Compensation Insurance Industry: Calm Amid the Storms? 2006 AASCIF Annual Conference Branson, MO June 19, 2006 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038
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State of the Workers Compensation Insurance Industry: Calm Amid the Storms? 2006 AASCIF Annual Conference Branson, MO June 19, 2006 Robert P. Hartwig,
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State of theWorkers Compensation
Insurance Industry:
Calm Amid the Storms?2006 AASCIF Annual Conference
Branson, MO
June 19, 2006
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Calm Amid the Storm?• Emerging Issue in Workers Comp• TRIA/Terrorism Update• Q & A
P/C FINANCIALOVERVIEW
Mega-CATs Affect theEntire Industry
Highlights: Property/Casualty,2005 vs. 2004
Item 2005 2004 Change
Net Written Prem. 425,653 424,089 +0.4%
Loss & LAE 311,395 300,948 +0.9%
Net UW Gain (Loss) (5,928) 4,263 N/A
Net Inv. Income 49,456 39,966 +23.7%
Net Income (a.t.) 43,013 38,501 +12.3%
Surplus* 427,138 391,294 +9.2%
Combined Ratio* 100.9 98.3 +2.6 pts.
Source: ISO, Insurance Information Institute *Comparison is with year-end 2004 value.
Growth rate lowest since late 1990s
Investment Income Rebound?
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
E2
00
6F
20
07
F2
00
8F
20
09
F2
01
0F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2006-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent.
2006-2010 (post-Katrina) period will resemble 1993-97
(post-Andrew)
2005: biggest real drop in premium since early 1980s
P/C Net Income After Taxes1991-2005 ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598$24,404
$36,819
$30,773
$21,865
-$6,970
$3,046
$30,029
$43,013
$20,559
$38,501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*ROE figures are GAAP; **Return on avg. surplus. ROAS = 9.8% after adj. for one-time special dividend paid by the investment subsidiary of one company. Sources: A.M. Best, ISO, Insurance Information Inst.
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROAS** = 10.5%
2005 Net Income only now exceeding levels of mid-1990s
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E
ROE Cost of Capital
ROE vs. Equity Cost of Capital: US P/C Insurance: 1991 – 2005E
Source: The Geneva Association, Ins. Information Inst.
The p/c insurance industry achieved will come close to achieving its cost of capital in 2005
-13.
2 p
ts
-1.7
pts
US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002,
US P/C Insurers All US Industries P/C excl. Hurricanes
ROE: P/C vs. All Industries 1987–2005
Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
2004/5 ROEs excl. hurricanes
4 Hurricanes
Katrina, Rita, Wilma
RETURN ON EQUITY (Fortune):Stock & Mutual vs. All Companies*
*Fortune 1,000 group.
Source: Fortune Magazine, Insurance Information Institute.
13%
10%
13.4%14.6%
10.4% 10.0%
14.9%14%
13%
7%6%
11%12%
9%
-2%
8%7%
2%
10%
13.9%12.6%
-4%-2%
0%2%4%
6%8%
10%12%
14%16%
1998 2000 2001 2002 2003 2004 2005
StockMutualAll Companies*
Stock insurer ROEs consistently above mutuals
The gap between stock and mutual profitability
has been narrowing
RNW for Major P/C Lines,1995-2004 Average
16.5%
8.5% 7.9% 7.7%
5.5% 5.4% 4.6%3.4%
-2.5%
21.4%
15.7%
5.9%
-5%
0%
5%
10%
15%
20%
25%
InlandMarine
AllOther
Fire PPAuto
WC AllLines
CommAuto
CMP MedMal
OtherLiab
Home Allied
Source: NAIC; Insurance Information Institute
Workers Comp performance has been about average in recent years, though now superior relative to CAT-
impacted lines
Workers’ Comp Underwriting Performance and Profitability
123 122
109
101
97
101
115
118
122
111 110
107
102
107
1004.9%
8.6%
14.3%
12.8%
8.8%
4.5%
2.3%
6.9%
10.5%
13.0%
1.7%
14.4%
12.4%
6.0%
13.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*
Ret
urn
on
Eq
uit
y (%
)
90
95
100
105
110
115
120
125
Calen
dar Y
ear Co
mb
ined
Ratio
*2005 ROE figure is III estimate; 2005 Combined Ratio is NCCI estimate Source: A.M. Best, NCCI
CATASTROPHEREVIEW
Workers Comp is Lost in the Background
U.S. InsuredCatastrophe Losses ($ Billions)*
$7.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$61.
2
$100
$0
$20
$40
$60
$80
$100
$120
89 91 93 95 97 99 01 03 05
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
2005 was by far the worst year ever for insured
catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E
0%
2%
4%
6%
8%
10%
12%
14%
16%
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
E
USWorldwideUS average: 1984-2004
*Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B.
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
US CAT losses were a record 13.8% of net premiums earned in 2005 and were 4.2
times the 1984-2004 average of 3.3%.
Anything left to pay WC claims?
Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)
$3.5 $3.8 $4.8 $5.0$6.6 $7.4 $7.7
$10.3
$21.6
$40.6
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Georges(1998)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Andrew(1992)
Katrina(2005)
$ B
illio
ns
Sources: ISO/PCS; Insurance Information Institute.
