2022 State of the Line Guide

Posted Date: May 10, 2022  

Introduction

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 insights, 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 NCCI’s 2022 State of the Line presentation highlighted:

  • The workers compensation line is strong and healthy.
  • The system saw its eighth consecutive year of underwriting profitability with a calendar year combined ratio of 87, outperforming other property-casualty lines.
  • Net written premiums rose about one percent in 2021.
  • Lost-time claim frequency data suggests the long-term decline continues, despite a rise in frequency in 2021. Since 2019, frequency has declined slightly.
  • There is no change expected in medical and indemnity claim severity in 2021.
  • There are potential challenges ahead as medical costs could experience inflationary pressure.
  • Workers compensation reserves are robust. Reserves grew to $16 billion redundant as of year-end 2021.

We hope you find the 2022 State of the Line Guide both a beneficial and informative resource.

P&C Results

Net Written Premium Growth

Key Insights

  • Total property and casualty net written premium for private carriers increased by approximately 9% to more than $700 billion in 2021
  • The overall increase results from large increases in all Liability Lines and Fire & Allied Lines

Background

The net written premium in this slide provides a measure of the size of each major line of business in the P&C insurance industry.

Data

  • National Association of Insurance Commissioners (NAIC) Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Net Combined Ratio (by Year)

Key Insights

  • Private carriers have produced an underwriting gain in 10 of the 21 years displayed, including 7 of the last 9 years
  • The average combined ratio over the period is 101%

Background

This slide displays a long-term history of the net combined ratios for the total P&C industry. 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 earned premium. The underwriting expense ratio is calculated as a ratio to written premium to provide a better match of the timing of the numerator and denominator.

Data

  • NAIC’s Annual Statement data: 2001–2008 and 2013–2021p
  • Insurance Services Office: 2009–2012

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.

Net Combined Ratio

Key Insights

  • The total P&C combined ratio was flat at 99% for private carriers in 2021
  • Combined ratios decreased in nearly every line of business, except for Personal Auto
  • Workers compensation remained flat with a combined ratio of 87% in 2021

Background

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 Net Combined Ratio (By Year) for more information.

Data

  • NAIC’s Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The values for the most recent year are preliminary because additional data submissions may still be received by the NAIC.

Today’s WC Environment

Workplace Environment

Key Insights

  • Payroll increased more than 10% in 2021—about 3% from employment and 7% from wages.
  • These increases were not uniform across all workers. Wage gains were largest for low-wage workers and industries.

Background

The change in payroll from 2020 to 2021 is broken down into changes in employment and wage growth.

Data

  • US Bureau of Labor Statistics
  • US Bureau of Economic Analysis
  • NCCI

WC Premium

Net Written Premium

Key Insights

  • The 2021 net written premium for private carriers is $38B, consistent with 2020
  • Once state fund premium is added in, the net written premium total is $43B
  • State funds saw a larger increase in premium compared with private carriers

Background

This slide displays WC net written premium by year, separately for private carriers and state funds.

In the context of the State of the Line presentation, NCCI’s definition of state funds includes only those carriers that are both members of the American Association of State Compensation Insurance Funds and largely exempt from paying federal income taxes. All other carriers are included in the private carrier values.

Data

  • National Association of Insurance Commissioners’ (NAIC’s) Annual Statement data
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

Premium values in the underlying table are in billions of dollars.

Residual Market Premium

Key Insight

  • Premium for the NCCI-serviced Residual Market Pools has been less than $1 billion in each of the last several years, with small year-over-year declines since 2015

Background

Insureds that are unable to obtain coverage in the voluntary market can secure coverage through the Residual Market Pool in participating states. The estimated ultimate premium for all Residual Market Pools serviced by NCCI is displayed by policy year.

Data

  • Pool data for all NCCI-serviced WC Residual Market Pool states, valued as of 12/31/2021
  • Tennessee Reinsurance Mechanism premium is not included
  • NCCI’s Residual Market Quarterly Results

Residual market premium values in the underlying table are in billions of dollars.

