Shifts in the Marketplace
Workers Compensation Residual Markets
CARe Presentation
Jon Hale, FCASTravelers P&C
September 17, 2003New York City, NY
2
Line of Business 2001 2002p ChangePersonal Auto 127.8 B$ 141.1 B$ 10.4%
Homeowners 35.1 B$ 40.0 B$ 13.9%
Other Liability (Incl Prod Liab) 21.9 B$ 31.2 B$ 42.4%
Workers Compensation 26.0 B$ 29.2 B$ 12.6%
Commercial Multiple Peril 22.2 B$ 25.4 B$ 14.3%
Commercial Auto 21.7 B$ 24.3 B$ 11.8%
Fire & Allied Lines (Incl EQ) 10.7 B$ 15.1 B$ 40.7%
Reinsurance Lines 12.7 B$ 15.8 B$ 24.0%
All Other Lines 45.3 B$ 47.0 B$ 3.8%
Total All Lines 323.5 B$ 369.1 B$ 14.1%
2002 P&C Industry Premium Growth Highest in Sixteen Years
Net Written Premium by Line—Private Carriers
p PreliminarySources: 2001, Best’s Aggregates & Averages; 2002p WC, NCCI; Other lines, Annual Statement data; 2002p Total, ISO
Used with permission of National Council on Compensation Insurance, Inc.
3
P&C Combined Ratios Improved Significantly in 2002
Net Combined Ratios—Private Carriers
Line of Business 2000 2001 2002pPersonal Auto 109% 108% 103%
Homeowners 111% 122% 113%
Other Liability (Incl Prod Liab) 112% 130% 119%
Workers Compensation 118% 122% 110%
Commercial Multiple Peril 115% 119% 112%
Commercial Auto 116% 116% 106%
Fire & Allied Lines (Incl EQ) 110% 126% 95%
Reinsurance Lines 107% 163% 126%
All Other 95% 116% 89%
Total All Lines 110% 116% 107%
p PreliminarySources: 2001, Best’s Aggregates & Averages; 2002p WC, NCCI; Other lines, Annual Statement data; 2002p Total, ISO
Used with permission of National Council on Compensation Insurance, Inc.
4
P&C Industry Calendar YearCombined Ratios
Private Carriers
116
105 105
109 110 109
116
102
110
116
109 108108 107107107
106 106
90
95
100
105
110
115
120
Calendar Year
Percent
2.9%Due toSept. 11
1985–2001 Average: 108.6%
p PreliminarySources: 1985–2001, Best’s Aggregates & Averages; 2002p, ISO
Used with permission of National Council on Compensation Insurance, Inc.
5
31.0 31.3 29.7 30.3 28.926.2 25.1 24.1 23.2 22.2
24.8 26.029.2
0
10
20
30
40
50
60
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Calendar Year
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
WC Net Written Premium Private Nonfarm Wages and Salaries
$ Billions $ Trillions
Workers Compensation Premium:Third Consecutive Year of Growth
Net Written Premium vs. Wages and Salaries—Private Carriers
$ Billions $ Trillions
Source: 1990–2001, Best’s Aggregates & Averages; 2002, NCCI; Private Non-Farm Wages & Salaries, Economy.com.
Used with permission of National Council on Compensation Insurance, Inc.
6
0
10
20
30
40
50
60
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Calendar Year
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Adjusted WC DWP Private Non-Farm Wages and Salaries
$ Billions $ Trillions
Adjusted Workers CompensationPremium Volume
Workers Compensation Direct Written Premium—Private Carriers
$ Billions $ Trillions
1. Direct of Reinsurance
2. Grossed-Up for Large Deductible Credits
3. Adjusted to 1990 Rate/Loss Cost Level
4. Grossed-Up for Carrier Departure
Used with permission of National Council on Compensation Insurance, Inc.
7
Workers Compensation Calendar Year Combined Ratio Declined in 2002
Private Carriers
117123 122
109101 97 100 101
108115 118 122
110
0
20
40
60
80
100
120
140
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Calendar Year
Loss LAE Underwriting Expense Dividends
1.9% Due to September 11th
Sources: 1990–2001, Best’s Aggregates & Averages; 2002, NCCI
Percent
Used with permission of National Council on Compensation Insurance, Inc.
