2023 State of the Line Guide
Posted Date: May 9, 2023
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 insights, 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 NCCI’s 2023 State of the Line presentation highlighted:
- Workers compensation net written premium increased 11% in 2022, returning to approximately the same level as 2019.
- The calendar year combined ratio for workers compensation is 84%, a sign of underwriting profitability for the system.
- Workers compensation’s accident year combined ratio is 97% with prior years continuing to experience downward reserve development.
- The workers compensation reserve redundancy grew to $17 billion.
- Lost-time claim frequency returned to its 20-year trend, declining 4% in the past year.
- NCCI reported a notable rise in severity for 2022 with medical claim severity increasing about 5% and indemnity claim severity rising about 6% year over year. The longer-term perspective indicates this is a manageable rise.
We hope you find the 2023 State of the Line Guide both a beneficial and informative resource.
P&C Results
Net Written Premium Growth—2021 to 2022
Key Insights
- Total property and casualty net written premium for private carriers increased by 8.4% to $771 billion in 2022
- All lines of business experienced premium increases of at least 5%
Background
The net written premium in this slide provides a measure of the size of each major line of business in the property and casualty (P&C) insurance industry.
Data
- National Association of Insurance Commissioners (NAIC) 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 the NAIC may still receive additional data submissions.
Net Written Premium Growth—2019 to 2022
Key Insights
- Total P&C net written premium for private carriers increased by 21.6% from 2019 to 2022
- The Workers Compensation Line experienced the smallest increase of 1.1%, with net written premium now past the pre-pandemic levels of 2019
Background
The net written premium in this slide provides a measure of the premium growth over a three-year time horizon for 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 the NAIC may still receive additional data submissions.
Quarterly Average Premium Changes
Key Insights
- Workers Compensation rate change has hovered around zero over this three-year time period
- Over this same time period, the other lines continued to experience rate increases, yet at a lower magnitude in the latest four quarters
Background
Survey respondents were asked to review recent renewals and determine how premium rates 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 Q1 2020 to Q4 2022.
These observations may be used to determine trends in pricing from one quarter to the next.
Data
- The Council of Insurance Agents & Brokers provided this pricing survey
Net Combined Ratio (by Year)
Key Insights
- Calendar Year 2022 is the first year since 2017 with a P&C industry combined ratio above 100%
- Private carriers produced an underwriting gain in 10 of the 21 years displayed, including 7 of the last 10 years
- The 20-year average combined ratio is 100%
Background
This slide displays a long-term history of the net combined ratios for the total P&C industry. 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: 2002–2008 and 2013–2022p
- Insurance Services Office: 2009–2012
The value for the most recent year is preliminary because the NAIC may still receive additional data submissions.
Combined ratios in the underlying table are in percentages.
Net Combined Ratio
Key Insights
- The total P&C combined ratio was 102% for private carriers in 2022
- Combined ratios decreased or remained flat in nearly every line of business except for Personal and Commercial Auto
- Workers Compensation remained low with a combined ratio of 84% in 2022
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 Net Combined Ratio (By Year) 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 the NAIC may still receive additional data submissions.
WC Premium
Net Written Premium
Key Insights
- The 2022 net written premium for private carriers was $42.5 billion, an increase of about 11% from 2021
- Total net written premium including state funds was $47.5 billion
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 the NAIC may still receive additional data submissions.
Premium values in the underlying table are in billions of dollars.
Residual Market Premium
Key Insight
- 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
- 2019 and 2020 had more significant decreases of 15.5% and 7.6%, respectively, falling below $1 billion
- Premium has not significantly changed in recent years
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 that NCCI services is displayed by policy year.
Data
- Pool Data for all NCCI-serviced WC Residual Market Pool states, valued as of 12/31/2022
- 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 Insight
- The residual market share continued to decline through 2022, and it is now approximately 6%
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 12/31/2022
- NCCI’s Residual Market Management Summary
Residual market shares in the underlying table are in percentages.
