Posted Date: May 11, 2021
NCCI’s annual State of the Line presentation provides an exclusive review of trends, cost drivers, and significant developments shaping the workers compensation (WC) industry. This State of the Line Guide provides a slide-by-slide examination of the key takeaways, data sources, and formulas underlying the State of the Line presentation.
As you review the information contained in this Guide, it may be useful to keep in mind the following market indicators and trends that were highlighted in NCCI’s 2021 State of the Line presentation:
We hope you find the 2021 State of the Line Guide both a beneficial and informative resource.
This slide shows workers compensation combined ratios. A combined ratio is the sum of the loss ratio, loss adjustment expense (LAE) ratio, dividend ratio, and underwriting expense ratio. The loss, LAE, and dividend ratios are calculated as ratios to net earned premium. The underwriting expense ratio is calculated as a ratio to net written premium to provide a better match of the timing of the numerator and denominator.
The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.
Combined ratios in the underlying table are in percentages. Information for state funds is included for informational purposes.
This slide shows the components of the workers compensation calendar year net combined ratios. The loss ratios in this slide compare net incurred losses to net earned premium. The loss ratio is the largest component of the combined ratio. The loss adjustment expense (LAE) ratio compares net incurred LAE to net earned premium. LAE includes both defense and cost containment expenses (DCCE) plus adjusting and other expenses. The underwriting expense ratio compares the costs associated with writing insurance to net written premium. The underwriting expenses included in the ratio are:
Policyholder dividends are the smallest component of the combined ratio and are compared to net earned premium.
The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.
Values in the underlying table are in percentages.
The overall investment gain is allocated by line of business according to the NAIC-prescribed allocation procedure.
The WC investment gain on insurance transactions (IGIT) ratio measures investment performance by comparing investment income allocated to the WC line of business to WC earned premium.
The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.
Investment gain ratios in the underlying table are in percentages.
The pretax operating gain in this slide measures the overall financial performance of the workers compensation line by considering both underwriting income and investment income. Pretax operating gain excludes direct changes to surplus, including, but not limited to, changes in:
The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.
Pretax operating gains in the underlying table are in percentages. Data for state funds is included for informational purposes.
In this slide, the overall private carrier workers compensation net combined ratios are shown for the most recent 10 years on both CY and AY bases. Each AY combined ratio reflects the experience on accidents as of the latest data evaluation date. See the Background section of WC Combined Ratio for more information.
The calendar year value for the most recent year is preliminary because additional data submissions may still be received by the NAIC. The AY values will change as losses develop to an ultimate level.
Combined ratios in the underlying table are in percentages.
In this slide, NCCI’s selected net combined ratios are compared to reported private carrier workers compensation net combined ratios. The values are shown for the most recent 10 years on an accident year (AY) basis. Each AY combined ratio reflects the experience on accidents as of the latest data evaluation date. See the Background section of WC Combined Ratio for more information.
Combined ratios in the underlying table are in percentages.
The accident year (AY) net incurred loss and LAE ratio is calculated as a ratio of AY net losses and LAE to CY earned premium. The values in this slide compare NCCI selections to those reported at the latest evaluation by private carriers.
For a given AY, a deficiency is reflected where NCCI’s selected net loss and LAE ratio is higher than the reported value by carriers; a redundancy is reflected where NCCI’s selected net loss and LAE ratio is lower than the value reported by carriers.
Net loss and LAE ratios in the underlying table are in percentages.
The net reserve deficiency is the dollar difference (in billions) between NCCI’s estimate of net loss and LAE reserves and the reported private carrier net loss and LAE reserves.
The overall workers compensation net reserve adequacy is calculated for all accident years combined at each year-end valuation.
A positive value on this slide indicates an overall reserve deficiency. A negative value on this slide indicates an overall reserve redundancy.
Redundancies and deficiencies in the underlying table are in billions of dollars.
The calendar year net combined ratios in this slide measure the overall performance of each line of business and the P&C industry as a whole. See the Background section of WC Combined Ratio for more information.
The values for the most recent year are preliminary because additional data submissions may still be received by the NAIC.
This slide displays a longer history of the net combined ratios for the total P&C industry. See the Background section of WC Combined Ratio for more information.
The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.
Combined ratios in the underlying table are in percentages.
This slide shows a summary of the COVID-19 claims reported on NCCI’s Financial Call #31 evaluated as of 12/31/2020. Values shown are based on large deductible and non-large deductible policies from private carriers and state funds for all jurisdictions where NCCI provides ratemaking services. The data does not include claims with zero dollars reported.