8
Workers Compensation Results in 2002 Improved Over 2001
Pretax Operating Gain Ratio—Private Carriers
-4.4
-8.7
-3.4
7.6
19.817.9
19.7
5.2
1.53.0
-7.7
13.1 13.7
-15
-10
-5
0
5
10
15
20
25
1990* 1991* 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Calendar Year
Percent
Sources: 1990–2001, Best’s Aggregates & Averages; 2002, NCCICombined Ratio less Investment Gain on Insurance Transaction and Other Income* Adjusted to include realized capital gains to be consistent with 1992 and after
Used with permission of National Council on Compensation Insurance, Inc.
9
The Impact of Discounting on Workers Compensation Premium
NCCI States—Private Carriers
Based on data through 12/31/2002 for the states where NCCI provides ratemaking services.Dividend ratios are based on calendar year statistics.
-7.5 -7.0-8.5
-10.4
-14.6
-17.7-19.2
-14.2
-6.0
-22.6 -23.2
-30
-25
-20
-15
-10
-5
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Policy Year
Pe
rce
nt
Rate/Loss Cost Departure Schedule Rating Dividends
Used with permission of National Council on Compensation Insurance, Inc.
10
Workers Compensation Residual Market MechanismsState Funds as of 1990
(Quasi-Pool)
14 State Funds acting as markets of last resort
2 Quasi-Pools (MN, ME)
36 Pool states (Direct Assignments did not exist)
Note: Arizona & Idaho had state funds but were not markets of last resort
Source: Jon Hale, Travelers
11
Note: Arizona, Idaho, & New Mexico have state funds but NCCI manages the markets of last resort
19 State Funds acting as markets of last resort
2 Quasi-Pools (FL & MN)
13 Pool states w/ Direct Assignment
15 Pool states w/o Direct Assignment
2 Private Carrier states (no Direct Assignments – MO & NE)(FWCJUA)
Workers Compensation Residual Market MechanismsState Funds as of 2003
(Quasi-Pool)
Source: Jon Hale, Travelers
12
Workers Compensation Residual Market Pool Premium Volume Is on the RiseNCCI Managed Workers Compensation Residual Market Pools
As of March 31, 2003
1.2
2.12.6
2.8
3.54.0
4.44.8
4.1
3.1
2.0
1.00.6
0.3 0.3
0
1
2
3
4
5
6
Policy Year
$634M
$352M
$1.1B
* Excludes Maine Residual Market Pool** Incomplete Policy Year Projected to UltimateIncludes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)
$ Billions
Used with permission of National Council on Compensation Insurance, Inc.
13
Workers Compensation Residual Market Plan New Applications Bound
Representative Subset of NCCI Plan Administered Residual Markets*
31%
42%41% 32%84%
82%69%
58%
60%
68%
18%16%0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
YTD 6-1998 YTD 6-1999 YTD 6-2000 YTD 6-2001 YTD 6-2002 YTD 6-2003
Assignments without Prior Coverage
Assignments with Prior Voluntary Coverage
Assignments without Prior Coverage–Total # of applications assigned with prior voluntary coverage during last six months prior to assignmentAssignments without Prior Coverage–Total # of applications assigned with no prior coverage during last six months prior to assignment* If servicing carriers stay through the contract years, they can renew policies themselves without having the employers to go through the application process. Also, changes of servicing carriers from one year to next may distort results
Used with permission of National Council on Compensation Insurance, Inc.
14
Workers Compensation Residual Market Plan New Premium Bound
Representative Subset of NCCI Plan Administered Residual Markets*
69%
77%
75%67%23%
26% 33%
41% 49%
31%
51%59%0
50
100
150
200
250
YTD 6-1998 YTD 6-1999 YTD 6-2000 YTD 6-2001 YTD 6-2002 YTD 6-2003
Assignments without Prior Coverage
Assignments with Prior Voluntary Coverage
Assignments without Prior Coverage–Total premium for applications assigned with prior voluntary coverage during last six months prior to assignmentAssignments without Prior Coverage–Total premium for applications assigned with no prior coverage during last six months prior to assignment* If servicing carriers stay through the contract years, they can renew policies themselves without having the employers to go through the application process. Also, changes of servicing carriers from one year to next may distort results
$ Millions
Used with permission of National Council on Compensation Insurance, Inc.
15
Workers Compensation Residual Market Plan Shares Have Increased in Recent
Years
11%
18%
3%
11%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1998 1999 2000 2001 2002 1st Qtr 2003
Policy Year
Policies Premium
Includes data for AL, AZ, AK, AR, CT, DC, GA, ID, IA, IL, IN, KS, NV, NH, NM, OR, SD, VA, VT
Used with permission of National Council on Compensation Insurance, Inc.