Seven of the 10 most expensive hurricanes in US history
occurred in the 14 months from Aug. 2004 – Oct. 2005:
p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2005 and developed to ultimateSource: Calendar Years 1994-2004, A.M. Best Aggregates & Averages; Calendar Year 2005p and Accident Years 1994-2005pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders
Calendar Yearp PreliminarySource: 1996-2004 Private Carriers, A.M. Best Aggregates & Averages; 2005p, NCCI1996-2005p State Funds: AZ, CA, CO, HI, ID, KY, LA, ME, MO, MT, NM, OK, OR, RI, TX, UT Annual StatementsSource: National Council on Compensation Insurance
WC state fund underwriting performance is now on par with private
p PreliminaryConsiders all reserve discounts to be deficient.Loss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selections.Source: 1995-2005p, NCCI analysis
Loss and LAE Reserve Deficiency—Private Carriers
Workers Comp Reserve Deficiency,1993-2005p
Calendar Year
WC reserve deficiencies have been cut by $12
billion—57% since 2001
Historical Ratings Distribution,US P/C Insurers, 2000 vs. 2005
A/A-52.3%
A++/A+9.2%
B++/B+26.4%
Vulnerable*12.1%
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings ‘B’ and lower.
ALSO “A.M. Best will perform additional “stress-tested” risk-adjusted capital analysis for a second event in order to determine the potential financial condition of an entity post a severe event.”IMPLICATION: Some insurers may be required to carry more capital to maintain the same rating.
*SRQ = Supplemental Rating QuestionnaireSource: A.M. Best Review & Preview, January 2006.
Source: Ibbotson Associates, Insurance Information Institute. *Through June 16, 2006.
Total Returns for Large Company Stocks: 1970-2006*
S&P 500 is up 0.3% so far in 2006*
Markets are moving sideways in 2006 as interest rates rise
0%
1%
2%
3%
4%
5%
6%
1m 3m 6m 1yr 2yr 3yr 5yr 7yr 10yr 20yr 30yr
Jun-04 Dec-04 Jun-05 Dec-05 May-06
The Treasury Yield CurveIs Still Fairly Flat
Source: Board of Governors, Federal Reserve System; Insurance Information Institute. *Week ending 5/26.
December 2004
June 2004
June 2005
December 2005
May 2006*
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.2$56.9
$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05***Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.**2005 figure includes special one-time dividend of $3.2B.Source: Insurance Services Office; Insurance Information Institute.
90* 91* 92 93 94 95 96 97 98 99 00 01 02 03 04 05p*Adjusted to include realized capital gains to be consistent with 1992 and after.**Investment Gain on Insurance Transaction includes Other Income. Source: 1990-2004 A.M. Best Aggregates & Averages; 2005p NCCI.
Rising interest rates should help WC investment returns
over time
Investment Gain on Insurance Transactions to Premium Ratio**Private Carriers
Source: A.M. Best, ISO, Insurance Information Institute *As of 12/31/05.
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity TODAY is $427.1B, 9.2% above year-end 2004, 47% above its 2002 trough and
22% above its mid-1999 peak. Sufficient capacity exists to pay all hurricane claims.
Foreign reinsurance and residual market mechanisms absorbed $27-$32B (57%-67%) of 2005
CAT losses of $57.7B
Announced Insurer Capital Raising*($ Millions, as of December 1, 2005)
$1,500
$38
$400 $450$600
$710
$300$100$140
$600
$129$297
$620
$124$202 $150$299
$490
$3,200
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$ M
illio
ns
*Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
As of Dec. 1, 19 insurers announced plans to raise $10.35 billion in new capital. Twelve start-ups plan to
raise as much as $8.75 billion more for a total of $19.1 billion. Actual total higher as Lloyd’s syndicates
have added capacity for 2006.
Announced Capital Raising by Insurance Start-Ups($ Millions, as of April 15, 2006)
$1,500
$1,000$1,000$1,000$1,000$1,000
$750
$500 $500 $500 $500
$220 $180$100
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$ M
illio
ns
*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.Sources: Morgan Stanley, Company Reports; Insurance Information Institute.
As of April 15, 14 start-ups plan to raise as
much as $9.75 billion.
$169
$151
$140
$145
$150
$155
$160
$165
$170
$175
2004 2006E
$ B
illio
ns
Shrinkage in 2006 (-11%) surplus is due to elimination
of several lines covered under TRIA though 2005 but
dropped under the Act’s extension effective 1/1/06
*2006 figure uses 2005 estimated year-end surplus and premiums by line as basis for calculations.Source: Insurance Information Institute.
(Billions of Dollars)
Surplus Under TRIA/TRIEA Covered Lines
PRICING TRENDS:
DOWNWARD PRESSURE?
