) net written premium for private carriers increased by 10.6% to almost $612 billion in 2018
  • Contributing to the growth in premium is the termination of quota-share agreements with offshore affiliates, partly due to the BEAT provision introduced in the Tax Cuts and Jobs Act of 2017

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

  • 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.

Net Combined Ratio

Key Takeaways

  • The total P&C combined ratio decreased by about 5 points for private carriers in 2018
  • This represents a $23 billion improvement in the underwriting results relative to 2017
  • Combined ratios improved for all major lines of business except other liability

Background

The calendar year combined ratios in this slide measure the overall performance of each line of business and the P&C industry as a whole, 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 earned premium. The underwriting expense ratio is calculated as a ratio to written premium to provide a better match of the timing of the numerator and denominator.

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.

Insured Losses From Natural Catastrophes

Key Takeaways

  • Insured losses due to natural catastrophes have averaged about $37 billion a year over the last seven years
  • Natural catastrophes were less costly in 2018 than 2017, but still above the long-term average

Background

This slide shows the amount of insured losses in the United States from natural catastrophes from 2012 to 2018.

Data

  • Munich Re’s NatCatSERVICE
  • Insurance Information Institute

Impact of Natural Catastrophes by Region

Key Takeaways

  • Major hurricanes in 2018 contributed about $15 billion in insured losses
  • California wildfires also added approximately $15 billion to 2018 total insured losses
  • Total catastrophe losses added almost 6 points to the 2018 P&C combined ratio

Background

This slide summarizes the impact on P&C industry losses due to natural catastrophes in the United States by region in 2018.

Data

  • Willis Re’s Summary of Natural Catastrophe Events 2018

Net Combined Ratio (by Year)

Key Takeaways

  • Private carriers have produced an underwriting profit in only 7 of the 21 years displayed
  • The average combined ratio over this period is approximately 102%
  • Underwriting discipline appears to have contributed to these results during a period of relatively low investment returns

Background

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

Data

  • NAIC’s Annual Statement data: 1998–2008 and 2013–2018p
  • 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.

Investment Gain Ratio

Key Takeaways

  • The investment gain ratio dropped from 12.5% to 11% in 2018 primarily due to a drop in the net realized capital gain ratio
  • The net realized capital gain ratio was also negatively impacted by a realized capital loss on the industry’s bond portfolio in 2018

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: 1998–2008 and 2014–2018p
  • 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.

Embedded and New Money Yields

Key Takeaways

  • Both Embedded and New Money Yields have generally declined over the last 20 years.
  • During and immediately after the last two recessions, the New Money Yield declined.
  • Throughout this period, the New Money Yield has generally been below the Embedded Yield. In recent years, the gap between the two has continued to slowly converge.

Background

Embedded Yield is the reported pretax investment income, excluding capital gains, for bond instruments held by P&C insurers divided by the asset value of those instruments. Embedded Yield is derived from accounting data as reported. It includes investment income both from (old) bonds owned at the beginning of each year and (new) bonds acquired during the year.

New Money Yield is the pretax yield for a bond portfolio containing similar securities and maturities, but whose yields reflect current bond prices.

The gray bars in the graph indicate periods of recession in the United States.

Data

  • Embedded Yield is based on data from A.M. Best’s Aggregates & Averages
  • New Money Yield is based on data from A.M. Best’s Aggregates & Averages, the Federal Reserve Bank, Value Line, TreasuryDirect.gov, Barron’s, and Bloomberg

Values in the underlying table are in percentages.

After-Tax Return on Surplus

Key Takeaways

  • The after-tax return on surplus, one of the best statutory measures of the property & casualty industry’s success, was 8% for 2018
  • This ratio exceeded the long-term average of 7.2%
  • The biggest contributor to the improvement over 2017’s ratio of 5.5% was the $23 billion improvement in underwriting results

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. The return on surplus tends to follow the ebb and flow of the underwriting cycle.