16
Workers Compensation Residual Market Pool Combined Ratios Are Holding Steady
NCCI Managed Workers Compensation Residual Market PoolsAs of March 31, 2003
116116118117113
10298
9397103
50
60
70
80
90
100
110
120
130
140
150
Policy Year
Percent
* Incomplete Policy Year Projected to UltimateIncludes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)
Used with permission of National Council on Compensation Insurance, Inc.
17
Workers Compensation Combined RatiosNCCI Managed Residual Market Pools as of March 2003
vs.Private Carriers Ultimate Accident Year Combined Ratios
95 97101
106
119129
137 133125
107116116118117113
102989397
103
5060
7080
90100110
120130
140150
Residual Market (Pol Yr) Private Carriers (Acc Yr)
Percent
* Incomplete Policy Year for Residual Market Projected to Ultimate. Includes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)
Source for private carriers accident years 1993–2002: NCCI. Accident year data is evaluated as of 12/31/2002, developedto ultimate and includes dividends to policyholders
Used with permission of National Council on Compensation Insurance, Inc.
18
Workers Compensation Residual Market Pool Combined Ratios Mainly Driven by Loss Ratios
NCCI Managed Workers Compensation Residual Market PoolsAs of March 31, 2003
3534 34
3333
36 37 35 35 35
10397 93
98102
113117 118 116 116
6862 60
6469
76 80 82 82 81
50
60
70
80
90
100
110
120
130
140
150
Policy Year
Percent
* Incomplete Policy Year Projected to UltimateIncludes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)
Used with permission of National Council on Compensation Insurance, Inc.
19
Workers Compensation Private Carrier Combined Ratios Driven by Both Loss & U/W
Expense Ratios
25 28 2930
31
3234 31
30
2795 97
101106
119
129137 133
125
107
70 69 7276
8897
103 10295
80
50
60
70
80
90
100
110
120
130
140
150
Policy Year
Percent
Source for private carriers accident years 1993–2002: NCCI. Accident year data is evaluated as of 12/31/2002, developed to ultimate and includes dividends to policyholders
Used with permission of National Council on Compensation Insurance, Inc.
20
Workers Compensation Loss RatiosNCCI Managed Residual Market Pools as of March 2003
vs.Private Carriers Ultimate Accident Year Combined Ratios
Percent
* Incomplete Policy Year for Residual Market Projected to Ultimate. Includes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)
Source for private carriers accident years 1993–2002: NCCI. Accident year data is evaluated as of 12/31/2002, developedto ultimate
70 69 7276
8897
103 10295
80818282807669
646062
68
5060
7080
90100110
120130
140150
Residual Market (Pol Yr) Private Carriers (Acc Yr)
Used with permission of National Council on Compensation Insurance, Inc.
21
Workers Compensation Residual Market Pool Underwriting Results Remain Negative
NCCI Managed Workers Compensation Residual Market PoolsAs of March 31, 2003
-104
107 128
25
-13 -42 -45 -62-103
-178
-500
-400
-300
-200
-100
0
100
200
300
400
500
19931994
19951996
19971998
19992000
20012002**
Policy Year
$ Millions
* Excludes Maine Residual Market Pool** Incomplete Policy Year Projected to UltimateIncludes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)
Used with permission of National Council on Compensation Insurance, Inc.
22
Number of StatesNCCI Non-NCCI
Programs Programs
• Surcharge and Differential Programs 22 5
• Take-Out Credit Program 16 2
• Removal of Premium Discounts 16 2
• Loss-Sensitive Rating Plan 15 1
• Assigned Risk Adjustment Program 15 6
(out of 22) (out of 9)
Workers Compensation Residual Market Plan Programs
Sources: NCCI (NCCI-states); Jon Hale (Non-NCCI states)Applicable in all states where NCCI administers assigned risk programs
23
Workers Compensation Policy Size Distribution
Residual Market Plan* vs. VoluntaryYTD through June 2001
Total number of assigned risk policies in force, updated 8/02/2003* Includes residual market policies for all NCCI Plan Administered states, including IN. (Does not include all Pool states such as NJ, DE, & NC)
Assigned Risk - YTD 6/2001$50,000-$99,999
1%$10,000-$49,9996%
$100,000 and over0%
$0-$2,49977%
$5,000-$9,9996%
$2,500-$4,99910%
Voluntary - YTD 6/2001$50,000-$99,999
1%
$10,000-$49,99910%
$100,000 and over1%
$0-$2,49964%
$5,000-$9,99910%
$2,500-$4,99914%
Used with permission of National Council on Compensation Insurance, Inc.
