Workers Comp

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Information about Workers Comp

Published on October 19, 2008

Author: guest3bd2a12

Source: slideshare.net

Montana State Auditor’s Office Role of Montana Insurance Commissioner in Regulation of Worker’s Comp John Morrison Montana State Auditor 2007 Governor’s Conference on Worker’s Comp October 4, 2007

Three different options for private employers to attain Work Comp Insurance: State Fund (60-65% of the market) Private Carriers (30-35% of the market) Self-Insure (Sub-set—usually paired w/private insurer) Employers may also reinsure a portion of their Work Comp coverage through a Captive program.

State Fund (60-65% of the market)

Private Carriers (30-35% of the market)

Self-Insure

(Sub-set—usually paired w/private insurer) Employers may also reinsure a portion of their Work Comp coverage through a Captive program.

SAO regulates private insurers only in the following ways: Rates—MT is a “File and Use” State May deviate from NCCI data; our actuary determines if and how much those rates can vary—rate variation has to do with expenses carriers have (on top of claims paid) NCCI files every year—carriers file only upon the Commissioner’s request, or if a change is made. Form filing – Done by NCCI on behalf of carriers Continued

Rates—MT is a “File and Use” State

May deviate from NCCI data; our actuary determines if and how much those rates can vary—rate variation has to do with expenses carriers have (on top of claims paid)

NCCI files every year—carriers file only upon the Commissioner’s request, or if a change is made.

Form filing – Done by NCCI on behalf of carriers

Continued

SAO regulates private insurers only in the following ways: Collects Premium Tax Issues Certificates of Authority Monitors Solvency Conducts Financial Examinations Conducts Insolvency Proceedings

Collects Premium Tax

Issues Certificates of Authority

Monitors Solvency

Conducts Financial Examinations

Conducts Insolvency Proceedings

Calendar-Accident Year Combined Ratio Why is the Calendar-Accident Year Combined Ratio an important financial indicator? Because it measures the adequacy of premiums to cover both the benefit costs and operating expenses of the benefit system, not taking into account investment returns.

Why is the Calendar-Accident Year Combined Ratio an important financial indicator?

Because it measures the adequacy of premiums to cover both the benefit costs and operating expenses of the benefit system, not taking into account investment returns.

Derivation of the Calendar-Accident Year Combined Ratio The Calendar-Accident Year Combined Ratio is the sum of accident year losses, the calendar year expenses and the calendar year dividends divided by premium: (Losses + Expenses + Dividends) / Premium Losses include medical and indemnity payments and reserves (case and IBNR) on claims with accident dates beginning January 1 and ending December 31 of that year. That is, the losses are developed to ultimate. Expenses includes all loss adjustment (attorney fees), commission, brokerage, taxes, licenses, fees, general and other expenses in a calendar year. Premium is the net earned premium paid by the insured in a calendar year after application of adjustments such as retrospective rating, schedule rating and premium discounts but prior to reinsurance. Investment income is not considered in the combined ratio.

What does the Calendar-Accident Year Combined Ratio indicate? A ratio of less than 100% indicates that the premium collected was adequate to pay losses, expenses and dividends. Therefore, a profit was realized for the year. A ratio of 100% indicates that the premium collected was equal to the losses, expenses and dividends paid. A ratio of more than 100% indicates that the premium was NOT adequate to pay losses, expenses and dividends. Therefore, a loss was realized for the year. Investment income is not considered in the combined ratio.

A ratio of less than 100% indicates that the premium collected was adequate to pay losses, expenses and dividends. Therefore, a profit was realized for the year.

A ratio of 100% indicates that the premium collected was equal to the losses, expenses and dividends paid.

A ratio of more than 100% indicates that the premium was NOT adequate to pay losses, expenses and dividends. Therefore, a loss was realized for the year.

Investment income is not considered in the combined ratio.

Sample Calculation of a Calendar-Accident Year Combined Ratio less than 100% Inputs Premium $100 Losses $50 Expenses $35 Dividends $5 Formula Calculation Combined Ratio = ($50 + $35 + $5)/$100 = 90% Result Underwriting Result is a 10% profit -- Therefore, the insurer paid out 10% less than it collected in premium thereby realizing a 10% profit on the policies it wrote.