How the Risk Dollar is Spent (2004)
Source: RIMS (2004); Insurance Information Institute
Firms w/Revenues < $1 Billion
Retained Property
4%
WC Premiums16%
Other1%
Retained WC6%
Property Premiums
22%
Total Mgmt. Liab.8%
Total Prof. Liab4%
Liability Premiums
27%
Retained Liability
3%
Admin Costs9%
Firms w/Revenues > $1 Billion
Total Mgmt. Liab.6%
Retained Liability
14%Admin Costs
7%
Property Premiums
19%
Retained Property
6%
Total Prof. Liab5%
WC Premiums6%Other
1%
Retained WC24%
Liability Premiums
14%
Workers Comp costs account for 20% - 30% of the risk dollar
$6.10 $6.40
$8.30$7.70
$7.30$6.49
$5.70$5.25
$5.71
$8.42
$13.50$13.91
$13.15
$11.95
$4.83$5.20
$4
$6
$8
$10
$12
$14
$16
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05* Cost of risk includes insurance premiums, retained losses and administrative expenses
Source: 2005 RIMS Benchmark Survey; Insurance Information Institute
Cost of Risk: 1990-2005*
1992-2000 = -41.8%
2000
-04
= +1
88%
$3.7
9
$3.7
3
$3.4
9$4.1
2
$4.2
1
$1.2
3
$4.6
0
$4.4
4
$3.3
2
$2.7
4
$2.2
0
$0.2
5
$0.8
$0.9
3
$0.2
2
$1.1
7
$1.3
5
$1.0
3
$0.3
5
$4.2
5
$1.0
$1.3
2
$0.1
6
$3.9
2
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
Total WCCosts
TotalLiability
Costs
TotalProperty
Costs
Other Costs Total Admin.Costs
Total Mgmt.LiabilityCosts
2001 2002 2003 2004
Components of Cost of Risk Per $1,000 of Revenue*
* Cost of risk includes insurance premiums, retained losses and administrative expensesSource: 2004 RIMS Benchmark Survey; Insurance Information Institute
+38.6% +62.0% +78.2%
-36%
+7.5% +65%
% Change
2001 -04
PRICING
Can Discipline be Maintained?
Average Commercial Rate Change,All Lines, (1Q:2004 – 1Q:2006)
-0.1%
-3.2%
-7.0%
-9.4% -9.7%
-4.6%
-2.7%
-5.9%
-8.2%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of rate decreases has diminished
greatly since mid-2005
Average Commercial Rate Change by Account Size
Commercial accounts trended downward from
early 2004 to mid-2005 but are now that trend is
shrinking post-Katrina
Source: Council of Insurance Agents & Brokers
Average Commercial Rate Change by Line
Source: Council of Insurance Agents & Brokers
Commercial accounts trended downward from
early 2004 to mid-2005 but now trend is shrinking post-Katrina & Property is up.
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Commercial lines pricing is weakening
Property
Casualty/Liability/Terrorism
Workers Comp Rate Changes:1999:Q4 – 2006: Q1
Source: Council of Insurance Agents and Brokers; Lehman Brothers.
Most WC renewals
are negative
Percent of WC Accounts Renewing Downward, by Region, 1st Qtr. 2006
39%
67%
76%
84%
68%70%
20%
30%
40%
50%
60%
70%
80%
90%
Northeast Southeast Midwest West Southwest USSource: Council of Insurance Agents and Brokers
Softness in WC pricing is most
evident in the West and Southwest
About 80% of WC accounts in the West and SW renewed
negative during Q1:2006
WORKERS COMPENSATION
OPERATING ENVIRONMENT
Workers Comp Premium VolumePrivate Carriers and State Funds: 1990-2005P
p PreliminarySource: 1990-2004 Private Carriers, A.M. Best Aggregates & Averages; 2005p, NCCI; Bureau of Economic Analysis.1996-2005p State Funds: AZ, CA, CO, HI, ID, KY, LA, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements
Workers Compensation Pre-Tax Operating Gain Ratios
Private Carriers and State FundsPercent
Calendar Year
p PreliminarySource: 1996-2004 Private Carriers, A.M. Best Aggregates & Averages; 2005p, NCCI1996-2005p State Funds: AZ, CA, CO, HI, ID, KY, LA, MN, MO, MT, NM, OK, OR, RI, TX, UT Annual StatementsOperating Gain equals 1.00 minus (Combined Ratio less Investment Gain on Insurance Transactions and Other Income)
Source: NCCI
Workers Comp Premium Drivers
129.0
129.5
130.0
130.5
131.0
131.5
132.0
132.5
133.0
133.5
134.0
134.5
135.0
135.5
Ja
n-0
0
Ap
r-0
0
Ju
l-0
0
Oc
t-0
0
Ja
n-0
1
Ap
r-0
1
Ju
l-0
1
Oc
t-0
1
Ja
n-0
2
Ap
r-0
2
Ju
l-0
2
Oc
t-0
2
Ja
n-0
3
Ap
r-0
3
Ju
l-0
3
Oc
t-0
3
Ja
n-0
4
Ap
r-0
4
Ju
l-0
4
Oc
t-0
4
Ja
n-0
5
Ap
r-0
5
Ju
l-0
5
Oc
t-0
5
Ja
n-0
6
Ap
r-0
6
Number of Employed Workers(Millions)
Source: U.S. Bureau of Labor Statistics; Insurance Information Institute
2.68 Million Jobs Lost from
Feb. 2001 – Aug. 2003
Employment peaked at 132. 56 million in
February 2001before slide and didn’t fully recover
until February 2005.
By August 2003, employment stood at
129.80 million, its lowest level since October 1999.
Employment rose by 75,000 in May 2006 to 135.106 million
5.3 million jobs created since 8/032.5 million since 2/01
12.1
7.4
10.0
2.9 3.5
1.2
4.96.6
-6.0-6.4
-3.2
-6.0
-8.0
-5.4
-2.6
-6.0
-10
-5
0
5
10
15
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*
Cumulative 1990-1993
+36.3%
Cumulative 1994-1999
-27.8%
Calendar Year Average Approved Bureau Rate/Loss Cost Changes
Percent
Cumulative 2000-2003
+17.1%
* States approved through 04/13/2006Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization.Source: NCCI
Calendar Year
Cumulative
2004-2005
-11.6%
3.5%
1.2%
6.6%
-6.0% -6.0%
-0.1%-0.8%
0.0%
1.8%0.5% 0.3%
4.9%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2000 2001 2002 2003 2004 2005*
All StatesAll States Excl. CA
Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization.Source: NCCI * States approved through 04/13/2006
Cumulative 2000-2004All States: +10.1%All States Excl. CA: +1.4%
Average Approved BureauRate/ Loss Cost ChangesAll States vs. All States Excluding California
Excludes Law-Only Filings
-18.
