National Council of Self-Insurers

Annual ConferenceKey Biscayne, FL

June 4, 2012

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Agenda

• Welcome and thank you• Current WC Market Conditions• What factors are driving these

results?• What is the impact on self-insured's?• What can/should should be done• How can we help

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State of the WC Market- “Conflicted”(NCCI –State of Line report May 10, 2012)

• Lost time frequency improved in 2011 – down another 1% after a 3% decline in 2010

• Average indemnity costs per claim increased by 2.0% in 2011 after 2.8% decrease in 2010

• Average medical costs per lost time claim increased by 4.0% in 2011 after a 1.3% increase in 2010

• Investment yields remain low but improving

• Reserve deficient position at $11 billion• Residual market pools increased to 5% of market

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WC Industry Combined Ratio

120.4

112.5 108.5 104.9101.6

96.0102.8 103.3

112.4

116.3 119.0118.0 117.0

0

20

40

60

80

100

120

140

Combined Ratio % (per Conning Research & Consulting)

Current WC Market Conditions

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• Current level of underwriting losses are not sustainable

• Industry reserve deficiency exceeding $11 billion – up $1 billion in one year

• Major carriers reevaluating their WC exposure– Chartis, Liberty & ACE have reduced

writings• Primary and Reinsurance rates are

increasing

Current WC Market Conditions

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What factors are driving these results?

• Economic Reasons• Societal Forces• Government Involvement

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Economic Reasons• Investment returns at historic lows

– Investment income has historically offset underwriting losses

– Carriers must carry more reserves because GAAP discount rate is lower

• WC “cost of capital” is higher than other lines of insurance. Carriers must set aside more surplus for longer tail lines.

What factors are driving these results?

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Societal Forces• Frequency decreases bottomed out in 1991

and are beginning to rise (first increase in 13 years)

• Inexperienced workers in recovering sectors (manufacturing, construction, etc.)

• Frequency decreases have balanced medical cost increases for two decades

• Frequency of severity has decreased over time• Severity continues to increase• Aging workforce

What factors are driving these results?

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Aging Workforce

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Societal Forces (continued)• Obesity epidemic

– Increases chance for injury – Increases the length of recovery and the

chance of PTD• Increased life expectancy• Narcotic pain medications

– Now account for 25% of WC prescription drugs– 2 Billion in waste (Express Scripts 2011 report)– Causing addiction and longer disability

What factors are driving these results?

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Impact of Rx on Medical Cost

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

1990 2000 2011

Rx Costs

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Government Involvement• Federal regulations increasing costs and

complexity– OSHA, EEOC, ADA, Dodd-Frank/FIO

• What will the impact of the Affordable Care Act be on WC?– PCI study of MA shows positive results?

• Medicare set asides - SCHIP Extension Act– Present practices are adding to claims

costs

What factors are driving these results?

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What is the impact on Self-Insured's?

• Cost of risk– Affected by all the same factors

• Cost of risk transfer– Increasing reinsurance costs &

retentions

• Impact of frequency and severity– Greater impact in recovering industries

• Medical cost inflation• Impact of Rx and Opioids

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Medical Share of Total Benefitsby Accident Year

© Copyright 2009 National Council on Compensation Insurance, Inc. All rights reserved.

1988

Indemnity54%

Medical46%

Indemnity47%

Medical53%

1998 Indemnity42%

Medical58%

2008Indemnity

40%Medical60%

2011

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Impact on Self-Insured's

Source: NCCI DCI Data

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Percent of Ultimate Losses Reported by Years of Development

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10

Years of Development

% o

f U

ltim

ate

Lo

ss

SNCC Ground UpSNCC ExcessIndustry Primary

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What can/should be done?

• Predictive modeling– Era of “Big Data”?

• Control of medical and Rx costs• Return to the basics

– Pre & Post Loss programs and controls

• Engage outside resources

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Predictive Modeling

• Use to indentify problem claims early– Are all factors considered?

• Soft tissue injuries• Early Rx for Opioids• Personal characteristics of employee

– Smoking, Obesity

• Work with TPA/Claim manager to develop your plan

• Impact on Rx

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Control of Medical and Rx Costs

• Work with TPA/Claims Manager on– Medical Cost Containment Strategy

• Does your plan encompass all areas of cost• Demand transparency and accountability

• What is your Rx strategy?– Do you have a PBM protocol in place– Generic vs. name brand– Control of dosage size (100 mg/day)– Urine testing to determine proper usage– Use of Peer Physician review

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What can/should be done?

• Stay committed to your risk management mission– Use your unique culture to attack these

problems?• Continue safety & loss prevention activities

– Incorporate wellness into our programs if possible

• Take advantage of broker/carrier services– Are they partners in your risk management

efforts?• Get/stay involved in industry and legislative

initiatives– SMART Act for SHCIP– State efforts for WC reform & Rx controls.

• Ex: Prime Tanning Case – Maine • Brown vs. Cassens Transportation - Michigan

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What is Safety National doing ?

• Working with customers to– Identify key severity “hot spots”

• Development of specialized services for self-insured's – Best Doctors – MAP Client Services

• Work Comp Kit - specialized risk control services• S:ERVE - specialized driver training program

• Taken a leadership role in industry activities – Medicare Advocacy Recovery Coalition (MARC)– Raise awareness of the impact of narcotics, aging and

obesity on WC– Facilitate WC industry discussions through LinkedIn and

the media

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Who is Safety National?

• Founded in 1942• Now part of Tokio Marine Holdings

– One of the ten largest insurance companies in the world

• Licensed and admitted in all 50 states, the District of Columbia, Puerto Rico, and Canada

• Longest continual provider of Excess Work Comp coverage in the US

• Market leader in Excess Work Comp – 30% domestic market share

• Named one of the “Best Places to Work” by Business Insurance magazine

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Questions?