Data

  • NAIC’s Annual Statement data: 1998–2008 and 2014–2018p
  • 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

  • P&C private carrier surplus fell to $744 billion in 2018, driven by unrealized capital losses on common stock and an increase in dividends to shareholders
  • The lower surplus, paired with the growth in net written premium, increased the 2018 premium-to-surplus ratio to 82%

Background

The 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: 1998–2008 and 2014–2018p
  • 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

Net Written Premium

Key Takeaways

  • Total workers compensation (WC) net written premium for private carriers and state funds exceeded the prerecession peak
  • A primary driver of the 8.5% increase in private carrier net written premium is the reduction in ceded premium to offshore affiliates
  • State fund net written premium grew by 2%

Background

This slide exhibits workers compensation 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 since 2013

Background

Insureds 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 12/31/2018
  • 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 has been between 7% and 8% of total market premium since 2013

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 12/31/2018
  • NCCI’s Residual Market Management Summary

Residual market shares in the underlying table are in percentages.

Direct Written Premium Change—2018

Key Takeaways

  • Between 2017 and 2018, the change in countrywide private carrier direct written premium is a slight decrease of 0.6%
  • There is considerable variation in premium growth across states

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.

Historical Direct Written Premium Change by Component

Key Takeaways

  • For NCCI states, private carrier direct written premium volume increased on a cumulative basis between 2014 and 2017
  • The increase in payroll over this time period was partially offset by changes in bureau loss cost level and the impact of carrier discounting

Background

This slide provides the major components impacting the three-year historical 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

Direct Written Premium Change by Component

Key Takeaways

  • For NCCI states, private carrier direct written premium volume slightly decreased between 2017 and 2018
  • 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

Increases in Payroll Continue to Drive Changes in Premium

Key Takeaways

  • The overall change in payroll (+5.3%) is driven by changes in the average wage (+3.3%) and employment (+1.9%).
  • Average wages grew at an above-average rate for the Professional and Business Services, Manufacturing, Construction, and All Other sectors.
  • Employment grew at an above-average rate for the Professional and Business Services, Education and Health Services, Manufacturing, and Construction sectors. Construction continues to be the fastest-growing economic sector.

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 10.1% from 2018 to 2019 as a result of 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 3, 2019.

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 2019.

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

Contributors to Rate/Loss Cost Changes

Key Takeaway

  • Contributions of several underlying factors may collectively explain why NCCI has filed rate/loss cost level decreases in most states in recent years. These may include improved premium/loss experience, decreases in loss development factors, and lower indicated frequency and severity trends.

Background

The components underlying each NCCI loss cost/rate filing generally include changes in premium and loss experience, loss development, trend, and benefit levels.

The experience period utilized in a jurisdiction’s loss cost/rate filing is typically the most recent two full policy years. Loss development reflects how the cost of claims change over time from when they are first reported until when they are ultimately settled. Trend factors recognize the expected impact that inflation has on losses over time.

In addition to changes in wage replacement benefits to injured workers, benefit level changes may also include the impact on workers compensation costs due to changes in medical fee schedules and drug formularies, for example.

Loss Development

Key Takeaways

  • Development is another area where we have seen improvement.
  • Over the time period shown, paid loss development has dropped by about 4% and paid plus case development has declined by more than 6%.
  • One of the possible contributors to these declines may be the decreased use of opioids. The number of claims with a prescription that included an opioid fell from 55% to 40% between 2013 and 2017.

Background

Loss development captures how claims change over time. This can be impacted by changes in claim-closing patterns, the mix of claims, or case-reserving practices.

This slide captures changes in accident year first report to eighth report loss development on an unlimited basis. It includes all states where NCCI provides ratemaking services, except Nevada, Texas, and West Virginia. The most recent data as of year-end 2017 is compared with that as of year-end 2013.

Data

  • NCCI’s Financial Call data

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 3, 2019. Law-only filings are not included in this analysis.

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

Data

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

Impact of Discounting on Premium

Key Takeaways

  • The graph shows the ebbs and flows of the insurance cycle
  • The overall estimated impact of carrier discounting was 1.3% in 2018

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 are a mix of relatively smaller 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.

Pricing—Market Index Survey

Key Takeaway

  • The percentage of respondents seeing price increases at renewal has continued to decrease over the last few years

Background

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

Blue represents the percentage of agents that observed an increase in premium rates at renewal, while light gray represents the percentage of agents that observed a decrease.

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

Data

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

Values in the underlying table are in percentages.

WC Results

Combined Ratio—Underwriting Gain Achieved

Key Takeaways

  • The Calendar Year 2018 private carrier combined ratio is 83%
  • This is the lowest workers compensation combined ratio since the 1930s

Background

This slide shows workers compensation combined ratios. See the Background section of P&C Net 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.