This slide shows the number of COVID-19 WC claims by accident date as reported on NCCI’s Financial Call #31 evaluated as of 12/31/2020. Values shown are based on large deductible and non-large deductible policies from private carriers and state funds for all jurisdictions where NCCI provides ratemaking services.
This slide shows a breakdown of the distribution of COVID-19 claims by type of claim reported on NCCI’s Financial Call #31 evaluated as of 12/31/2020. Values shown are based on large deductible and non-large deductible policies from private carriers and state funds for all jurisdictions where NCCI provides ratemaking services.
This slide shows a breakdown of the distribution of COVID-19 claims by size of loss reported on NCCI’s Financial Call #31 evaluated as of 12/31/2020. Values shown are based on large deductible and non-large deductible policies from private carriers and state funds for all jurisdictions where NCCI provides ratemaking services. The size of loss groupings is determined by total indemnity and medical paid+case reported for a claim.
This slide shows the distribution of COVID-19 claims as reported on NCCI’s Financial Call #31 evaluated as of 12/31/2020. These are grouped by industry based on the policy’s governing class code as reported in NCCI’s Policy data. Values shown are based on large deductible and non-large deductible policies from private carriers and state funds for all jurisdictions where NCCI provides ratemaking services.
This slide displays changes in frequency (lost-time claims per million dollars of pure premium) for all jurisdictions where NCCI provides ratemaking services. The year-to-year changes are based on data for matched states.
Frequency is defined as lost-time claim counts (developed to an ultimate basis) per million dollars of premium. Premium is adjusted to current wage and voluntary pure premium levels. Data is valued as of 12/31/2019. However, Accident Year 2020 is based on preliminary data valued as of 12/31/2020. Accident Years 2010 and 2011 show adjusted values, primarily due to significant changes in audit activity due to the Great Recession. High-deductible policies are excluded from all years.
Values in the underlying table are in percentages.
This slide displays average medical lost-time claim severity based on data for all jurisdictions where NCCI provides ratemaking services. Accident Years prior to 2010 exclude West Virginia, prior to 2006 exclude Texas, and prior to 2004 exclude Nevada. High-deductible policies are excluded from all years. Severity represents ultimate medical losses divided by ultimate lost-time claim counts. Data is valued as of 12/31/2019. However, Accident Year 2020 is based on preliminary data values as of 12/31/2020.
Two medical lost-time claim severity values are shown in the underlying table for Accident Years 2004, 2006, and 2010. Accident Year 2004 is restated to exclude Nevada in order to match the states included in Accident Year 2003. Accident Year 2006 is restated to exclude Texas in order to match the states in Accident Year 2005. Accident Year 2010 is restated to exclude West Virginia in order to match the states in Accident Year 2009. This restatement ensures that each year’s severity change is based on the same group of states.
The severity shown for Accident Year 2020 is the midpoint of the estimated range for the medical severity.
This slide compares the growth in average medical lost-time claim severity with the growth in the Personal Health Care Chain-Weighted Price Index (PHC). The PHC is a proxy for medical care price inflation that responds to changes in the blend of different medical services over time.
The year-to-year severity changes are based on data for unmatched states. The year a state is first included in the data, the countrywide severity change from the prior year may be influenced by the newly added state’s severity.
Both the WC average medical lost-time claim severity and PHC trend lines have been indexed to the year 2000. High-deductible policies are excluded from all years.
Values in the underlying table are in percentages.
This slide displays average indemnity claim severity based on data for all jurisdictions where NCCI provides ratemaking services. Accident Years prior to 2010 exclude West Virginia, prior to 2006 exclude Texas, and prior to 2004 exclude Nevada. High-deductible policies are excluded from all years. Severity represents ultimate indemnity losses divided by ultimate lost-time claims. Data is valued as of 12/31/2019. However, Accident Year 2020 is based on preliminary data valued as of 12/31/2020.
Two indemnity severity values are shown in the underlying table for Accident Years 2004, 2006, and 2010. Accident Year 2004 is restated to exclude Nevada in order to match the states included in Accident Year 2003. Accident Year 2006 is restated to exclude Texas in order to match the states in Accident Year 2005. Accident Year 2010 is restated to exclude West Virginia in order to match the states in Accident Year 2009. This restatement ensures that each year’s severity change is based on the same group of states.
This slide compares the growth in average indemnity claim severity with the growth in average weekly wages.
Average weekly wages between 2008 and 2011 were adjusted to compensate for exceptional volatility in bonuses for the financial sector during these years. The year-to-year severity changes are based on data for unmatched states. The year a state is first included in the data, the countrywide severity change from the prior year may be influenced by the newly added state’s severity.