Direct Written Premium Change—2019 to 2022
Key Insights
- Between 2019 and 2020, the change in NCCI and independent bureau private carrier direct written premium was a decrease of 8.7%
- Between 2020 and 2021, the change in NCCI and independent bureau private carrier direct written premium was an increase of 1.9%
- Between 2021 and 2022, the change was an increase of 10.5%
- Between 2019 and 2022, the change in NCCI and independent bureau private carrier direct written premium was an increase of 3.1%
Background
Underlying the change in the private carrier direct written premium volume are the changes in premium volume by individual jurisdiction. The percentage changes depicted on the map exclude monopolistic fund states. Orange represents premium volume increases, while blue 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.
Changes in Payroll by Component
Key Insights
- Payroll increased by about 10% in 2022, about 5% from employment and 5% from wages.
- The largest gain was in Leisure and Hospitality, which reflects a partial recovery as this sector was by far the furthest below pre-pandemic employment in 2021.
- These increases were not uniform across all workers. Wage gains were largest for low-wage workers and industries.
Background
The change in payroll from 2021 to 2022 is broken down into changes in employment and wage growth.
Data
- US Bureau of Labor Statistics
- US Bureau of Economic Analysis
- NCCI
Values in the underlying table are in percentages.
Approved Changes in Bureau Premium Level
Key Insight
- Written premiums are expected to decrease by an average of 7.6% from 2022 to 2023 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 5, 2023.
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. The changes shown reflect several factors that impact NCCI filings, such as changes in claim frequency and severity, changes in the economy, cost containment initiatives, legislative reforms, and judicial decisions. 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 2023.
Approved changes in bureau premium level in the underlying table are in percentages.
Most Recent Changes in Bureau Premium Level
Key Insight
- The most recent filings resulted in decreases for all but one NCCI state
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 5, 2023. Law-only filings are not included in this summary.
In the slide, orange represents premium level increases, while blue 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.
Combined Impact of Schedule Rating, Dividends, and Rate/Loss Cost Departure
Key Insight
- The overall estimated combined impact of schedule rating, dividends, and rate/loss cost departure was a factor of 1.06 in 2022
Background
This slide shows the combined impact of schedule rating, dividends, and rate/loss cost departures on policy year premium based on private carrier data for all jurisdictions where NCCI provides ratemaking services, excluding Texas.
Data
- NAIC’s Annual Statement Statutory Page 14
- NCCI’s Financial Call data
The value for the most recent year is preliminary because the NAIC may still receive additional data submissions.
Values in the underlying table are in percentages.
Change in Combined Impact of Schedule Rating, Dividends, and Rate/Loss Cost Departure
Key Insights
- The year-over-year change in the combined impact of schedule rating, dividends, and rate/loss cost departure has been about 1% per year over the last five years
- The changes are primarily driven by rate/loss cost departures
Background
This slide shows the changes in the combined impact of schedule rating, dividends, and rate/loss cost departures on policy year premium based on private carrier data for all jurisdictions where NCCI provides ratemaking services, excluding Texas.
Data
- NAIC’s Annual Statement Statutory Page 14
- NCCI’s Financial Call data
The value for the most recent year is preliminary because the NAIC may still receive additional data submissions.
WC Impact on Premium by Component
Key Insights
- For NCCI states, private carrier direct written premium volume increased by 5.3% between 2019 and 2022
- From 2019 to 2022, the changes in Payroll and Other Factors are partially offset by the change in Loss Cost & Mix
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 schedule rating, dividends, rate/loss cost departure, average experience mod, deductible credit types or amounts, the mix of policy types, or the 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
WC Results
Net Combined Ratio
Key Insights
- The 2022 private carrier combined ratio of 84% marks the sixth consecutive year of results under 90% and the ninth consecutive year of underwriting gains
- The 2022 combined ratio translates to a 16-point underwriting gain
Background
This slide shows workers compensation combined ratios. See the Background section of Net Combined Ratio (By Year) 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 the NAIC may still receive additional data submissions.