2 -13.
5-4
.2 -0.6
-0.3
32.9
9.9
9.4
9.3
7.0
6.5
5.7
5.5
5.3
5.0
4.4
4.2
4.0
2.6
2.4
2.1
1.8
1.4
1.6
0.8
0.0 1.2
-1.3
-1.5
-1.8
-1.9-2
.0-3
.6-3
.9
-25-20-15-10
-505
101520253035
HI RI DC MS AR LA MOOR
ME TN IN KY UT AL OK IL AZ VA
Percent Change
Current NCCI Voluntary MarketFiled Rate/Loss Cost Changes
Notes: Effective 1/1/06 or prior except subsequent to 1/1/06 in MS, VT, TN, MT, KY, NE, AL, NC and VA. SC filed and pending as of 4/20/06.Source: NCCI as of 4/20/06
Workers Comp Frequency & Severity
Trends
Workers Comp Calendar Year vs. Ultimate Accident Year – Private Carriers
p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2005 and developed to ultimateSource: Calendar Years 1994-2004, A.M. Best Aggregates & Averages; Calendar Year 2005p and Accident Years 1994-2005pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders
Workers Comp Combined Ratios, 1994-2005P
Lost-Time Claims
-4.2 -4.4
-9.2
-6.9-5.7
-4.3 -3.9
0.3
-6.5
-4.5
0.5
-3.9
-2.3
-4.5 -4.5
-10
-8
-6
-4
-2
0
2
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05p
Cumulative Change of –45.8%(1991-2004)
Accident Year
Percent Change
Workers Comp Lost-TimeClaim Frequency (% Change)
2003p: Preliminary based on data valued as of 12/31/20051991-2003: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI
2005p: Preliminary based on data valued as of 12/31/20051991-2004: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI
Accident Year
Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2005p
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
WC Indemnity Severity vs. Wage Inflation
4.3
pts
WC indemnity severity is no longer outpacing
wage inflation
2005p: Preliminary based on data valued as of 12/31/2005; 1991-2004: Based on data through 12/31/2004, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI
2005p: Preliminary based on data valued as of 12/31/20051991-2004: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
*Analysis is on an accident year (AY) basis, developed through 8th report.Source: National Council on Compensation: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.
WC drug costs account for an increasingly large share of WC medical costs. They are a major driver behind
the accelerating cost of providing medical care to injured workers.
Workers Comp Residual Market Trends
$1
.4
$1
.1
$0
.6$1
.2
$2
.1 $2
.6
$2
.8 $3
.5 $4
.0 $4
.4 $4
.8
$4
.1
$3
.1
$2
.0
$1
.0
$0
.6
$0
.3
$0
.3
$0
.4
$1
.5
$1
.4
$0
$1
$2
$3
$4
$5
$6
* Incomplete Policy Year Projected to UltimateSource: NCCI
$ Billions
Policy Year
Workers Comp Residual Market Premium Volume
NCCI-Serviced Workers Compensation Residual Market Poolsas of December 31, 2005
Residual market premium volume declined in 2005 for
the first time since 1997
Workers Compensation Residual Market Shares StabilizeWorkers Compensation Insurance Plan States*
Premium as a Percent of Direct Written Premium
9
1618 17
2224
2629 28
24
17
118
4 3 3
1312
1311
5
0
5
10
15
20
25
30
35
Percent
p Preliminary•NCCI Plan states plus DE, IN, MA, MI, NJ, NC•Source: NCCI
NCCI-Serviced Workers Compensation Residual Market Pools As of December 31, 2005
177
165169167160
143
127
112104
97 95 98103
116117118113113111115113
80
100
120
140
160
180
200
*Incomplete Policy Year Projected to UltimateSource: NCCI
Policy Year
Percent
Residual market combined ratios are stable and
remain well below the highs of the late 1980s
($1
89
)
($2
01
)
($9
34
)
($1
,37
4)
($1
,78
4)
($1
,89
9)
($1
,69
9)
($1
,19
9)
($5
69
) ($1
46
)
($1
9)
($5
1)
($4
6)
($6
5)
($2
,08
5)
$1
6
$1
07
$7
7
($1
49
)
($1
60
)
($8
1)
-2,500
-2,000
-1,500
-1,000
-500
0
500
WC Residual Market Underwriting Results Are Stable
NCCI-Serviced Workers Compensation Residual Market PoolsAs of December 31, 2005
Policy Year
$ Millions
*Incomplete Policy Year Projected to UltimateSource: NCCI
Residual market underwriting losses
are manageable
EMERGING ISSUES
OBESITY & WORKERS
COMPENSATION
A Heavy BurdenFor Workers Comp?
Avg. Annual Hours Lost Per CA Worker Due to Obesity & Physical Inactivity
15.7516.6513.0
19.8
28.75
36.45
0
10
20
30
40
50
Obesity Physical Inactivity
Hou
rs L
ost
Per
Yea
r
Absences Short-term disability Presenteeism*
*Presenteeism is defined as productivity loss that occurs when workers are on the job but not fully functioning. Source: Topline Report, The Economic Costs of Physical Inactivity, Obesity, and Overweight in California Adults.