Both the WC average indemnity claim severity and average weekly wage trend lines have been indexed to the year 2000. High-deductible policies are excluded from all years.
Values in the underlying table are in percentages.
In early 2018, the IDC received approval from the NCCI Board of Directors. Since then, NCCI has worked closely with industry stakeholders. Data reporter certification began in early 2020, and the first quarterly submission of IDC data was due by September 30, 2020.
NCCI has recently started to leverage the new Call data for targeted purposes.
The start of the collection of the IDC aligned very closely with the start of the pandemic. As a result, we have been able to leverage this new Call in producing COVID-19-related research, as well as in legislative analyses addressing presumptions pertaining to exposure-only (i.e., quarantine) claims.
The ability to link the IDC with our other NCCI data sources has assisted with enhancing the quality and depth of the information we collect. This more robust data will expand the boundaries of NCCI research and further increase our ability to analyze legislative changes.
Prior to COVID-19, telemedicine was used very infrequently, due in large part to legislation, regulation, and HIPAA privacy concerns.
During the pandemic, however, emergency orders and permanent rule changes facilitated the expansion of telemedicine. For example:
Essentially, access to care via telemedicine has expanded significantly and therefore is expected to continue to be more widely used in the future.
During 2020:
Most of the presumptions implemented in 2020 focused on healthcare workers and first responders.
This slide shows the ratio of lost-time COVID-19 claims to total Accident Year 2020 claims by jurisdiction as reported on NCCI’s Financial Calls evaluated as of 12/31/2020. Values shown are based on non-large deductible policies from private carriers and state funds for all jurisdictions where NCCI provides ratemaking services. This slide also identifies (in blue) the states that implemented presumptions in 2020.
To date in 2021:
As was the case in 2020, the 2021 presumption bills have generally been retroactive to the start of the pandemic. However, several of the bills in 2021 have expanded their scope of occupational groups that would be covered by such a presumption.
The issue of mental health has taken an even more prominent position in discussions across the country given the potential effects of the pandemic on healthcare workers, as well as more frequent reports of mass shootings in the workplace.
Mental-mental injury coverage under workers compensation is specific to situations where the claimant does not have a physical injury. The handling for these claims varies across states:
For those that do provide coverage, it is often limited. A common limitation is when mental-mental injury coverage applies to specific occupations, such as police officers or firefighters.
Note that West Virginia is listed as a state that specifically excludes WC coverage for mental-mental injuries, but it recently enacted legislation to provide such coverage to first responders beginning July 1, 2021.
Posttraumatic stress disorder (PTSD) and continuous traumatic stress disorder (CTSD) have been of particular concern for healthcare workers during the pandemic. While legislatures and the courts decide if and when treatment for mental health is covered under workers compensation, other avenues may exist for workers to get needed treatment, such as wellness programs and group health coverage.
Accident Year (AY)—A loss accounting term for experience that is summarized by the calendar year in which an accident occurred.
Adjusting and Other Expenses (AOE) Incurred—Loss adjustment expenses, other than those categorized as Defense and Cost Containment Expense. Examples:
Assigned Carrier—The insurer assigned to provide residual market coverage to an eligible employer that has applied for workers compensation insurance under NCCI’s Workers Compensation Insurance Plan. An assigned carrier can be either a servicing carrier or direct assignment carrier.
Calendar Year (CY)—A method of accounting that includes all financial transactions occurring during a 12-month period, beginning January 1.
Carrier Discounting—Combined impact on premium due to rate/loss cost departures, schedule rating, and dividends.
Commissions and Brokerage Expenses Incurred—Fees paid to producers.
Defense and Cost Containment Expense (DCCE) Incurred—Expenses for defense by the insurer in contentious situations (whether a first-party or third-party claim) for litigation involving a claim and for cost containment expense. Examples:
Direct Assignment—Assigned risk business written and serviced directly by an insurance company that has been authorized by the Insurance Department to write such business. These insureds are written without reinsurance through the National Workers Compensation Reinsurance Pooling Mechanism or other reinsurance pool.
Dividends to Policyholders—When actual costs and expenses are less than anticipated costs and expenses, carriers may opt to return the difference to policyholders in the form of a dividend.
Earned Premium—Proportional share of each policy’s written premium applicable to the expired part of the policy. Derived by subtracting the change in the unearned premium reserve from the written premium.
Estimated Annual Premium—Premium charged by an insurance company, at the time the policy is issued, for coverage provided by an insurance contract for a period of time. Estimated premium is reported before endorsements or audits.
Experience Mod—A factor calculated from actual case loss experience used to adjust an insured’s manual premiums (up or down) based on the insured’s loss experience relative to the average underlying the manual premiums. It compares the insured’s experience to the average class experience.
