Posted Date: May 14, 2019
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:
We hope you find the 2019 State of the Line Guide both a beneficial and informative resource.
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.
The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.
This slide shows the amount of insured losses in the United States from natural catastrophes from 2012 to 2018.
This slide summarizes the impact on P&C industry losses due to natural catastrophes in the United States by region in 2018.
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.
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.
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.
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 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.
Values in the underlying table are in percentages.
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.
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.
This slide shows workers compensation combined ratios. See the Background section of P&C Net Combined Ratio for more information.
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.
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.
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.
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:
Policyholder dividends are the smallest component of the combined ratio and are compared to net earned premium.
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.
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.
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.
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.
Combined ratios in the underlying table are in percentages.
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.
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.
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:
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.
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.
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.
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.
Combined ratios in the underlying table are in percentages.
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.
Net loss and LAE ratios in the underlying table are in percentages.
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.
Redundancies and deficiencies in the underlying table are in billions of dollars.
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.
Net loss and LAE ratios in the underlying table are in percentages.
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.
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.
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.
Values in the underlying table are in percentages.
This slide compares the growth in indemnity claim severity to the growth in workers’ wages during the 1998–2008 and 2008–2018 time periods.
See the data table underlying Average Indemnity Claim Severity (and Wage Inflation) for annual percentage changes.
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.
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.
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.
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.
Values in the underlying table are in percentages.
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.
See the data table underlying Average Medical Lost-Time Claim Severity (And Price Inflation) for annual percentage changes.
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.
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.
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.
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.
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.
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:
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:
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.
General Expenses Incurred—Overhead expenses incurred in the insurer’s operations, other than those included in the other expense categories. Examples:
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:
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:
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.
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 \[ =\frac{ \begin{bmatrix} \begin{align} & \small\text{Commissions and Brokerage Expenses Incurred} \\ & \small\text{+ Taxes, Licenses, and Fees Incurred} \\ & \small\text{+ Other Acquisitions, Field Supervision, and Collection Expenses Incurred} \\ & \small\text{+ General Expenses Incurred} & \end{align} \end{bmatrix} } {\small\text{Written Premium}} \]