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

Combined Ratios by Carrier Group

Key Takeaways

  • In a given year, the distribution of carrier results may vary considerably
  • In 2018, the middle 50% of carriers had combined ratios that ranged from the high 70s to about 100%

Background

This slide shows the distribution of workers compensation combined ratios by carrier group for private carriers between Calendar Years 2014 and 2018. A carrier group’s combined ratio is represented in the chart by a circle whose size is based on the carrier group’s premium volume up to $2.5 billion.

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

Combined Ratios—Selected Carrier Groups

Key Takeaway

  • The slide shows how the results, for carrier groups near the median in 2018, varied in prior years

Background

This slide shows the distribution of workers compensation combined ratios by carrier group for private carriers between Calendar Years 2014 and 2018. A carrier group’s combined ratio is represented in the chart by a circle whose size is based on the carrier group’s premium volume up to $2.5 billion.

The rightmost distribution on this slide highlights individual carrier groups whose 2018 combined ratios were close to the 2018 median combined ratio across all carrier groups. The historical combined ratios corresponding to the subset of carriers identified in 2018 are then highlighted in Calendar Years 2014 through 2017 to observe how carrier performance may vary over time.

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

Combined Ratio by Component

Key Takeaways

  • Improvement in the underlying loss ratio is the primary driver for the combined ratio decrease observed between 2017 and 2018
  • The other combined ratio components have recently remained relatively stable

Background

This slide shows the components of the calendar year workers compensation 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.

LAE-to-Loss Ratio—Net Incurred LAE to Incurred Losses

Key Takeaway

  • In recent years, LAE as a ratio to incurred losses has been slightly higher—likely resulting from favorable loss experience

Background

The ratio of net incurred LAE to net earned premium provides the contribution of LAE to the overall combined ratio. This slide displays LAE as a ratio to losses, which may be a more meaningful measure of the effort it takes to manage and settle claims.

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.

LAE-to-loss ratios in the underlying table are in percentages.

Residual Market Combined Ratio

Key Takeaways

  • The residual market combined ratio for Policy Year 2018 is preliminary and based on an incomplete year
  • In recent years, the residual market combined ratio has hovered around 100%

Background

Historical residual market combined ratios are displayed on this slide for all NCCI-serviced Residual Market Pool states. These ratios reflect projected ultimate losses, servicing carrier allowance, producer fees, and other pool and plan administration expenses as a ratio to ultimate premium plus pool interest income on cash flow.

The results are calculated by policy year, which allows a direct match between premium earned and claims incurred for a given block of policies. Policy year combined ratios can change over time as new claims are reported and the reserves on existing claims are reevaluated.

Data

  • Pool data and Plan expenses for pool members for all NCCI-serviced WC Residual Market Pool states; data valued as of 12/31/2018
  • Tennessee Reinsurance Mechanism experience is not included in the combined ratios
  • NCCI’s Residual Market Quarterly Results

Combined ratios in the underlying table are in percentages.

Investment Gain on Insurance Transactions

Key Takeaways

  • The workers compensation investment gain on insurance transactions declined to 9% in 2018
  • This is below the long-term average of 12.9%

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

  • A 9-point investment gain on insurance transactions paired with a 17% underwriting gain led to a 26-point pretax operating gain in 2018
  • Underwriting gains due to the improvement in the loss ratios have driven the increase in the recent years’ operating gains

Background

The pretax operating gain in this slide measures the overall financial performance of the workers compensation line, 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.

WC Accident Year Results

Net Combined Ratios—Calendar Year vs. Accident Year As Reported

Key Takeaways

  • The Accident Year (AY) 2018 net combined ratio is 97%
  • While the AY 2018 combined ratio is currently higher than the corresponding Calendar Year (CY) 2018 value, NCCI expects AY 2018 to develop favorably over time

Background

The net combined ratios are the sum of the net incurred loss and LAE ratio, underwriting expense ratio, and dividend ratio. In this slide, the overall private carrier workers compensation combined ratios are shown for the most recent 10 years on both CY and AY bases.

The AY combined ratio reflects the experience on accidents as of the latest data evaluation date.

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.

Combined ratios in the underlying table are in percentages.

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

Key Takeaway

  • For the years shown on this chart, NCCI’s selections suggest that experience for the most recent AYs will develop favorably over time.

