1

Overview of Tennessee’sWorkers’ Compensation Market Conditions and

EnvironmentAugust 29, 2013

Advisory Council on Workers’ Compensation

Presented by Mike Shinnick - TDCI

2

Presentation Covers• Premium Segment Changes• Key National Indicators• National and State Price Changes• 2013 Voluntary LCM Distribution• Assigned Risk Trends• Assigned Risk Cycle Implications• Likely Assigned Risk 2014 LCM

Recommendation• Insolvency Changes, Including Two New• TN A.M. Best Ratings By Premium

Concentrations• NCCI AIS Summary

3

2012 Market Segments

Voluntary Self Insureds SI Groups* TWCIP$0

$100

$200

$300

$400

$500

$600

$700

$800 $721

$169

$22 $39

$779

$149

$23$54

20112012

+8%

+38%+5%

-12%**

Millions in Premiums

• * Excluding government sponsored groups; Individual Self Insureds are on an equivalent premium basis, Group premiums are estimated.

• ** Change in “equivalent premium” premium tax calculation: weighted average voluntary LCM vs. assigned risk LCM: 1.34/1.51(-11.3%); lost 5 & no new added 

4

National Picture

5

Property & Casualty Underwriting

Results

Improved Significantly

Net Calendar Year Combined Ratio – Private Carriers

Line of Business

2010 2011 2012 preliminary

Personal Auto 101% 102% 102%

Homeowners 107% 122% 104%

Com. Multi Peril

101% 113% 107%

Com. Auto 98% 104% 107%

Workers’ Comp 115% 115% 109%

Total P&C Industry

102% 108% 103%

Sources: NCCI for Workers Comp; Total P/C Industry: ISO

Combined Ratio = Expense Ratio + Loss & LAE Ratio; results <100 equate to an underwriting

profit

6

Calendar Year Combined RatiosExcept for 2008, WC Consistently Trails Overall P&C Results

(on Average 6 Points Less Favorable)

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12p0

20

40

60

80

100

120

140

122111 110 107 103

93101 101

110115 115

109

CY WCCY P&C

Source: NCCI; Annual Statement Date; ISO; 2011 preliminary data

7

Workers’ Compensation Indemnity

Claims Cost – Modest Increase in

2012

'00'' '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11p '12p

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1%

-3%

2%1%

Source: NCCI (2012 is preliminary)

8

WC Medical Claim Cost Trends

'00

'02

'04

'06

'08

'10

'12p

0

2

4

6

8

10

12

14

16

Change in Med. SeverityMedical CPI

Sources: NCCI – Medical Severity; Economy.com – Medical CPI; 2012 is preliminary

Percentage Change

9

WC Lost-Time Claim Frequency Continued to

Decline in 2012

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11p '12-8

-6

-4

-2

0

2

4

6

Source: NCCI; 2012 is Preliminary; 2010 & 2011 frequency is adjusted for recessionary factors

Percentage

10

Countrywide Accident Year Combined Ratios

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12p0

20

40

60

80

100

120

7465 63 65

7380 82

90 8680

23.8

23.4 23.6 20.9

26.1

26.427.8

28.327.6

28

97.8

88.4 86.6 85.9

99.1

106.4 109.8113.6

108.0

118.3

Loss & LAE Ratio

Expense Ratio Includ-ing Dividends

Source: NCCI; 2012 preliminary data

11

WC Operating

Gain Reemerges

Pre-Tax Operating Gain Ratio – Private Carriers

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12p

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Source: 2000-2011, Annual Statement Data; 2012 NCCI - preliminary

5.2% Average (1990-2011)

12

According to Goldman Sachs, Prices Appear to be

Increasing

Agent Responses on WC Rates on Renewals vs. 12 Months Prior

Down 21%+

Down 11-20%

Down 1-10%

No Change

Up 1-10%

Up 11%+-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

0% 0%

1%

8%

57%

33%Jan-11Jan-12Jan-13

Source: Goldman Sachs Research, Proprietary Survey, January 2013 Pricing Survey, Insurance: Property & Casualty (Exhibit 4, WC)

Percentage of Respondents

13

Change in Commercial Rate Renewals,

by Line: 1Q12 vs. 1Q13

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1.30%

4.60% 4.30% 4.60%5.50%

4.10%

6.80%

9.80%

Source: Council of Insurance Agents and Brokers; Insurance Information Institute

14

Tennessee Specific

15

TN Direct Premium Written

Premium (DPW) History

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-50000000

50000000

150000000

250000000

350000000

450000000

550000000

650000000

750000000

850000000

950000000

DPW

10%

-4%

11%

DPW: “Direct Premiums Written" - Property/casualty premiums collected by the insurer from policyholders, before reinsurance premiums are deducted. Insurers share some direct premiums and the risk involved with their reinsurers.