Obesity costs employers nearly 2 weeks per year per employee in terms
of lost output/ productivity
Physical inactivity costs employers
nearly 1.5 weeks per year per employee
in terms of lost output/ productivity
$1,682.0
$766.5$915.3
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
Absences ST Disability Presenteeism
Lost Productivity Cost By Risk Factor Tied to Obesity in California ($ Millions)
In California, total lost productivity cost tied to obesity is approximately $3.36 billion
$ Billions
Source: Source: The Economic Costs of Physical Inactivity, Obesity and Overweight in California Adults: Health Care, Workers’ Compensation and Lost Productivity,” April 2005. Study conducted by David Chenoweth, Ph.D., FAWHP, for the California Department of Health Services.
$2,065.1$1,699.2
$3,764.3
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
Absences ST Disability Presenteeism
Lost Productivity Cost By Risk Factor Tied to Physical Inactivity in California
In California, total lost productivity cost tied to physical inactivity is
approximately $7.53 billion
$ Millions
Source: Source: The Economic Costs of Physical Inactivity, Obesity and Overweight in California Adults: Health Care, Workers’ Compensation and Lost Productivity,” April 2005. Study conducted by David Chenoweth, Ph.D., FAWHP, for the California Department of Health Services.
Most Obesity-Related Costs to WC Systems are Indirect
Direct Costs20.0%
Indirect Costs80.0%
Most losses to associated with
WC claim arising from obesity are
indirect in nature.
Source: Source: The Economic Costs of Physical Inactivity, Obesity and Overweight in California Adults: Health Care, Workers’ Compensation and Lost Productivity,” April 2005. Study conducted by David Chenoweth, Ph.D., FAWHP, for the California Department of Health Services.
Direct and Indirect Workers Comp Costs for Obesity in California Adults
(2000 Dollars)
Source: Source: The Economic Costs of Physical Inactivity, Obesity and Overweight in California Adults: Health Care, Workers’ Compensation and Lost Productivity,” April 2005. Study conducted by David Chenoweth, Ph.D., FAWHP, for the California Department of Health Services.
$ Millions
$17.7
$70.6
$0
$10
$20
$30
$40
$50
$60
$70
$80
Direct Indirect
Estimated Cost of Obesity on US Workers Compensation Systems
($ Millions)
$845.1
$885.0
$926.8
$970.5
$1,016.3
$1,064.3
$700
$750
$800
$850
$900
$950
$1,000
$1,050
$1,100
00 01 02 03 04 05*Estimates extrapolated by the Insurance Information Institute based on CA estimates for 2000 assuming 4.72% annual inflation in WC costs (same rate as was assumed in source study below).Source: The Economic Costs of Physical Inactivity, Obesity and Overweight in California Adults: Health Care, Workers’ Compensation and Lost Productivity,” April 2005. Study conducted by David Chenoweth, Ph.D., FAWHP, for the California Department of Health Services.
Estimated Cost of Physical Inactivity on US Workers Compensation Systems
($ Millions)
$2,831.8
$2,392.6
$2,530.9
$2,677.1
$3,168.6
$2,995.5
$2,000
$2,200
$2,400
$2,600
$2,800
$3,000
$3,200
$3,400
00 01 02 03 04 05*Estimates extrapolated by the Insurance Information Institute based on CA estimates for 2000 assuming 5.779% annual inflation in WC costs (same rate as was assumed in source study below).Source: The Economic Costs of Physical Inactivity, Obesity and Overweight in California Adults: Health Care, Workers’ Compensation and Lost Productivity,” April 2005. Study conducted by David Chenoweth, Ph.D., FAWHP, for the California Department of Health Services.
Estimated Obesity Costs as a Percentage of WC Loss & LAE*
Obesity Costs as % of Loss & LAE
3.5%3.9% 4.2% 4.3%
4.0% 4.0%
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%
2000 2001 2002 2003 2004 2005
Obesity costs account for about 4% of workers comp losses over
the period from 2000-2005
*Estimates extrapolated by the Insurance Information Institute based on CA estimates for 2000 assuming 5% annual inflation in WC costs (same rate as was assumed in source study below).Source: The Economic Costs of Physical Inactivity, Obesity and Overweight in California Adults: Health Care, Workers’ Compensation and Lost Productivity,” April 2005. Study conducted by David Chenoweth, Ph.D., FAWHP, for the California Department of Health Services. Note: Adjusting for self-insured and entities with high deductible programs would reduce this estimate by an indeterminate sum.
Impact of Obesity on WC Systems Varies With Heath Fitness of Population
Source: Behavioral Risk Factor Surveillance System; Insurance Information Institute
<10%
15%-19%
≥20%
WC systems in the Southeast and Midwest incur a disproportionate burden because
relatively high proportion of workforce is obese
Prevalence of Overweight and Obesity among US Adults (aged 20-74 years)
32 33 33
56%
64%
47%
0
10
20
30
40
50
60
70
NHANES II (1976-80) NHANES III (1988-94) NHANES (1999-2000)
%
Obese (BMI>30)
Overweight (BMI 25.0-29.9)
Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition
Examination Survey (NHANES); Insurance Information Institute
Nearly 2/3 of US adults are overweight or obese, up
from 47% in the late 1970s Workforce out of shape too.