Combined ratios in the underlying table are in percentages. Information for state funds is included for informational purposes.
Net Combined Ratio by Component
Key Insights
- The decrease in the combined ratio for 2022 is primarily the result of the decline in the loss ratio
- This is the sixth consecutive year with a loss ratio under 50%, representing the lowest loss ratio seen in at least 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 the NAIC may still receive additional data submissions.
Values in the underlying table are in percentages.
Investment Gain on Insurance Transactions
Key Insights
- The preliminary WC investment gain on insurance transactions decreased to 9% in 2022
- This ratio is below the long-term average of 11.7% and is one of the lowest values in the last 20 years
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 the NAIC may still receive additional data submissions.
Investment gain ratios in the underlying table are in percentages.
Pretax Operating Gain
Key Insights
- A 9% investment gain ratio combined with a 16% underwriting gain resulted in a 25-point operating gain in 2022
- This is the sixth straight year with results more than 20%, which represents the most profitable period we’ve seen going back at least 30 years
- Workers compensation results have been strong, with a decade of operating gains
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 the NAIC may still receive additional data submissions.
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 Insights
- Adjustments to reserves on prior accident years impact CY results. More than $5 billion prior year reserve reductions influenced these CY combined ratios for each of the last six years.
- The Accident Year (AY) 2022 As Reported combined ratio in the NAIC Annual Statement is 97, declining three points from the AY 2021 As Reported combined ratio.
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 Net Combined Ratio (By Year) 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 CY value for the most recent year is preliminary because the NAIC may still receive additional data submissions.
Combined ratios in the underlying table are in percentages.
Net Combined Ratios—NCCI’s AY Selections vs. As Reported
Key Insights
- NCCI’s selection is the level to which we believe each AY will develop over time
- NCCI believes the As Reported values for AY 2022 will decline significantly, falling by 11 points when all claims for that year are settled and closed
- While the magnitude of the expected decline is sizable, it’s comparable to what we also expect will occur for 2021 and what has already occurred for other AYs
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 Net Combined Ratio (By Year) 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 Insights
- For every AY displayed, NCCI believes the current As Reported AY results (on the right in each two-bar pair) will decline over time, and the recent AYs will decline significantly. These values are expected to converge over time, as we have seen for older AYs.
- The AY 2022 As Reported Loss and LAE ratio is 11 points higher than NCCI’s selected.
- AY 2022 Loss and LAE ratios are lower than the previous AY 2021 by several points, for both NCCI selected and As Reported by carriers.
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 occurs when NCCI’s selected net loss and LAE ratio is higher than the reported value by carriers; a redundancy occurs when NCCI’s selected net loss and LAE ratio is lower than the value reported by carriers.
Data
- NAIC’s Annual Statement, Schedule P, Part 1D
Net loss and LAE ratios in the underlying table are in percentages.
Emergence of Reported WC Net Loss and LAE Ratios
Key Insights
- Starting at the left for AY 2013, the Initial Carrier Reported Loss and LAE Ratio was 76%. Over subsequent valuations that value has decreased to 68% as of the current 2022 valuation.
- Generally speaking, carrier-reported loss and LAE ratios have decreased since the initial valuation.
Background
The net incurred loss and LAE ratio is calculated as the ratio of AY net incurred losses and LAE to CY net earned premium. The accident year (AY) net loss and LAE ratios change with each valuation as loss experience matures.
For each AY, the orange line represents the carrier-reported net loss and LAE ratio as of the first report (the first year-end valuation for each corresponding AY) and the current report (as of year-end 2022).
Data
- NAIC’s Annual Statement, Schedule P, Part 1D
Net loss and LAE ratios in the underlying table are in percentages.