General Expenses Incurred—Overhead expenses incurred in the insurer’s operations, other than those included in the other expense categories. Examples:
Net Written Premium—The gross premium income adjusted for additional or return premiums, including any additions for reinsurance assumed and deductions for reinsurance ceded.
Other Acquisitions, Field Supervision, and Collection Expenses Incurred—Expenses incurred in obtaining insurance business. Examples:
Policy Year (PY)—The year of the effective date of the policy. Policy year financial results summarize experience for all policies with effective dates in a given calendar year period.
Pure Premium—Portion of bureau level premium that provides for indemnity and medical loss payments.
Residual Market Pool—A financial agreement among participating insurers to share in the experience of certain assigned risks. This reduces both administrative costs and annual fluctuations in the liability of participating insurers resulting from the operation of state insurance plans.
Servicing Carrier—An insurer, other than a direct assignment carrier, authorized to receive Plan assignments and provide coverage to eligible employers on behalf of insurance company members of the National Workers Compensation Reinsurance Association NFP (NWCRA)—or participants in other reinsurance pooling mechanisms—incorporated as a part of the Plan in a state.
Servicing Carrier Allowance—The ceding commission retained by a servicing carrier as compensation for the expenses of servicing an employer under a Workers Compensation Insurance Plan or similar program.
Taxes, Licenses, and Fees Incurred—State taxes, assessments, and miscellaneous fees. Examples:
Unearned Premium Reserve—Proportional share of each policy’s written premium applicable to the unexpired part of the policy.
Workers Compensation Insurance Plan (WCIP or Plan)—A program established and maintained by NCCI and approved by state insurance regulatory authorities whereby workers compensation insurance may be secured by eligible employers unable to secure such coverage in the voluntary market.
After-Tax Return on Surplus \[ =\frac{\small\text{Net Income}}{\small\text{Average Surplus}} \]
Average Surplus \[ =\small\text{0.5 x (Surplus as regards policyholders, December 31 current year} \\ \small\text{ + Surplus as regards policyholders, December 31 prior year)} \]
Combined Ratio \[ =\small\text{Loss Ratio + LAE Ratio + Dividend Ratio + Underwriting Expense Ratio} \] Combined Ratio (Residual Market Slides) \[ =\frac{\small\text{Losses}}{\small\text{Earned Premium}} + \frac{\small\text{Expenses and Allowances}}{\small\text{Written Premium}} \]
Dividend Ratio \[ =\frac{\small\text{Dividends to Policyholders}}{\small\text{Earned Premium}} \]
Indicated Net Loss & LAE Reserves \[ =\small\text{Ultimate Net Loss & LAE – Net Loss & LAE Payments} \]
Investment Gain on Insurance Transactions Ratio \[ =\frac{\small\text{Investment Gain on Funds Attributable to Insurance Transactions + Other Income Less Other Expenses}}{\small\text{Earned Premium}} \]
Investment Gain Ratio \[ =\frac{\small\text{Net Investment Gain (Loss)}}{\small\text{Earned Premium}} \]
Loss Adjustment Expense (LAE) Ratio \[ =\frac{\small\text{DCCE Incurred + AOE Incurred}}{\small\text{Earned Premium}} \]
Loss & LAE Ratio \[ =\frac{\small\text{Incurred Loss + DCCE Incurred + AOE Incurred}}{\small\text{Earned Premium}} \]
Loss Ratio \[ =\frac{\small\text{Incurred Loss}}{\small\text{Earned Premium}} \]
Net Earned Premium \[ =\small\text{Net Written Premium + Change in Unearned Premium Reserve} \]
Net Reserve Adequacy \[ =\small\text{NCCI Indicated Net Loss & LAE Reserves – Private Carrier Net Loss & LAE Reserves As Reported} \]
Premium-to-Surplus Ratio \[ =\frac{\small\text{Net Written Premium}}{\small\text{Surplus as regards policyholders}} \]
Pretax Operating Gain \[ =\small\text{1 – (Combined Ratio – Investment Gain on Insurance Transactions Ratio)} \]
Underwriting Expense Ratio \[ =\frac{ \begin{bmatrix} \begin{align} & \small\text{Commissions and Brokerage Expenses Incurred} \\ & \small\text{+ Taxes, Licenses, and Fees Incurred} \\ & \small\text{+ Other Acquisitions, Field Supervision, and Collection Expenses Incurred} \\ & \small\text{+ General Expenses Incurred} & \end{align} \end{bmatrix} } {\small\text{Written Premium}} \]