15
2331
Prevalence of Overweight and Obesity Among Children and Adolescents
15%
7%
4%
11%
15%
11%
5%6%
0
2
4
6
8
10
12
14
16
NHANES I (1971-74) NHANES II (1976-80) NHANES III (1988-94) NHANES (1999-2000)
Ages 6-11
Ages 12-19
%
Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition
Examination Survey (NHANES); Insurance Information Institute
In the past two decades the percentage of overweight children has more than
doubled and the percentage of adolescents who are overweight has tripled
Next generation of workers likely to be the most overweight ever, so cost to workers comp
systems will rise steadily
Issues in Reintegration of Military Veterans
Exposure Issues AssociatedWith War in Iraq
• By the time “major operations” are completed in Iraq and Afghanistan, likely that more than 500,000 military personnel will have be deployed, some more than once
• About 40% of these are National Guard and Reserves• Pentagon planning for presence of 100,000+ through 2009
with 25% Reserve/Guard component• About 4.2% of troops in Iraq are physically injured
18,229 physically injured so far; many 1000s more yet to comeMost will return to civilian workforce; some w/impairment
• Nearly 30% of soldiers deployed to Iraq exhibit some post-deployment symptoms of mental health problems, including depression, anxiety and PTSD; Alcohol issueEstimated that 100,000+ may need some mental health helpOnly a minority will actually ever receive it
Why Does this Matter forWorkers Compensation?
• Tens of thousands of soldiers will re-enter the civilian workforce having suffered some physical injurySome will require accommodationPossibility of reinjury/second injuryMany injuries undiagnosed, incl. Traumatic Brain Injuries
• 100,000+ will have suffered some mental health issuesHow will lack of treatment manifest itself in the workplace?When?
• Costs to VA are already staggeringVA spent $4.3 billion on PTSD disability payments in 2004 (excl.
med costs)• Could be some cost shifting to WC for both physical and
“stress” (ultimately mental health related) injuries• Outcome of war, community/family can have effect on
incidence of psychological disorders
Why Does this Matter forWorkers Compensation?
• Post Traumatic Stress Disorder, or PTSD, is a psychiatric disorder that can occur following the experience or witnessing of life-threatening events such as military combat, natural disasters, terrorist incidents, serious accidents, or violent personal assaults like rape.*
• While Most Vets Function Normally, PTSD & Related
Issues that Can Affect Workers Comp Injury Frequency and/or SeverityDepression Sleep DeprivationSubstance Abuse Marital/Family ProblemsOccupational Instability Social MaladjustmentAnxiety
*Source: National Center for PTSD; http://www.ncptsd.va.gov/facts/general/fs_what_is_ptsd.html accessed August 20, 2005.
Death Rates for Combat Troops vs. High-Risk Civilian Occupations*
887.3
235.1
92.4 92.4 86.4 47.0 37.5
CombatArms
CombatArms
Support
Loggers AircraftPilots
Fisherman StructuralIron &Steel
Farmers/Ranchers
A soldier in Iraq is nearly 10 times more likely to be killed than civilians in
the most dangerous occupations
*Military data are for the period March 2003 through May 2005. Civilian data are for 2004.Source: Brookings Institution, Iraq Index Archive, updated June 5, 2006; US Bureau of Labor Statistics.
Death Rates per 100,000 Employees
Deaths: March 19, 2003 through May 31, 2006
0
20
40
60
80
100
120
140
160
Mar
-03
May
-03
Jul-
03
Sep-
03
Nov
-03
Jan-
04
Mar
-04
May
-04
Jul-
04
Sep-
04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-
05
Sep-
05
Nov
-05
Jan-
06
Mar
-06
May
-06
Military PersonnelKilled in Iraq
Source: Brookings Institution, Iraq Index Archive, updated June 5, 2006. *Through 6/16/06.
Deaths can fluctuate
dramatically from month to
month
More than 2,500 US troops have been killed in Operation Iraqi Freedom*
Injury Count from March 19, 2003through May 31, 2006
0
200
400
600
800
1,000
1,200
1,400
1,600
Mar
-03
Apr
-03
May
-03
Jun-
03Ju
l-03
Aug
-03
Sep-
03O
ct-0
3N
ov-0
3D
ec-0
3Ja
n-04
Feb
-04
Mar
-04
Apr
-04
May
-04
Jun-
04Ju
l-04
Aug
-04
Sep-
04O
ct-0
4N
ov-0
4D
ec-0
4Ja
n-05
Feb
-05
Mar
-05
Apr
-05
May
-05
Jun-
05Ju
l-05
Aug
-05
Sep-
05O
ct-0
5N
ov-0
5D
ec-0
5Ja
n-06
Feb
-06
Mar
-06
Apr
-06
May
-06
Non-Fatal Injuries to Military Personnel Deployed in Iraq
Source: Brookings Institution, Iraq Index Archive, updated June 5, 2006.
Injury counts can fluctuate
dramatically from month to month
18,229 military personnel were
reported wounded through May 2006 in Operation Iraqi Freedom. Their
issues have received relatively little
attention.