Background

The net combined ratios are the sum of the net incurred loss and LAE ratio, underwriting expense ratio, and dividend ratio. In this slide, NCCI’s selected combined ratios are compared to reported private carrier workers compensation combined ratios. The values are shown for the most recent 10 years on an AY basis. The AY combined ratio reflects the experience on accidents as of the latest data evaluation date.

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 Accident Year Selections vs. As Reported

Key Takeaways

  • The largest differences between NCCI’s Selections and the As Reported values are in AYs 2017 and 2018
  • 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 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 2018 overall reserve adequacy is a $5 billion redundancy
  • NCCI considers all reserve discounts, both tabular and nontabular, to be deficient
  • Without the $4.1 billion tabular discount, there would be an even greater redundancy

Background

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

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

Data

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

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

Emergence of Reported WC Net Loss and LAE Ratios

Key Takeaway

  • The reported net loss and LAE ratios for AYs 2012–2017 have decreased since 1st report, and NCCI expects them to decline further over time

Background

The net incurred loss and LAE ratio is calculated as the ratio of incurred losses and LAE to earned premium. The AY net incurred loss and LAE ratios change over time as losses are paid, and the reserves on claims are reevaluated (i.e., AY emergence).

For each accident year, the dot on the left is the net loss and LAE ratio reported at 1st report while the dot on the right is the value reported at year-end 2018.

Data

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

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

WC Loss Drivers

Average Indemnity Claim Severity

Key Takeaway

  • NCCI estimates that the average indemnity cost per claim for Accident Year (AY) 2018 will be 3% higher than that for AY 2017

Background

This slide displays average indemnity claim severity based on data for all jurisdictions where NCCI provides ratemaking services. AYs 1998–2007 exclude West Virginia; AYs 1998–2003 exclude Nevada and Texas. High-deductible policies are excluded from all years. Severity represents ultimate indemnity losses divided by ultimate lost-time claims. Data is valued as of 12/31/2017. However, AY 2018 is based on preliminary data valued as of 12/31/2018.

Data

  • NCCI’s Financial Call data

Two indemnity severity values are shown in the underlying table for AYs 2004 and 2008. AY 2004 is restated to exclude Nevada and Texas in order to match the states in AY 2003. AY 2008 is restated to exclude West Virginia in order to match the states in AY 2007. This restatement ensures that each year’s severity change is based on the same group of states.

Average Indemnity Claim Severity (and Wage Inflation)

Key Takeaway

  • Since 1998, indemnity claim severity has doubled, in large part due to an increase in wages of 80% 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 severity changes through AY 2004 exclude Nevada and Texas. The severity changes through AY 2008 exclude West Virginia.

Both the WC average indemnity claim severity and average weekly wage trend lines have been indexed to 1998.

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 1998–2007 and 2012–2017
    2. QCEW and average weekly earnings data from the BLS for 2008–2011; 2018p is estimated by NCCI using forecasts from Moody’s Analytics

Values in the underlying table are in percentages.

Relative Growth Rates—Indemnity Severity vs. Wage Inflation

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 1998–2008 and 2008–2018 time periods.

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 1998–2007 and 2012–2017
    2. QCEW and average weekly earnings data from the BLS for 2008–2011; 2018p 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.

Average Indemnity Claim Severity (by State)

Key Takeaways

  • Moderate increases in indemnity claim severity were observed in most jurisdictions between 2013 and 2017
  • The observed decreases in Oklahoma and Tennessee may be attributable to reforms in these states that lowered indemnity benefits

Background

The average annual change in indemnity claim severity by state between 2013 and 2017 (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 12/31/2017.

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 wages.

Data

  • NCCI’s Financial Call data

Average Medical Lost-Time Claim Severity

Key Takeaway

  • NCCI estimates that the average medical cost per lost-time claim for AY 2018 will be 1% higher than that for AY 2017

Background

This slide displays average medical lost-time claim severity based on data for all jurisdictions where NCCI provides ratemaking services. AYs 1998–2007 exclude West Virginia; AYs 1998–2003 exclude Nevada and Texas. High-deductible policies are excluded from all years. Severity represents ultimate lost-time medical losses divided by ultimate lost-time claim counts. Data is valued as of 12/31/2017. However, AY 2018 is based on preliminary data valued as of 12/31/2018, and AY 2017 was revised based on 12/31/2018 data to reflect emerged development in 2018, which differed from expected.