Inputs

Premium $100

Losses $50

Expenses $35

Dividends $5

Formula Calculation

Combined Ratio = ($50 + $35 + $5)/$100 = 90%

Result

Underwriting Result is a 10% profit -- Therefore, the insurer paid out 10% less than it collected in premium thereby realizing a 10% profit on the policies it wrote.

Sample Calculation of a Calendar-Accident Year Combined Ratio greater than 100% Inputs Premium $100 Losses $70 Expenses $35 Dividends $5 Formula Calculation Combined Ratio = ($70 + $35 + $5)/$100 = 110% Result Underwriting Result is a 10% loss. Therefore, the insurer paid out 10% more than it collected in premium thereby realizing a 10% loss on the policies it wrote.

Inputs

Premium $100

Losses $70

Expenses $35

Dividends $5

Formula Calculation

Combined Ratio = ($70 + $35 + $5)/$100 = 110%

Result

Underwriting Result is a 10% loss. Therefore, the insurer paid out 10% more than it collected in premium thereby realizing a 10% loss on the policies it wrote.

Montana Calendar-Accident Year Combined Ratios Calendar-Accident Year 169.5% 160.0% 128.6% 119.4% 124.2% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 180.0% 2001 2002 2003 2004 2005

Calendar-Accident Year Montana Calendar-Accident Yr. Combined Ratios by Component 133.5% 31.1% 4.9% 123.3% 31.9% 4.8% 100.6% 27.5% 0.5% 84.1% 30.9% 4.4% 87.1% 35.3% 1.8% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 180.0% 2001 2002 2003 2004 2005 Losses Expenses (Private Carrier Only) Dividends (Private Carrier Only)

 

 

 

State and 2006 Oregon Rate Ranking as of December 31, 2005 2005 Calendar-Accident Year Combined Ratio for 36 NCCI states and 2006 Oregon Rate Ranking 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% HA 15 TX 17 DC 16 AR 48 IN 50 FL 6 NM 27 AK 1 VT 7 MO 24 MI 31 NE 33 ID 32 CT 14 KS 43 AL 9 MD 40 LA 11 TN 26 ME 8 NV 30 VA 49 IL 20 NH 19 UT 38 IA 45 CO 29 OK 13 KY 4 GA 41 RI 22 NC 37 OR 42 AZ 46 MT 5 SD 44

Pre Tax Rate of Return Why is the pre tax rate of return an important financial indicator to an insurer? Because it indicates whether or not the insurer is earning a profit or loss prior to taxes taking into account both underwriting and investment returns.

Why is the pre tax rate of return an important financial indicator to an insurer?

Because it indicates whether or not the insurer is earning a profit or loss prior to taxes taking into account both underwriting and investment returns.

Derivation of the Pre Tax Rate of Return The Pre Tax Rate of Return is the pre tax operating income or loss divided by net earned premium. A positive pre tax rate of return indicates that a profit has been realized. A negative pre tax rate of return indicates that a loss has been realized.

The Pre Tax Rate of Return is the pre tax operating income or loss divided by net earned premium.

A positive pre tax rate of return indicates that a profit has been realized.

A negative pre tax rate of return indicates that a loss has been realized.

Five Year Average (2001-2005) Pre Tax Rate of Return for Liberty Northwest Insurance Corporation and Montana State Fund Data From A.M. Best 4.2% -3.8% - 5.0% - 4.0% - 3.0% - 2.0% - 1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% Liberty Northwest Insurance Corporation Montana State Fund Liberty Northwest Insurance Corporation Montana State Fund

 

 

Observations While the experience over the last few years has improved, there is still much room for improvement. The frequency of workplace injuries has declined but medical costs continue to rise.

While the experience over the last few years has improved, there is still much room for improvement.

The frequency of workplace injuries has declined but medical costs continue to rise.