Residual Market Share

Key Insight

  • The residual market share continued to decline through 2021, and it is now approximately 6%

Background

Pool and direct assignment premium for all NCCI-serviced Residual Market Pool states as a percentage of total WC market premium is displayed by calendar year.

Data

  • Pool and direct assignment data for all NCCI-serviced WC Residual Market Pool states valued as of 12/31/2021
  • NCCI’s Residual Market Management Summary

Residual market shares in the underlying table are in percentages.

Direct Written Premium Change—2021

Key Insight

  • Between 2020 and 2021, countrywide private carrier direct written premium increased 1.9%

Background

Underlying the change in the private carrier direct written premium volume are the changes in premium volume by individual jurisdiction. The percentage changes depicted on the map exclude monopolistic fund states. Orange represents premium volume increases, while blue represents premium volume decreases. The deeper colors represent larger magnitudes of change.

Data

  • NAIC’s Annual Statement Statutory Page 14 for calendar year written premium by state

Direct written premium changes in the underlying table are in percentages.

Most Recent Changes in Bureau Premium Level

Key Insight

  • The most recent filings resulted in decreases for all but one NCCI state

Background

This slide displays the most recent approved change (or filed and pending change) in voluntary market advisory rates or loss costs in each jurisdiction where NCCI provides ratemaking services as of May 6, 2022. Law-only filings are not included in this summary.

In the slide, orange represents premium level increases, while blue represents premium level decreases. The deeper colors represent larger magnitudes of change.

Data

Changes in bureau premium level in the underlying table are in percentages.

Approved Changes in Bureau Premium Level

Key Insight

  • Bureau premium levels are expected to decrease by an average of 7.5% from 2021 to 2022 as a result of approved NCCI filings

Background

The bureau premium level changes shown here reflect the approved changes in advisory rates, loss costs, and assigned risk rates as filed in jurisdictions where NCCI provides ratemaking services as of May 6, 2022.

The percentage changes by state, which reflect the impact on written premium (from one year to the next) due to NCCI filing activity, are weighted using calendar year (CY) direct written premium as reported to the NAIC. The changes shown reflect several factors that impact NCCI filings, such as changes in claim frequency and severity, changes in the economy, cost containment initiatives, legislative reforms, and judicial decisions. Texas is included beginning with CY 2011 and West Virginia beginning with CY 2008.

This methodology reflects the effective date of each state’s filing when determining the impact on written premium from one year to the next.

Data

  • NAIC’s Annual Statement Statutory Page 14

The value for the most recent year is preliminary because there may be additional filing approvals with effective dates in 2022.

Approved changes in bureau premium level in the underlying table are in percentages.

WC Impact on Premium by Component

Key Insight

  • From 2016 to 2021, increased payroll has been the primary force offsetting the decreases in loss costs

Background

This slide provides the major components impacting the change in premium from 2016 to 2021, for all states where NCCI provides ratemaking services.

Data

  • NAIC’s Annual Statement Statutory Page 14
  • NCCI’s Financial Call data
  • NCCI’s Policy data

Impact of Discounting on Premium

Key Insight

  • The overall estimated impact of carrier discounting was 5.0% in 2021

Background

This slide shows the combined impact of rate/loss cost departures, schedule rating, and dividends on policy year premium based on private carrier data for all jurisdictions where NCCI provides ratemaking services, excluding Texas. The rate/loss cost departure reflects carrier departures from the NCCI rate level, which excludes both a profit and contingency provision and an expense constant.

Data

  • NAIC’s Annual Statement Statutory Page 14
  • NCCI’s Financial Call data

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.

Impact of Discounting on Premium by Component

Key Insights

  • Data for the most recent years reflect a mix of relatively smaller dividend payouts, moderate schedule rating credits, and upward rate and loss cost departures
  • Since 2002, the individual elements have been largely offsetting, which has led to a modest overall impact from discounting

Background

This slide shows the component impacts of rate/loss cost departures, schedule rating, and dividends on policy year premium based on private carrier data for all jurisdictions where NCCI provides ratemaking services, excluding Texas. The rate/loss cost departure reflects carrier departures from the NCCI rate level, which excludes both a profit and contingency provision and an expense constant.