Data

  • NCCI’s Financial Call data

Two medical lost-time claim severity values are shown in the underlying table for AYs 2004 and 2008. AY 2004 is restated to exclude Nevada and Texas in order to match the states in AY 2003. AY 2008 is restated to exclude West Virginia in order to match the states in AY 2007. This restatement ensures that each year’s severity change is based on the same group of states.

Average Medical Lost-Time Claim Severity (and 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 (PHC) Chain-Weighted Price Index. The PHC index is a proxy for medical care price inflation that responds to changes in the blend of different medical services over time.

Both the WC average medical lost-time claim severity and PHC trend lines have been indexed to 1998.

Data

  • Medical 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.

Relative Growth Rates—Medical Severity vs. Price Inflation

Key Takeaways

  • Prior to 2008, changes in medical lost-time claim severity outpaced changes in the 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 PHC index during the 1998–2008 and 2008–2018 time periods.

Data

  • Medical severity is 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.

Average Medical Lost-Time Claim Severity (by State)

Key Takeaways

  • Increases in medical claim severity were observed in most jurisdictions between 2013 and 2017
  • Large claim activity was a contributing factor to the observed increase in Nevada’s medical claim severity

Background

The average annual change in medical lost-time claim severity by state between 2013 and 2017 (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 12/31/2017.

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

Lost-Time Claim Frequency (by State)

Key Takeaway

  • Average claim frequency declines were observed in all jurisdictions between 2013 and 2017

Background

The average annual changes in lost-time claim frequency between AYs 2013 and 2017 (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

Lost-Time Claim Frequency

Key Takeaways

  • NCCI estimates that the frequency for AY 2018 will be 1% lower than that for AY 2017
  • Several potential underlying causes for 2018’s relatively moderate decrease in claim frequency have been suggested: (1) previous NCCI research has shown that a strong economy with new job growth can put upward pressure on claim frequency, (2) the relatively severe 2018 winter may have contributed to an increased number of claims (e.g., slips and falls), and (3) random volatility (similar to the observed decrease in medical severity for 2015)

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 upon matched states. For example, Texas and West Virginia are first included in AYs 2007 and 2012, respectively.

Lost-time claim counts are developed to an ultimate basis. Premium is adjusted to current wage and voluntary pure premium levels. Data is valued as of 12/31/2017. However, AY 2018 is based on preliminary data valued as of 12/31/2018. AYs 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 Carrier Group

Key Takeaways

  • In any individual year, the distribution of carrier results may vary considerably
  • Overall average lost-time claim frequencies (represented by the blue lines) have generally decreased over the time period shown

Background

This slide shows the distribution of workers compensation lost-time claim frequency values by carrier group between AYs 2009 and 2017 for all jurisdictions where NCCI provides ratemaking services. A carrier group’s frequency value is represented in the chart by a circle whose size is based on the carrier group’s premium volume up to $300 million.

Claim frequency is defined as lost-time claim counts per million dollars of pure premium. Claim counts are developed to an ultimate basis. Premium is adjusted to current wage and voluntary pure premium levels. Data is valued as of 12/31/2017 and high-deductible policies are excluded.

Data

  • NCCI’s Financial Call data

Lost-Time Claim Frequency—High and Low Carrier Groups

Key Takeaway

  • Carrier groups reporting relatively high claim frequency values in 2017 have generally experienced relatively high frequency values over the entire time period shown in the chart. A similar result holds for carrier groups reporting relatively low claim frequency values in 2017.

Background

This slide shows the distribution of workers compensation lost-time claim frequency values by carrier group between Accident Years 2009 and 2017 for all jurisdictions where NCCI provides ratemaking services. A carrier group’s frequency value is represented in the chart by a circle whose size is based on the carrier group’s premium volume up to $300 million.

The “high” group consists of those carriers reporting claim frequency values between the 80th and 90th percentiles of the 2017 frequency distribution. The “low” group consists of those carriers reporting claim frequency values between the 10th and 20th percentiles of the 2017 frequency distribution.

Claim frequency is defined as lost-time claim counts per million dollars of pure premium. Claim counts are developed to an ultimate basis. Premium is adjusted to current wage and voluntary pure premium levels. Data is valued as of 12/31/2017 and high-deductible policies are excluded.

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