Medical Costs—what is behind them (components) and comparison of general health vs. work comp: Aging population (general healthcare) More advanced medicine (general healthcare) Prescription Drugs –more costly, brand name drugs (general healthcare) More disability management (work comp) More and longer visits More paperwork—higher administrative costs Rising Medical Costs: Contributing Factor to Work Comp Rates

Medical Costs—what is behind them (components) and comparison of general health vs. work comp:

Aging population (general healthcare)

More advanced medicine (general healthcare)

Prescription Drugs –more costly, brand name drugs (general healthcare)

More disability management (work comp)

More and longer visits

More paperwork—higher administrative costs

Utilization for Work comp is higher Reimbursement rates (fee schedules) Most work comp systems pay 100% of price of service (this is a contrast to Medicaid, Medicare, and private health insurers. Work Comp Disparity % difference (Kaiser Permanente) Study of physician work requirements found (on average—national) work is 28% higher Study of practice expense found (on average--national) expenses are 33% higher Rising Medical Costs: Contributing Factor to Work Comp Rates

Utilization for Work comp is higher

Reimbursement rates (fee schedules)

Most work comp systems pay 100% of price of service (this is a contrast to Medicaid, Medicare, and private health insurers.

Work Comp Disparity % difference (Kaiser Permanente)

Study of physician work requirements found (on average—national) work is 28% higher

Study of practice expense found (on average--national) expenses are 33% higher

Rising Trend Needs to be Reversed – Key: Decreasing Medical Costs Health Information Technology Medical procedures should be managed the same as non-occ care Integration, risk sharing, an shared standards and utilization Measure quality Cover the Uninsured in health insurance market—will lead to less cost-shifting overall

Health Information Technology

Medical procedures should be managed the same as non-occ care

Integration, risk sharing, an shared standards and utilization

Measure quality

Cover the Uninsured in health insurance market—will lead to less cost-shifting overall

Additional Methods to Reduce Worker’s Comp Rates Companies can Self-Insure Companies can form a “Captive” What is a Captive?   A captive insurance company primarily insures the risks of its owners and sometimes related or affiliated firms.  It serves the insurance needs of the owners and related parties without the uncertainties of commercial availability and cost.  Captives provide an insurance alternative for businesses and organizations, which is particularly important in today’s difficult insurance market when companies are looking for options.

Companies can Self-Insure

Companies can form a “Captive”

What is a Captive?   A captive insurance company primarily insures the risks of its owners and sometimes related or affiliated firms.  It serves the insurance needs of the owners and related parties without the uncertainties of commercial availability and cost.  Captives provide an insurance alternative for businesses and organizations, which is particularly important in today’s difficult insurance market when companies are looking for options.

Captives in Montana The law requires Montana-based captives to locate their books and records here and hold an annual board meeting here.  Because captives do not interact with consumers in the same fashion as traditional multi-line companies, the State Auditor’s Office has been able to create a streamlined regulatory environment for them. Captives are a multi-billion dollar industry nationwide. Currently, there are 27 captive insurance companies formed in Montana to insure rural hospitals, nursing homes, fuel stations, commercial trucking firms, an investment firm, a medical professional firms, construction companies, and attorneys.  Long-term benefits to Montana include the potential for new jobs, an expanded tax base and increased economic activity.

The law requires Montana-based captives to locate their books and records here and hold an annual board meeting here.  Because captives do not interact with consumers in the same fashion as traditional multi-line companies, the State Auditor’s Office has been able to create a streamlined regulatory environment for them.

Captives are a multi-billion dollar industry nationwide.

Currently, there are 27 captive insurance companies formed in Montana to insure rural hospitals, nursing homes, fuel stations, commercial trucking firms, an investment firm, a medical professional firms, construction companies, and attorneys. 

Long-term benefits to Montana include the potential for new jobs, an expanded tax base and increased economic activity.

Captives in Montana -- Uses The captive can be used to fund a large deductible plan from an admitted insurer. An employer can utilize a captive to reinsure coverage written by an admitted insurer. An employer can utilize a captive to provide an excess layer of coverage above the statutory minimum written by an admitted carrier or an approved self insured plan.

The captive can be used to fund a large deductible plan from an admitted insurer.

An employer can utilize a captive to reinsure coverage written by an admitted insurer.

An employer can utilize a captive to provide an excess layer of coverage above the statutory minimum written by an admitted carrier or an approved self insured plan.

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