24
Workers Compensation Policy GrowthChange in Number of Risks
Residual Market Plan* vs. VoluntaryYTD through June 2003 vs. YTD through June 2001
Total number of assigned risk policies in force, updated 8/02/2003* Includes residual market policies for all NCCI Plan Administered states, including IN. (Does not include all Pool states such as NJ, DE, & NC)
-8%
0%5%
10% 12%19%
53%59%
46%38%
28%
-6%-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
$0-$2,499 $2,500-$4,999 $5,000-$9,999 $10,000-$49,999
$50,000-$99,999
$100,000 andover
Assigned Risk Voluntary
Used with permission of National Council on Compensation Insurance, Inc.
25
Voluntary - YTD 6/2003
$50,000-$99,9992%
$10,000-$49,99911%
$100,000 and over2%
$0-$2,49960%
$5,000-$9,99911%
$2,500-$4,99914%
Assigned Risk - YTD 6/2003$50,000-$99,999
1%$10,000-$49,999
8%
$100,000 and over1%
$0-$2,49970%
$5,000-$9,9998%
$2,500-$4,99912%
Workers Compensation Policy Size Distribution
Residual Market Plan* vs. VoluntaryYTD through June 2003
Total number of assigned risk policies in force, updated 8/02/2003* Includes residual market policies for all NCCI Plan Administered states, including IN. (Does not include all Pool states such as NJ, DE, & NC)
Used with permission of National Council on Compensation Insurance, Inc.
26
Workers Compensation Residual Market Plan Top 15 Class Codes
Policy DistributionNumber of Policies In Force
Ranking at 6/2003
Ranking at 12/2002
Ranking at 12/2001
5645 CARPENTRY-DETACHED ONE OR TWO FAMILY DWELLINGS 1 1 18810 CLERICAL OFFICE EMPLOYEES NOC 2 2 27228 TRUCKING-LOCAL HAULING ONLY-& DRIVERS 3 3 45474 PAINTING OR PAPERHANGING NOC & SHOP OPERATIONS DRIVERS 4 9 128742 SALESPERSONS COLLECTORS OR MESSENGERS-OUTSIDE 5 4 55437 CARPENTRY-INSTALLATION OF CABINET WORK OR INTERIOR TRIM 6 12 139015 BUILDINGS-OPERATION BY OWNER OR LESSEE 7 7 69014 BUILDINGS-OPERATION BY CONTRACTORS 8 11 109082 RESTAURANT NOC/CATERER 9 15 16913 DOMESTIC WORKERS-INSIDE 10 5 38017 STORE: RETAIL NOC 11 13 118832 PHYSICIAN & CLERICAL 12 8 78380 AUTOMOBILE SERVICE OR REPAIR CENTER & DRIVERS 13 16 18908 DOMESTIC WORKERS-INSIDE- OCCASIONAL 14 6 87229 TRUCKING-LONG DISTANCE HAULING-& DRIVERS 15 14 15
Used with permission of National Council on Compensation Insurance, Inc.
27
Workers Compensation Residual Market Plan Top 15 Class Codes
Premium DistributionPremium In Force
Ranking at 6/2003
Ranking at 12/2002
Ranking at 12/2001
5645 CARPENTRY-DETACHED ONE OR TWO FAMILY DWELLINGS 1 1 18861 CHARITABLE OR WELFARE - PROFESSIONAL EMPLOYEES AND CLERICAL 2 2 37229 TRUCKING-LONG DISTANCE HAULING-& DRIVERS 3 5 55551 ROOFING-ALL KINDS & YARD EMPLOYEES DRIVERS 4 3 27228 TRUCKING-LOCAL HAULING ONLY-& DRIVERS 5 4 48380 AUTOMOBILE SERVICE OR REPAIR CENTER & DRIVERS 6 6 69015 BUILDINGS-OPERATION BY OWNER OR LESSEE 7 15 108868 COLLEGE: PROFESSIONAL EMPLOYEES & CLERICAL 8 9 118835 NURSING-HOME HEALTH PUBLIC AND TRAVELING-ALL EMPLOYEES 9 17 195474 PAINTING OR PAPERHANGING NOC & SHOP OPERATIONS DRIVERS 10 16 139014 BUILDINGS-OPERATION BY CONTRACTORS 11 11 83724 MACHINERY OR EQUIPMENT ERECTION OR REPAIR NOC & DRIVERS 12 19 Not in Top 156217 EXCAVATION & DRIVERS 13 10 128829 CONVALESCENT OR NURSING HOME-ALL EMPLOYEES 14 7 179082 RESTAURANT NOC/CATERER 15 14 7
Used with permission of National Council on Compensation Insurance, Inc.