16

Tennessee Accident Year Combined Ratios

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12p0

20

40

60

80

100

120

140

78 74.367.6 69.3 70.3

77.4 82.596.3

84.775.6

25.125.6

28.6 21.7 24.4

25.824.8

26.6

24

24.1

103.1 99.996.2 91 94.7

103.2 107.3 108.7

99.7

122.9

Loss & Loss Ad-justment Expense

Expense Ratio Includ-ing Dividends

Source: NCCI - added 9/23/13; 2012 preliminary data

Loss Cost Filing & Final Approvals Since 2004 Reforms

Implemented

Year Filing Made

NCCI Filed Rate

Advisory Council Recommendation

C&I Approved Rate

Effective Date

2004 -6.3% -6.3% -6.3% 9/1/2004

2005 3.9% 3.9% 3.9% 7/1/2005

2005 -6.9% -6.9% -6.9% 7/1/2005

2006 1.6% 1.6% 1.6% 3/1/2006

2007 1.4% 0% 1.4% 3/1/2007

2007 2.4% 2.4% 2.4% 7/1/2007

2007 -7.2% -8.6% -7.2% 3/1/2008

2008 -3.1% -3.1% -3.1% 7/1/2008

2008 -3.1% -3.4% -3.1% 3/1/2009

2009 -.1% -.1% -.1% 3/1/2010

2010 -5.1% -5.3% -5.1% 3/1/2011

2011 6.3% 6.3% 6.3% 11/1/11

2011 1.6% -.3% .4% 3/1/12

2012 -5.1% -5.1% -5.1% 8/9/12

2012* 2.3% 1.6% 2.3% 3/1/13

17

-19% since 2004 Reforms*

18

Tennessee Voluntary Market Weighted

Average Loss Cost Multiplier History

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20131.25

1.3

1.35

1.4

1.45

1.5

1.461.49

1.461.43

1.41.37

1.33 1.34 1.34 1.35

1.4

Multipliers are based on prior year premium “weighted average” market shares.

+4%

19

TN Price Change Analysis

Oct

'11

Nov

'11

Dec '1

1

Jan

'12

Feb '1

2

Mar

'12

Apr '1

2

May

'12

Jun

'12

Jul '

12

Aug '1

2

Sep '1

2

Oct

'12

Nov

'12

Dec '1

2

Jan

'13

Feb '1

3

Mar

'13

Apr '1

3

May

'13

-10

-5

0

5

10

15

Average Re-ported Net Rate Change: Cur-rent/Prior Peri-ods (5% in 2012, 1% in2013)

Filed Loss Cost Change

Source: NCCI

20

2013 LCM Distribution(by Direct Premium Written)

Median 1.40

80% are above 1.05 and below 1.6325% above 1.52 Assigned Risk LCM

A complete listing of LCMs is posted on the Department’s website

21

TN WC Premium Tax Revenues

YE 8/31/09 YE 8/31/10 YE 8/31/11 YE 8/31/12

Self Insurance

$8M $6.7M $7.5M $6.4M

Insurance $31.8M $25.9M $26.6M $31.7M

Total Premium Tax*

$39.8M $32.6M $34.1M $38.1M

Data excludes .4% TOSHA Surcharge

22

Tennessee Workers Compensation Insurance Plan

(TWCIP)

23

TWCIP Premium History

0

20000000

40000000

60000000

80000000

100000000

120000000

140000000

160000000

Premium

Poor Experience Poor Experience

Up 38%

Best Experience

24

Servicing Carrier & Direct Assignment

Carrier Loss Ratio History

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0% (1.55LCM Leveled)

Loss Ratio

Premium at Low Ebb71% Break

Even

25

TWCIP LCM History

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2

1.497

1.7 1.7

1.95 1.951.85

1.7 1.631.54 1.51 1.55

1.671.52

26

TN Assigned Risk Market Share -

NAIC Direct Premium Written

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

14.76%15.65%

14.94%

11.00%

8.80%

6.60%

5.30%4.80%4.70%5.20%

6.49%

Statutory ThresholdMarket Share

27

LCM History: Voluntary vs.

TWCIP

TWCIP 21% On Average Higher

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '140

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1.46 1.49 1.46 1.43 1.4 1.37 1.33 1.34 1.34 1.35 1.40 1.44

1.7

1.95 1.951.85

1.71.63

1.54 1.51 1.551.67

1.52 1.55

Voluntary

TWCIP

2014 is esti-mated at 8% higher than voluntary market – as-sumes 4 point in-crease in vol-untary LCM

28

TN Assigned Risk Bookings Up, But Growth

Slowing Since March 2013

July '12

Aug '12

Sept '12

Oct '12

Nov '12

Dec '12

Jan '13

Feb '13

Mar '13

Apr '13

May '13

Jun '13

July '13

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

Last 6 months of 2012:Bookings up 41%

First 6 months of 2013:Bookings up 21%

NCCI Plans Up 34% through June 2013

NCCI Plans Up 61% for last 6 months of 2012

‘12/’13

’11/’12

29

TCA § 56-5-314 (c)(6)(B)

 • “The commissioner shall annually establish the

multiplier to be applied to the advisory prospective loss cost for the assigned risk plan. In establishing such multiplier, the commissioner shall consider the estimated cost of providing required services pursuant to this subsection and the level of the multipliers in the voluntary market.” (emphasis added)

30

Servicing Carrier & Direct Assignment

Carrier Loss Ratio History

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0% (1.55LCM Leveled)

Loss Ratio

Premium at Low Ebb

“Low” LCM Projection Period: 2003-2007Aggressive pick: LCM Projection Period: 2003-2006

1.57

71% Break Even

1.54

31

Aon’s Actuarial Estimate of Break Even

3/1/14 LCM

Mid Point Low High

1.57 1.66

• Projections are “grossed up” to reflect 50% reduction in tabular surcharge effective 9/1/12.