Injury Rate of Troops Deployed in Iraq May 2003 through May 2006 (Injuries as % of Total Troops Deployed)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
May
-03
Jun-
03Ju
l-03
Aug
-03
Sep-
03O
ct-0
3N
ov-0
3D
ec-0
3Ja
n-04
Feb
-04
Mar
-04
Apr
-04
May
-04
Jun-
04Ju
l-04
Aug
-04
Sep-
04O
ct-0
4N
ov-0
4D
ec-0
4Ja
n-05
Feb
-05
Mar
-05
Apr
-05
May
-05
Jun-
05Ju
l-05
Aug
-05
Sep-
05O
ct-0
5N
ov-0
5D
ec-0
5Ja
n-06
Feb
-06
Mar
-06
Apr
-06
May
-06
Non-Fatal Physical Injury RatesAmong Troops in Iraq
Source: Insurance Information Institute calculations based in data from the Brookings Institution, Iraq Index Archive, updated June 5, 2005.
About 1-in-300 troops is wounded in any given month. On an annual
basis, a soldier in Iraq has about a 4.1% chance of
being wounded
Troops Deployed from May 2003 through April 2006
100
110
120
130
140
150
160
May
-03
Jun-
03Ju
l-03
Aug
-03
Sep-
03O
ct-0
3N
ov-0
3D
ec-0
3Ja
n-04
Feb
-04
Mar
-04
Apr
-04
May
-04
Jun-
04Ju
l-04
Aug
-04
Sep-
04O
ct-0
4N
ov-0
4D
ec-0
4Ja
n-05
Feb
-05
Mar
-05
Apr
-05
May
-05
Jun-
05Ju
l-05
Aug
-05
Sep-
05O
ct-0
5N
ov-0
5D
ec-0
5Ja
n-06
Feb
-06
Mar
-06
Apr
-06
Troop Strength Levels in Iraq Guarantee Significant Flow of Injured
Source: Brookings Institution, Iraq Index Archive, updated June 5, 2006.
To date, 54% of troops have been National Guard or Reservists, meaning 100,000+ people eventually looking to
be returned to the workforce soon
Status of Personnel Deployed to Iraq and Afghanistan*
61.3% 70.6%86.7% 93.5% 89.1%
24.0%18.8%
14.8% 10.6% 13.3% 6.5% 10.9%
0%
20%
40%
60%
80%
100%
Army Air Force Marines Navy CoastGuard
Reserves
National Guard
Active Duty
Nearly 40% of Army and 30% of Air Force personnel deployed to Iraq and Afghanistan
are National Guard or Reservists
*September 2001 through January 2005. (latest available).Source: Brookings Institution, Iraq Index Archive, updated June 5, 2006.
Reported Mental Health Problems Among Army & Marine Personnel
After Iraq Deployment*
15.2% 14.7%17.5%
15.7%18.0%
19.9%
27.9% 29.2%
0%
5%
10%
15%
20%
25%
30%
35%
Army Study Group Marine Study Group
DepressionAnxietyPTSDAny of These
Nearly 30% of returning army and marine personnel exhibit at least one
symptom of mental illness.
Source: Hoge, et al, “Combat Duty in Iraq and Afghanistan, Mental Health Problems, and Barriers to Care,” New England Journal of Medicine, v. 351, no.1, July 1, 2004, pp. 13-22.
War Takes a Toll on Mental Health of Military
Source: Han Kang and Kenneth Hyams, Department of Veterans Affairs.
3.0%
6.0%
10.0%
13.0%
19.0%
26.0%
Feb. 13 Jun. 28 9-Dec
Post Traumatic Stress Disorder Any Mental Heath Problem
Incidence of PTSD more than tripled and other
mental health problems doubled in 2004
Reported Alcohol Misuse Among Army & Marine Personnel After Iraq Deployment
17.2%
24.2%
29.4%
0%
5%
10%
15%
20%
25%
30%
35%
Army Study Group Marine Study Group
Before Deployment
After Deployment
Sharp increase in alcohol misuse reported following deployment
Source: Hoge, et al, “Combat Duty in Iraq and Afghanistan, Mental Health Problems, and Barriers to Care,” New England Journal of Medicine, v. 351, no.1, July 1, 2004, pp. 13-22.
N/A
Combat Experience of US ArmySoldiers Deployed to Iraq
93%
89%
86%
86%
80%
77%
69%
65%
50%
48%
38%
22%
22%
21%
14%
14%
8%
95%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Seeing Dead Bodies/RemainsShot At/Receiving Small Arms Fire
Being Attacked/AmbushedReceiving Artillery, Rocket, Mortar
Knowing Someone Killed/Ser. InjuredClearing/Searching Homes
Shooting/Directing Fire at EnemyIll/Injured Women/Child Couldn't
Seeing Dead/Serious Inj. AmericansHandling/Uncovering Human
Resp. for Death of Enemy CombatantParticipating in Demining Ops
Buddy Shot/Hit Near YouEngaged in Hand-to-Hand Combat
Saved Soldier/Civilian LifeBeing Wounded or Injured
Responsible for Noncombatant DeathClose Call/Hit but Saved by Gear
Source: Hoge, et al, “Combat Duty in Iraq and Afghanistan, Mental Health Problems, and Barriers to Care,” New England Journal of Medicine, v. 351, no.1, July 1, 2004, pp. 13-22.
Soldiers have experienced large numbers of potentially
life-altering events-both physical and psychological
Few Troops Who Need Mental Health Help Actually Receive It*
78%
43% 40%
27%
Acknowledged aProblem
Interested inReceiving Help
Received Help (fromany professional in
past year)
Received Help (frommental health prof.
in past year)
Among troops with signs of major depression, generalized anxiety or PTSD,
only about 1-in-4 (27%) will receive treatment from a mental health professional
*Among troops whose survey response met screening criteria for major depression, anxiety or PTSD.Source: Hoge, et al, “Combat Duty in Iraq and Afghanistan, Mental Health Problems, and Barriers to Care,” New England Journal of Medicine, v. 351, no.1, July 1, 2004, pp. 13-22.