28
Distribution of Avg WC Residual Market Plan Mods Has Remained Stable in Recent Periods
Excludes Non-Experience Rated PoliciesPolicies Effective in 2001
Jan-Jun, 2001 Jul-Dec, 2001
Experience Mod Range# of
Mods %# of
Mods %
Less than 0.70 73 0.9% 72 0.8%
0.70 - 0.79 451 5.3% 451 4.8%
0.80 - 0.89 1,903 22.3% 1,993 21.3%
0.90 - 0.99 1,871 21.9% 1,938 20.7%
1.00 69 0.8% 79 0.8%
1.01 - 1.10 583 6.8% 737 7.9%
1.11 - 1.20 663 7.8% 800 8.5%
1.21 - 1.30 757 8.9% 786 8.4%
Greater than 1.30 2,168 25.4% 2,516 26.8%
Total 8,538 100.0% 9,372 100.0%
Includes data for AK, AL, AR, AZ, CT, DC, GA, IA, ID, IL, IN, KS, NH, NM, NV, OR, SC, SD, VA, & VT
Used with permission of National Council on Compensation Insurance, Inc.
29
Distribution of Avg WC Residual Market Plan Mods Has Remained Stable in Recent Periods
Excludes Non-Experience Rated Policies Policies Effective in 2002
Jan-Jun, 2002 Jul-Dec, 2002
Experience Mod Range# of
Mods %# of
Mods %
Less than 0.70 99 0.7% 76 0.6%
0.70 - 0.79 670 5.0% 625 4.7%
0.80 - 0.89 2,878 21.6% 2,749 20.6%
0.90 - 0.99 3,031 22.7% 3,061 22.9%
1.00 111 0.8% 129 1.0%
1.01 - 1.10 1,032 7.7% 1,093 8.2%
1.11 - 1.20 1,092 8.2% 1,116 8.4%
1.21 - 1.30 1,201 9.0% 1,185 8.9%
Greater than 1.30 3,240 24.3% 3,330 24.9%
Total 13,354 100.0% 13,364 100.0%
Includes data for AK, AL, AR, AZ, CT, DC, GA, IA, ID, IL, IN, KS, NH, NM, NV, OR, SC, SD, VA, & VT
Used with permission of National Council on Compensation Insurance, Inc.
30
Distribution of Avg WC Residual Market Plan Mods Has Remained Stable in Recent Periods
Excludes Non-Experience Rated Policies Policies Effective in 2003
Jan-Jun, 2003
Experience Mod Range# of
Mods %
Less than 0.70 78 0.5%
0.70 - 0.79 661 4.1%
0.80 - 0.89 3,485 21.7%
0.90 - 0.99 4,043 25.2%
1.00 147 0.9%
1.01 - 1.10 1,282 8.0%
1.11 - 1.20 1,362 8.5%
1.21 - 1.30 1,402 8.7%
Greater than 1.30 3,599 22.4%
Total 16,059 100.0%
Includes data for AK, AL, AR, AZ, CT, DC, GA, IA, ID, IL, IN, KS, NH, NM, NV, OR, SC, SD, VA, & VT
Used with permission of National Council on Compensation Insurance, Inc.
31
Distribution of Avg WC Residual Market Plan Mods Has Remained Stable in Recent Periods
Excludes Non-Experience Rated PoliciesSix Month Policy Effective Intervals From January 2001 through June 2003
-5%
0%
5%
10%
15%
20%
25%
30%
< 0.69 0.70-0.79
0.80-0.89
0.90-0.99
1.00 1.01-1.10
1.11-1.20
1.21-1.30
> 1.31
Jan-Jun 2003
Jul-Dec 2001
Jul-Dec 2002
Jan-Jun 2001
Jan-Jun 2002
Includes data for AK, AL, AR, AZ, CT, DC, GA, IA, ID, IL, IN, KS, NH, NM, NV, OR, SC, SD, VA, & VT
Used with permission of National Council on Compensation Insurance, Inc.