Emergence of NCCI Selected WC Net Loss and LAE Ratios
Key Insights
- Starting at the left for AY 2013, the initial NCCI-selected loss and LAE ratio was 73%. Over subsequent valuations NCCI’s selection has decreased and is now 65 as of the current 2022 valuation.
- Generally speaking, NCCI’s selected and carrier-reported net loss and LAE ratios have decreased over subsequent valuations, and they tend to converge by the 10th valuation.
Background
The net incurred loss and LAE ratio is calculated as the ratio of AY net incurred losses and LAE to CY net earned premium. The accident year (AY) net loss and LAE ratios change with each valuation as loss experience matures.
For each AY, the blue lines represent the NCCI-selected net loss and LAE ratios, as of the first report (the first year-end valuation for each corresponding AY) and the current report (as of year-end 2022).
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 Insights
- The private carrier reserve adequacy for year-end 2022 grew to -$17B (i.e., $17B redundancy), since the redundancy for AY 2022 more than offsets the CY reserve releases from other AYs
- WC results reflect a strong financial position and strong performance for more than five years
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 combined for all accident years at each year-end valuation and considers all reserve discounts as deficiencies.
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.
COVID-19 and Ratemaking
Direct Impact of COVID-19—Accident Years 2020 to 2022
Key Insights
- COVID-19 incurred losses total $628 million
- 118K COVID-19 claims with payments associated with them have been reported
- COVID-19 claims have an average severity of $5,300
- COVID-19 incurred losses from non-large deductible policies represent 1% of the total incurred losses reported on NCCI’s Financial Call #5 for Accident Years 2020–2022
- COVID-19 incurred losses, claim counts, average severity, and percent-of-total incurred losses all decreased across Accident Years 2020–2022
Background
This slide summarizes some key observations of WC COVID-19 claims reported on NCCI’s Financial Call #31 evaluated as of 12/31/2022 based on large deductible and non-large deductible policies from private carriers and state funds for all jurisdictions where NCCI provides ratemaking services. Does not include claims with zero payments. Accident Year 2020 is evaluated at a third report, Accident Year 2021 is evaluated at a second report, and Accident Year 2022 is evaluated at a first report.
Data
- NCCI’s Financial Call data
WC Loss Drivers
Lost-Time Claim Frequency
Key Insights
- NCCI estimates that lost-time claim frequency for Accident Year 2022 will be 4% lower than that for Accident Year 2021, slightly lower than the long-term average change of –3.3%.
- If COVID-19 claims are included, the frequency change for Accident Year 2022 would be about the same, or a 4% decrease over Accident Year 2021.
- Audits of prior policies have notably increased premium in Accident Year 2021, which has the effect of muting the actual frequency decline occurring in Accident Year 2022. Excluding audits, the frequency change for Accident Year 2022 is estimated to be about a 7% decrease.
- Pandemic-related shutdowns in 2020, with workers returning to work in 2021, are likely contributors to the offsetting +/–8.3% frequency changes in Accident Years 2020 and 2021.
- The cumulative change in claim frequency over the pandemic period of 2019 through 2022 is estimated to be nearly a 5% decrease.
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.
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 12/31/2021. However, Accident Year 2022 is based on preliminary data, valued as of 12/31/2022. Accident Years 2010–2011 and 2019–2022 show adjusted values, primarily due to significant changes in audit activity. All years exclude high-deductible policies.
Data
- NCCI’s Financial Call data. Excludes COVID-19 claims.
Values in the underlying table are in percentages.
Lost-Time Claim Frequency by Industry Group
Key Insights
- The Manufacturing and Miscellaneous industries experienced sizable increases in frequency over Accident Years 2019–2021. Manufacturing saw a rise in the number of short-tenure employees in 2021 that may be contributing to an increase in accident frequency due to lack of training/experience.
- The Contracting and Goods & Services industries saw Accident Year 2021 frequency nearly return to the levels observed in Accident Year 2019.