Reasons Why Troops Don’t Seek Treatment for Mental Health Issues
63%
59%
55%
51%
50%
45%
41%
38%
25%
22%
18%
65%
0% 10% 20% 30% 40% 50% 60% 70%
Perceived as Weak
Unit Leadership Might Treat Differently
Unit Members Might Lose Confidence in Me
Difficulty Getting Time Off for Treatment
Leaders Would Blame Me for Problem
Would Harm My Career
Difficult to Schedule Appointment
Too Embarrassing
Don't Trust Mental Health Professionals
Mental Health Care Doesn't Work
Don't Know Where to Get Help
Don't Have Adequate Transportation
Source: Hoge, et al, “Combat Duty in Iraq and Afghanistan, Mental Health Problems, and Barriers to Care,” New England Journal of Medicine, v. 351, no.1, July 1, 2004, pp. 13-22.
Stigma of mental health problems
remains
What Can/Should Employers,WC Insurers (esp. Claims Staff) Do?
• Be aware of physical injuries sustained in theater by returning/new employees who served in military combat roles or as contractors in war zones
• Be aware of possible mental health issuesMonitoring is probably wise, esp. in stressful jobs or jobs involving
operation of heavy equipment and driving Most former military will have no major problem readjustingSome will, so know how to get them help
• Most employers, claims people may mistake root cause of workplace. Not trained to recognize warning signs.
• Veteran’s who were wounded or suffer from service-related mental health problems entitled to lifetime medical benefits from the Veterans AdministrationNOTE: Many may be undiagnosed (barely ¼ see MH prof.)
• Be aware of local VA resources: http://www.va.gov/rcs/ VA Readjustment Counseling Service: 800-905-4675
The Defense Base Act:What is It & Its Relationship to WC?
• Congress passed DBA in 1941 to cover construction workers in lend/lease military bases outside continental US & broadened several times since
• DBA extends USL&H Act to civilian workers on bases overseas & contractors employees outside USAdministered by US Department of Labor
• Covers all US citizens employed on job site (e.g., Iraq), 3rd party and local nationals, subcontractors
Claims Under Defense Base Actin Iraq (As of June 2005)
987
304
1,350
317220
No Lost Time Lost Time < 4Days
Lost Time > 3Days
Death Other
Premiums are high for US contractors operating abroad. Death rate among
contractors is high, reflecting hazardous work in a war zone
Source: US Department of Labor
Degenerative Neurological Diseases &
Occupational Risk
The Next Frontier for Workers Comp?
Occupational Groups Showing Elevated Incidence of PSD or AD
Cosmotologists5. Social Workers6. Teachers (prim/sec.)7. Farmers**Under age 65 only
Alzheimer’s Disease1. Aircraft Mechanics2. Bank Tellers3. Clergy4. Hairdressers/Cosmo.5. Painters/Sculptors6. Secretaries7. Teachers (prim/sec.)8. Farmers**Under age 65 only
Source: Park, Robert M., et al, “Potential Occupational Risks for Neurodegenerative Diseases,” AmericanJournal of Industrial Medicine, 48: 63-77 (2005).
Occupational Groups Showing Elevated Incidence of PD or MND
Parkinson’s Disease
1. Biological Scientists
2. Post-Secondary Teachers
3. Clergy
4. Other Religious Workers
5. Welding**For deaths under age 65 only
Motor Neuron Disease
1. Graders & Sorters (non-agricultural)
2. Hairdressers
3. Teachers (prim/sec.)
4. Veterinarians
5. Farmers
Source: Park, Robert M., et al, “Potential Occupational Risks for Neurodegenerative Diseases,” AmericanJournal of Industrial Medicine, 48: 63-77 (2005).
Casual Theories About Occupations With Elevated Odds of
Neurodegenerative Diseases
Profession Associative Theory
Hairdressers Increased risk of PSD, AD and MND, suggesting risk associated with dyes, components of hair care products & other exposures in hairdressing, manicure
Farmers Increased risk for all 4 NDDs, esp. before age 65. Suggests risk associated with pesticides.
Teachers, Clergy & Other Professionals
Elevated risk for all 4 NDDs described as “perplexing.” Possibly educated professionals at lower risk of death for other diseases (less smoking, better health care). Mixed/no evidence of educational attainment link. Risk factors for teachers may include stress and exposure to infectious agents.
Welding PD-like disorder associated with manganese fumes from arc-welding (manifestation of manganism). Studies in US, Europe, Korea suggest link.
TRIA EXTENSION
The Burden Grows
Insurance Industry Retention Under TRIA ($ Billions)
$10.0$12.5
$15.0
$25.0$27.5
$0
$5
$10
$15
$20
$25
$30
$35
Year 1(2003)
Year 2(2004)
Year 3(2005)
Year 4(2006)
Year 5(2007)
$ B
illi
ons
Source: Insurance Information Institute
•Individual company retentions rise to 17.5%
in 2006, 20% in 2007
•Above the retention, federal govt. pays 90% in
2006, 85% in 2007
Extension
Congress & Administration
want TRIA dead
Terrorism Coverage Take-Up Rate Rising
Source: Marsh, Inc.; Insurance Information Institute