• MID POINT: Full data period is 2004-2011, excluding experience for 2010 due to $5M+ claim. Had Aon used 2010 data, the full impact would have projected a HIGH of 1.66 LCM. Six million dollar claim development in 2006 responsible for overall increase in the numbers.

• No provision for adverse deviation due to 2014 premium projected to be much higher than 2009-2011, when cycle was in its low ebb.

• 1.54 “final target” reflects experience from 2003-2006, while 1.57 reflects “final target low” 2003-2007.o Same 2003-2006 data segment that produced current 1.52 LCMo Encompasses upper end of cycle premium levels. Premiums for the next several years are

expected to grow significantly and approach the upper end range similar to what’s anticipated 2014 premium position. However, will likely factor premium levels not being as high as same point in prior cycle.

o Recommendation of 1.55 or 1.56 likely to be made which is between “aggressive” and “low” end projections. This is due to introduction of TAIL plan for policies with a standard premium of $250,000 and up (1.65 maximum). This should substantially improve loss ratio for this segment. TAIL Plan policies make up approximately 7% of the total premium.

1.61

Likely Recommendation 1.55-1.56

32

Currnetly Five Active Self-Insured Groups

Self Insured Groups

Associated Builders & Contractors of Tennessee

Comptrust AGC of Tennessee

Tennessee Automotive Association

Tennessee Forestry Association

Tennessee Health Care Association

33

Insolvencies• Individual carrier data included in this section

includes insolvencies over $1million in total losses.

34

WC Insolvency Data – Valued

7/31/13

(Listing Only Carriers Having Over $1M Total Unpaid Losses)

Carrier(Liquidation Date)

Total # Claims

Total $ Amount Paid Claims

Total $ UnpaidClaims

Reliance (10/01) 1,759 38,018,295 24,408,008

Home Ins. Co. (6/03) 125 2,657,057 4,891,376

Reciprocal of America (6/03) 313 1,683,790 2,798,327

Legion & Villanova (7/03) 1,878 40,405,486 22,621,821

Casualty Reciprocal (8/04) 52 1,706,249 2,707,130

Realm National (6/05) 52 3,010,248 2,211,751

Imperial Casualty (5/10) 127 1,537,591 1,544,505

Pegasus (8/10) 6 192,621 1,181,475

Lumbermens Mutual (5/13) – PRELIMINARY

87 2,022 7,377,907

Ullico (5/13) - PRELIMINARY 40 7,522 *5,994,891

Totals (all since 10/3/01) 4,439 89,220,881 75,737,191Source: TN Guarantee Association; * projected, as not all claims have been reserved

35

Number of WC Carrier Insolvencies

Per Year Impacting TN

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '120

1

2

3

4

5

6

Source: TN Guarantee Association; 2003 Legion & Villanova are combined & shown as one.

36

TN Guaranty Fund Assessment History (Millions)

'90-'99

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '120

2

4

6

8

10

12

14

16

18

37

A.M. Best Ratings for Companies

with >$1M Premium – Premium

Shares

39%

57%

1% 1% 2%

A+, A++A-,AB, B++C or BelowNot Rated

Superior

Good

Weak

Not Rated

As of July 31, 2013

38

TN Restaurant Association

• All claims have been paid. • TDCI is filing fees, a final return

with the IRS then closure motion with the court. 

39

NCCI Annual Issues Symposium Summary

Negatives Positives

• Underwriting results • Premium increased

• Potential expansion of alternative systems for WC

• Frequency decline resumes

• Interest rates at historic lows

• Severity growth moderate

• Uncertain impact from healthcare reform

• Improved Countrywide AY Combined Ratio

• Pace of economic recovery • Industry’s capital position“Encouraging”

Summary: NCCI Filings Reported

Quarterly

Third Quarter 2012• TWCIP Change • Revision to TWCIP Rehabilitation and Tabular Surcharge

Reduction Incentive Plan

Fourth Quarter 2012• 02-TN-2012 • Revision to Basic Manual State Rule Exceptions for Rule 2-E-1-B

and Rule 2-E-3

40

First Quarter 2013• None

• N/A

Second Quarter 2013• Item R-1406-2013

• Item R-1407-2013

• Update to the Retrospective Rating Plan Parameters – Excess Loss Factors

• Update to the Retrospective Rating Plan Parameters – State Hazard Group Differentials

41

Summary: NCCI Filings Reported Quarterly

(continued)First Quarter 2013• None

Second Quarter 2013• Item R-1406-2013

• Item R-1407-2013

• Update to the Retrospective Rating Plan Parameters – Excess Loss Factors

• Update to the Retrospective Rating Plan Parameters – State Hazard Group Differentials