- Office & Clerical is the only industry that has neither returned to nor surpassed the Accident Year 2019 frequency level, in part as a result of a transition to remote and hybrid work environments.
Background
The changes in lost-time claim frequency (reported lost-time claims per million dollars of pure premium at a first report) between Accident Year 2019 and Accident Year 2021 are displayed by Industry Group. Data is included for all jurisdictions where NCCI provides ratemaking services. All years exclude high-deductible policies.
Data
- NCCI’s Statistical Plan data. Excludes COVID-19 claims.
Lost-Time Claim Frequency by Cause of Injury
Key Insights
- Slight increases in frequency occurred over Accident Years 2019–2021 for claims that fall under the Caught in Between or Burn/Rubbed/Abraded By groupings.
- Nearly 60% of lost-time claims fall under either the Strain or Slip and Fall Cause of Injury groupings. Frequency of these claims decreased by just 1% for Strains and 2% for Slip and Fall claims across Accident Years 2019–2021.
- Motor Vehicle Accidents experienced the largest decline in frequency over Accident Years 2019–2021, driven by the drop-off in driving exposure following the onset of the COVID-19 pandemic in 2020.
Background
The changes in lost-time claim frequency (reported lost-time claims per million dollars of pure premium at a first report) between Accident Year 2019 and Accident Year 2021 are displayed by Cause of Injury groupings. Data is included for all jurisdictions where NCCI provides ratemaking services. All years exclude high-deductible policies.
Data
- NCCI’s Statistical Plan data. Excludes COVID-19 claims.
Medical Cost Distribution
Key Insights
- The largest medical cost category is Physicians, making up 41% of all medical paid dollars
- Facilities is the second largest category which includes Hospital Outpatient, Ambulatory Surgical Center (ASC), and Hospital Inpatient services
- The Other category includes Home Health, Skilled Nursing, Transportation, and other miscellaneous services
Background
This slide shows the paid share of Medical by cost category for Service Year 2021. Physician services include medical doctors, physician assistants, nurse practitioners, physical therapists, and other professional service providers.
Data
- NCCI’s Medical Data Call
Medical Price Pressure by Medical Cost Category
Key Insight
- Physicians, the largest share of paid medical, has the least amount of price pressure as measured by the Producer Price Index for Physician Care
- Those categories that exhibited the largest price pressure in 2022 make up the smallest paid share: Medical Supplies and Other, which includes Home Health and Transportation
Background
This slide shows average inflation experienced by each medical cost category from 2021 to 2022.
Data
- US Bureau of Labor Statistics
- NCCI’s Medical Data Call
Medical Lost-Time Claim Severity
Key Insights
- NCCI estimates that the average medical lost-time claim severity for Accident Year 2022 will be about 5% higher than Accident Year 2021
- If COVID-19 claims are included, the severity change for Accident Year 2022 would be about the same, or a 5% increase over Accident Year 2021
- The cumulative change in medical lost-time claim severity over the pandemic period of 2019 through 2022 is estimated to be an increase of about 3%
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 2004 exclude Nevada, prior to 2008 exclude Texas, and prior to 2012 exclude West Virginia. All years exclude high-deductible policies. Severity represents ultimate medical losses divided by ultimate lost-time claim counts. Data is valued as of 12/31/2021. However, Accident Year 2022 is based on preliminary data valued as of 12/31/2022.
Data
- NCCI’s Financial Call data. Excludes COVID-19 claims.