Data

  • NAIC’s Annual Statement Statutory Page 14
  • NCCI’s Financial Call data

The value for the most recent year is preliminary because additional data submissions may still be received by the NAIC.

WC Results

Net Combined Ratio

Key Insights

  • The 2021 private carrier combined ratio of 87% marks the fifth consecutive year of results under 90%, and the eighth consecutive year of underwriting gains
  • The 2021 combined ratio translates into a 13-point underwriting gain

Background

This slide shows workers compensation combined ratios. See the Background section of Net Combined Ratio (By Year) for more information.

Data

  • NAIC’s Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

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.

Net Combined Ratio by Component

Key Insights

  • The 2021 combined ratio is primarily the result of the low underlying loss ratio
  • The 2018 to 2021 loss ratios have been the lowest observed in at least 30 years
  • There was a slight increase in the underwriting expense ratio in 2021, while the dividend and LAE ratios remained relatively stable

Background

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:

  • Commission and brokerage expenses
  • Taxes, licenses, and fees
  • Other acquisition expenses
  • General expenses

Policyholder dividends are the smallest component of the combined ratio and are compared to net earned premium.

Data

  • NAIC’s Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

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.

Investment Gain on Insurance Transactions

Key Insight

  • The preliminary WC investment gain on insurance transactions increased to 12% in 2021—consistent with the long-term average of 11.8%

Background

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.

Data

  • NAIC’s Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

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.

Pretax Operating Gain

Key Insights

  • A 12% investment gain ratio combined with a 13% underwriting gain results in a 25-point operating gain in 2021
  • This is the fifth straight year with results over 20%, which represents the most profitable period we’ve seen going back at least 30 years
  • Workers compensation results have been strong, with nearly a decade of operating gains

Background

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:

  • Unrealized capital gains
  • Unrealized foreign exchange gain
  • Net deferred income tax
  • Nonadmitted assets
  • The provision for reinsurance
  • Surplus notes

Data

  • NAIC’s Annual Statement data for individual carriers prior to consolidation of affiliated carriers
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

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.

Net Combined Ratios—CY vs. AY As Reported

Key Insights

  • CY results are impacted by adjustments to reserves on prior accident years. The low CY results for 2020 and 2021 are indeed impacted by reserve decreases in prior AYs.
  • The 2021 AY CR as reported in the NAIC Annual Statement is 102.

Background

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 Net Combined Ratio (By Year) for more information.

Data

  • NAIC’s Annual Statement, Schedule P, Part 1D
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

The CY 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.

Net Combined Ratios—NCCI’s AY Selections vs. As Reported

Key Insights

  • NCCI’s selection is the level to which we believe each AY will develop over time
  • NCCI believes AY 2021 will trend downward over time, falling by 10 points before all claims for that year are settled and closed
  • While the magnitude of the expected decline is sizable, it’s comparable to what we also expect will occur for 2020 and what has already occurred for other AYs

Background

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 Net Combined Ratio (By Year) for more information.

Data

  • NAIC’s Annual Statement, Schedule P, Part 1D
  • Insurance Expense Exhibit Part II—Allocation to Lines of Business Net of Reinsurance

Combined ratios in the underlying table are in percentages.

Net Loss and LAE Ratios—NCCI’s AY Selections vs. As Reported

Key Insight

  • For almost every AY displayed, NCCI believes the current As Reported AY results (on the right in each two-bar pair) will decline over time—with the more recent AYs declining significantly

Background

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.

Data

  • NAIC’s Annual Statement, Schedule P, Part 1D

Net loss and LAE ratios in the underlying table are in percentages.

Emergence of Reported WC Net Loss and LAE Ratios

Key Insights

  • The carrier-reported net loss and LAE ratios for all AYs shown have decreased since their initial report (Note: AY 2021 is at first report at year-end 2021 valuation, so no emergence to be observed yet)
  • NCCI expects carrier-reported net loss and LAE ratios to decline further over subsequent valuations, to the level indicated by the blue lines—i.e., to the level of NCCI’s selected ultimate net loss and LAE ratios
  • For AY 2021, we expect to see a 10-point decrease in the ultimate loss ratio, from what carriers have currently reported for that year

Background

The net incurred loss and LAE ratio is calculated as the ratio of AY net incurred losses and LAE to CY net earned premium. The accident year (AY) net loss and LAE ratios change over each valuation as losses are paid and reserves are reevaluated (i.e., AY emergence).

