Residual Markets

2003 National Council on Compensation Insurance, Inc. 1

Workers Compensation Residual Market Overview

Cliff MerrittNCCI

Residual MarketsHelena, Montana

November 7, 2003

2003 National Council on Compensation Insurance, Inc.

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In order to ensure that all employers have some means of complying with their statutory obligations, many states have created a market of last resort—the residual market.

The Residual Market within a particular state can be in the form of:

NCCI’s WCIP (Workers Compensation Insurance Plan) Assigned Risk Reinsurance Pool State Fund JUA (Joint Underwriting Association) Alternative Assigned Risk Plan

Residual Markets


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NCCI’s WORKERS COMPENSATION INSURANCE PLAN (cont’d)

The PLAN is the set of rules that govern the administration of the residual market and are approved by the state regulatory authority

the random and equitable assignment of employers to assigned carriers (i.e., direct assignment and servicing carriers)administrationeligibility of employersparticipation of carrierspolicy issuance requirementsduties and responsibilities of the Plan Administrator and assigned carriers


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NCCI’s WORKERS COMPENSATIONINSURANCE PLAN (cont’d))

NCCI provides Plan Administration services in the following states as of 1/2003:

AL, AK, AR, AZ, CT, DE, DC, GA, ID, IN, IA, IL, KS, MS, NH, NJ, NM, NV, NC, OR, SC SD, VA, VT

NCCI also provides Pool Administration services in the following states:

AL, AK, AR, AZ, CT, DE, DC, GA, ID, IN, IA, IL, KS, MA, MI, MO, NH, NJ, NM, NV, NC, OR,

SC, SD, VA, VT


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RESIDUAL MARKET WORKERSCOMPENSATION REINSURANCE

POOLS

• The POOL is a contractual agreement among participating insurers to share in the operating results arising out of Plan assignments.

• The largest reinsurance pooling arrangement is the National Workers Compensation Reinsurance Pool (NWCRP or National Pool or Pool) for which NCCI serves as Administrator.


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RESIDUAL MARKET WORKERSCOMPENSATION REINSURANCE

POOLS (cont’d)

• Participating companies in the National Pool share in the operating results of the Pool for those states where they are participating, in proportion to their share of the total voluntary workers compensation insurance premium in that state.


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STATE RESIDUAL MARKET MECHANISMS

STATE STATE FUND RESIDUAL MARKETArizona Competitive NWCRPCalifornia Competitive State FundColorado Competitive State FundHawaii Competitive State FundIdaho Competitive NWCRPKentucky Competitive State FundLouisiana Competitive State FundMaine Competitive State FundMaryland Competitive State FundMinnesota Competitive MN AR PoolMissouri Competitive AlternativeMontana Competitive State FundNew Mexico Competitive NM AR Pool


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STATE STATE FUND RESIDUAL MARKETNew York Competitive State FundNorth Dakota Monopolistic State FundOhio Monopolistic State FundOklahoma Competitive State FundOregon Competitive NWCRPPennsylvania Competitive State FundRhode Island Competitive State FundSouth Carolina Competitive NWCRPTexas Competitive State FundUtah Competitive State FundWashington Monopolistic State FundWest Virginia Monopolistic State FundWyoming Monopolistic State Fund


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STATE STATE FUND RESIDUAL MARKETAlabama None NWCRPAlaska None NWCRPArkansas None NWCRPConnecticut None NWCRPDelaware None NWCRPD.C. None NWCRPFlorida None JUAGeorgia None NWCRPIllinois None NWCRPIndiana None NWCRPIowa None NWCRPKansas None NWCRPMassachusetts None MA Pool


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STATE STATE FUND RESIDUAL MARKETMichigan None MI Facility/PoolMississippi None MS AR PoolNebraska None AlternativeNevada None NWCRPNew Hampshire None NWCRPNew Jersey None NWCRPNorth Carolina None NWCRPSouth Dakota None NWCRPTennessee None AlternativeVermont None NWCRPVirginia None NWCRPWisconsin None WI Pool


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Premium Size Profile—Policy Year 2002Assigned Risk in NCCI-Administered Plan States

Premium Size (000s) Policy Count

Total Percent of Policies

(%)

Estimated Annual Premium

(000s)

Total Percent of Premium

(%)

Average Premium

(000s) 1– 2,499 159,339 72.39 129,242,066 11.58 811

2,500– 4,999 24,953 11.34 87,997,481 7.88 3,527 5,000– 9,999 15,933 7.24 111,329,108 9.97 6,987

10,000– 49,999 16,070 7.30 337,772,343 30.26 21,019 50,000– 99,999 2,376 1.08 165,975,443 14.87 69,855

100,000–499,999 1,384 0.63 237,547,752 21.28 171,639 500,000+ 52 0.02 46,510,536 4.17 894,433

Totals 220,107 100.00 1,116,374,730 100.00 5,072

Premium Size (000s) Policy Count

Total Percent of Policies

(%)

Estimated Annual Premium

(000s)

Total Percent of Premium

(%)

Average Premium

(000s) 1– 2,499 23,300 71.28 14,212,175 7.90 610

2,500– 4,999 3,509 10.73 12,538,568 6.97 3,573 5,000– 9,999 2,762 8.45 19,477,602 10.82 7,052

10,000– 49,999 2,574 7.87 52,655,850 29.26 20,457 50,000– 99,999 322 0.99 22,230,604 12.35 69,039

100,000–499,999 201 0.61 38,137,532 21.19 189,739 500,000+ 20 0.06 20,685,268 11.50 1,034,263

Totals 32,688 100.00 179,937,599 100.00 5,505

Montana – Total Market


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States With Highest Residual Market ShareCalendar Year 2002

Residual Market Premium as Percentage of Total Direct Premiums Written


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States With Lowest Residual Market ShareCalendar Year 2002

Residual Market Premium as Percentage of Total Direct Premiums Written


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RESIDUAL MARKET PROGRAMS

# States(out of 22)

• Surcharge and Differential Programs 22

• Take-Out Credit Program 16

• Removal of Premium Discounts 16

• Loss-Sensitive Rating Plan 15

• Assigned Risk Adjustment Program 15


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MONTANA ISSUES

• Adequate Rates to Prevent Transfer of Liabilities to the Industry – Self Funded Residual Market

• Number, Profile, Historical Losses of “Residual Market” Accounts Needed for Rating Purposes

• Time – Need to Implement Rules, Rates and Select Servicing Carriers (1 year)

• Claimant and Policyholder Service is Important• Need Approval for Reinsurance from NWCRP

Board

Documents

Residual Markets