The underlying table shows two medical lost-time claim severity values for Accident Years 2004, 2008, and 2012. Accident Year 2004 is restated to exclude Nevada in order to match the states included in Accident Year 2003. Accident Year 2008 is restated to exclude Texas in order to match the states in Accident Year 2007. Accident Year 2012 is restated to exclude West Virginia in order to match the states in Accident Year 2011. 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 Insights
- Medical lost-time claim severity in NCCI states has grown slightly more than medical price inflation over the last 20 years—with much of that growth occurring in the early-to-mid 2000s
- Pandemic-related impacts caused a slowdown in medical lost-time severity growth in 2020 and 2021, resulting in medical care prices rising faster than medical severity over the two-year period
- Severity in 2022 appears to once again track closely with medical price inflation
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 from 2002 to 2022. The PHC Chain-Weighted Price Index 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, it may influence the countrywide severity change from the prior year. Both the average medical lost-time claim severity and the PHC Chain-Weighted Price Index trend lines are indexed to 2002. All years exclude high-deductible policies.
Data
- Medical lost-time claim severity is derived from NCCI’s Financial Call data. Excludes COVID-19 claims.
- PHC Chain-Weighted Price Index is from the Centers for Medicare & Medicaid Services.
Values in the underlying table are in percentages.
Indemnity Claim Severity
Key Insights
- NCCI estimates that the average indemnity cost per claim for Accident Year 2022 will be about 6% higher than Accident Year 2021
- If COVID-19 claims are included, the severity change for Accident Year 2022 would be about the same, or a 6% increase over Accident Year 2021
- The cumulative change in indemnity claim severity over the pandemic period of 2019 through 2022 is estimated to be an increase of about 8%
Background
This slide displays average indemnity claim severity based on data for all jurisdictions where NCCI provides ratemaking services. Accident Years prior to 2004 exclude Nevada, prior to 2008 exclude Texas, and prior to 2012 exclude West Virginia. All years exclude high-deductible policies. Severity represents ultimate indemnity losses divided by ultimate lost-time claims. Data is valued as of 12/31/2021. However, Accident Year 2022 is based on preliminary data valued as of 12/31/2022.
Data
- NCCI’s Financial Call data. Excludes COVID-19 claims.
The underlying table shows two indemnity severity values for Accident Years 2004, 2008, and 2012. Accident Year 2004 is restated to exclude Nevada in order to match the states included in Accident Year 2003. Accident Year 2008 is restated to exclude Texas in order to match the states in Accident Year 2007. Accident Year 2012 is restated to exclude West Virginia in order to match the states in Accident Year 2011. This restatement ensures that each year’s severity change is based on the same group of states.
Indemnity Claim Severity vs. Wage Inflation
Key Insights
- The change in indemnity claim severity has historically tracked quite closely with the change in average wage
- In more recent years, wage growth has greatly outpaced the growth in average indemnity claim severity, putting notable upward pressure on indemnity claim costs
Background
This slide compares the growth in average indemnity claim severity with the growth in average weekly wages across the time period of 2002 to 2022. An adjustment to average weekly wages between 2008 and 2011 compensates 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, it may influence the countrywide severity change from the prior year. Both the WC average indemnity claim severity and average weekly wage trend lines are indexed to 2002. All years exclude high-deductible policies.
Data
- Indemnity severity is derived from NCCI’s Financial Call data. Excludes COVID-19 claims.
- US Average Weekly Wage is based on Quarterly Census of Employment and Wages (QCEW) data from the US Bureau of Labor Statistics (BLS) for 2002–2007 and 2012–2019; NCCI and QCEW for 2008–2011 and 2020–2021; and NCCI, BLS, and the US Bureau of Economic Analysis for 2022p.
Values in the underlying table are in percentages.
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.
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 policies 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—The 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.
- 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—The 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—The 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 (IGIT) 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 \[ =\frac{ \begin{bmatrix} \begin{align} & \small\text{Commissions and Brokerage Expenses Incurred} \\ & \small\text{+ Taxes, Licenses, and Fees Incurred} \\ & \small\text{+ Other Acquisitions, Field Supervision, and Collection Expenses Incurred} \\ & \small\text{+ General Expenses Incurred} & \end{align} \end{bmatrix} } {\small\text{Written Premium}} \]