For each AY, the orange line represents the carrier-reported net loss and LAE ratio as of the first report (the first year-end valuation for each corresponding AY).

For each AY, the gray bars represent the amount of emergence of the carrier-reported net loss and LAE ratios between first report and year-end 2021.

For each AY, the blue line represents the difference between the carrier-reported and NCCI-selected net loss and LAE ratios, as of year-end 2021.

Data

  • NAIC’s Annual Statement, Schedule P, Part 1D

Net loss and LAE ratios in the underlying table are in percentages.

Net Loss and LAE Reserve Adequacy

Key Insights

  • This year’s analysis indicated that reserves held by private carriers as of year-end 2021 are redundant and that the redundancy has grown to $16B in total
  • WC results continue to reflect a strong financial position

Background

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 combined for all accident years at each year-end valuation and considers all reserve discounts as deficiencies.

A positive value on this slide indicates an overall reserve deficiency. A negative value on this slide indicates an overall reserve redundancy.

Data

  • NAIC’s Annual Statement, Schedule P, Part 1D

Redundancies and deficiencies in the underlying table are in billions of dollars.

COVID-19 Update

Direct Impact of COVID-19—Accident Years 2020 & 2021

Key Insights

  • Approximately 60,000 COVID-19-related claims with associated losses have been reported to NCCI since the beginning of Accident Year 2020
  • In total, those claims are associated with approximately $500M in losses

Background

This slide shows a summary of the COVID-19 claims reported on NCCI’s Financial Call #31 evaluated as of 12/31/2021. 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 or expense-only claims.

Data

  • NCCI’s Financial Call data

COVID-19 Waves—Accident Years 2020 & 2021

Key Insight

  • Similar to 2020, the COVID-19 infection rates peaked in waves as the country endured the Delta and Omicron variants

Background

This slide shows the daily number of US COVID-19 cases in 2020 and 2021—as reported to the Centers for Disease Control and Prevention as of 3/15/2022

Data

  • Centers for Disease Control and Prevention (cdc.gov)

COVID-19 Waves—Accident Years 2020 & 2021 (Claims)

Key Insights

  • The intensity of the waves of WC COVID-19 claims in 2021 was significantly moderated
  • The higher availability of vaccines and increased usage of personal protective equipment likely contributed to fewer WC COVID-19 claims in 2021

Background

This slide shows the number of WC COVID-19 claims by accident date as reported on NCCI’s Financial Call #31, evaluated as of 12/31/2021. 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. Does not include claims with zero payments.

Data

  • NCCI’s Financial Call data

The Share of COVID-19 Claims That Are Indemnity-Only Grew in Size

Key Insights

  • In 2020, indemnity-only claims accounted for over 40% of COVID-19 claims, which is much higher than the share observed for prepandemic claims. These claims include claimants that needed to quarantine, but did not have any symptoms that required medical services.
  • Carriers showed commitment to paying out COVID-19 medical benefits as demonstrated by initial medical case reserves established in 2020. But the outcome for many in 2021 appears to have been less severe than initially anticipated, and as a result, the indemnity-only share of COVID-19 claims has grown in size to over 55%.

Background

This slide shows a breakdown of the distribution of WC COVID-19 claims by type of claim reported on NCCI’s Financial Call #31, evaluated as of 12/31/2020 and 12/31/2021, including data submissions through mid-April of each respective valuation of 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. Does not include claims with zero incurred losses.

Data

  • NCCI’s Financial Call data

COVID-19 Claim Severities—Accident Years 2020 & 2021

Key Insights

  • COVID-19 indemnity-only claim severity decreased in 2021—from approximately $1,600 to $1,100. This decrease could potentially be a result of the shorter quarantine period recommended by the Centers for Disease Control and Prevention in 2021.
  • COVID-19 medical-only claim severity increased slightly in 2021—from approximately $1,100 to $1,400.
  • COVID-19 severity for claims with both indemnity and medical components increased significantly in 2021—from approximately $18.6K to $24.8K. This increase may be a result of the evolution of medical treatments throughout 2021.

Background

This slide shows the average severities of WC COVID-19 claims by type of claim reported on NCCI’s Financial Call #31, evaluated as of 12/31/2021—for Accident Year 2020 and Accident Year 2021, both evaluated at a first report. 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. Does not include claims with zero incurred losses.

Data

  • NCCI’s Financial Call data

COVID-19 Claims by Size of Loss—Accident Years 2020 & 2021

Key Insights

  • The distribution of WC COVID-19 claims by size of loss observed for Accident Year 2021 is very similar to that for Accident Year 2020.
  • More than two-thirds of WC COVID-19 claims are associated with incurred losses of less than $1,500. Most of these claims are indemnity-only or medical-only claims.
  • The overwhelming majority of COVID-19 claims are less severe than the median cost of a non-COVID-19 WC claim.
  • Claims over $100K account for less than 2% of all COVID-19 claims but represent more than 60% of total incurred losses. These claims generally had more medical services and likely resulted in a hospital stay.
  • Close to half of the most complex claims—the rare claims that exceed $500,000 in incurred losses—are fatal claims.

Background

This slide shows a breakdown of the distribution of WC COVID-19 claims by size of loss reported on NCCI’s Financial Call #31, evaluated as of 12/31/2021—for Accident Year 2020 and Accident Year 2021. 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. Does not include claims with zero incurred losses. Claims were assigned to a size of loss by the claim’s total reported indemnity and medical paid+case losses.

Data

  • NCCI’s Financial Call data

COVID-19 Fatality Claims Have a Disproportionate Share of Losses

Key Insight

  • Less than 1% of COVID-19 claims are fatalities, but these claims account for almost 25% of all COVID-19 incurred losses

Background

This slide shows the claim and loss distributions of WC COVID-19 claims by type of injury based on NCCI’s Statistical Plan 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.

Data

  • NCCI’s Financial Call data

Workers Impacted by COVID-19—Accident Years 2020 & 2021

Key Insights

  • Frontline workers continue to account for a majority of all COVID-19 claims
  • In 2021, the share of COVID-19 claims for Nursing and Convalescent Homes decreased significantly, potentially as a result of increased usage of personal protective equipment, strict visitor restrictions, and increased vaccination rates
  • In 2021, the share of COVID-19 claims for Retail/Store, Education, and Trucking workers increased as a result of the country opening back up in 2021

Background

This slide shows the breakdown of the percentage of WC COVID-19 claims by type of worker based on NCCI’s Statistical Plan data—for Accident Year 2020 and Accident Year 2021. 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.

Data

  • NCCI’s Financial Call data

WC Loss Drivers

Lost-Time Claim Frequency

Key Insights

  • NCCI estimates that lost-time claim frequency for Accident Year 2021 will be 7% higher than that for Accident Year 2020
  • Pandemic-related shutdowns in 2020, with workers returning to work in 2021, are likely contributors to this increase
  • After combining the annual lost-time claim frequency changes for the two most recent years, we see claim frequency has declined slightly since 2019
  • If COVID-19 lost-time claims are included, the increase is less steep, with an average increase in lost-time frequency of 2% between Accident Years 2020 and 2021

Background

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 upon 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 12/31/2020. However, Accident Year 2021 is based on preliminary data, valued as of 12/31/2021. Accident Years 2010–2011 and 2019–2021 show adjusted values, primarily due to significant changes in audit activity. High-deductible policies are excluded from all years.

Data

  • NCCI’s Financial Call data. COVID-19 claims are excluded.

Values in the underlying table are in percentages.

Lost-Time Claim Frequency by Cause of Injury

Key Insights

  • Declines in lost-time claim frequency were observed across all Cause of Injury groupings in Accident Year 2020.
  • Motor vehicle accident frequency had the largest decline at nearly -13%. These claims account for a small share of all lost-time claims.
  • Slip and fall claims also had an above-average decline in frequency. These claims account for almost 30% of all lost-time claims.

Background

The changes in lost-time claim frequency (reported lost-time claims per million dollars of pure premium at a first report) between Accident Year 2019 and Accident Year 2020 are displayed by Cause of Injury groupings. Data is included for all jurisdictions where NCCI provides ratemaking services. High-deductible policies are excluded from all years.

Data

  • NCCI’s Statistical Plan data. COVID-19 claims are excluded.

Indemnity Claim Severity

Key Insights

  • NCCI estimates that the average indemnity cost per claim for Accident Year 2021 will be about the same as that for Accident Year 2020
  • If COVID-19 claims were included, the estimated 2020-to-2021 indemnity severity change would be approximately 3%
  • The average cost of a COVID-19 lost-time claim increased slightly between 2020 and 2021, so including those claims puts upward pressure on the 2020-to-2021 indemnity severity change

Background

This slide displays average indemnity claim severity based on data for all jurisdictions where NCCI provides ratemaking services. Accident Years prior to 2011 exclude West Virginia, prior to 2007 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 12/31/2020. However, Accident Year 2021 is based on preliminary data valued as of 12/31/2021.

Data

  • NCCI’s Financial Call data. COVID-19 claims are excluded.

Two indemnity severity values are shown in the underlying table for Accident Years 2004, 2007, and 2011. Accident Year 2004 is restated to exclude Nevada in order to match the states included in Accident Year 2003. Accident Year 2007 is restated to exclude Texas in order to match the states in Accident Year 2006. Accident Year 2011 is restated to exclude West Virginia in order to match the states in Accident Year 2010. This restatement ensures that each year’s severity change is based on the same group of states.

Indemnity Claim Severity vs. Wage Inflation

Key Insights

  • Between 2012 and 2020, the change in indemnity claim severity has tracked quite closely with the change in the average weekly wage
  • Strong wage growth has served to widen the gap between wages and indemnity claim severity in 2021

Background

This slide compares the growth in average indemnity claim severity with the growth in average weekly wages. Both the WC average indemnity claim severity and average weekly wage trend lines have been indexed to 2012. High-deductible policies are excluded from all years.

Data

  • Indemnity severity is derived from NCCI’s Financial Call data. COVID-19 claims are excluded.
  • US Average Weekly Wage is based on Quarterly Census of Employment and Wages (QCEW) data from the US Bureau of Labor Statistics (BLS) for 2012–2019; NCCI and QCEW for 2020; 2021p is estimated by NCCI using forecasts from Moody’s Analytics.

Values in the underlying table are in percentages.

Medical Lost-Time Claim Severity

Key Insights

  • NCCI estimates that the average medical lost-time claim severity for Accident Year 2021 will be about the same as that for Accident Year 2020.
  • If COVID-19 claims other than those that are strictly indemnity-only were included, the estimated 2020-to-2021 medical severity change would be approximately 1%
  • The decline in medical lost-time claim severity in 2020 may generally be attributed to a combination of direct and indirect pandemic-related impacts that have caused shifts in the overall percentage of medical-only claims, the distribution of WC claims by injury type, and the utilization of hospital inpatient facilities. These impacts may or may not continue going forward.

Background

This slide displays average medical lost-time claim severity based on data for all jurisdictions where NCCI provides ratemaking services. Accident Years prior to 2011 exclude West Virginia, prior to 2007 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 12/31/2020. However, Accident Year 2021 is based on preliminary data valued as of 12/31/2021.

Data

  • NCCI’s Financial Call data. COVID-19 claims are excluded.

Two medical lost-time claim severity values are shown in the underlying table for Accident Years 2004, 2007, and 2011. Accident Year 2004 is restated to exclude Nevada in order to match the states included in Accident Year 2003. Accident Year 2007 is restated to exclude Texas in order to match the states in Accident Year 2006. Accident Year 2011 is restated to exclude West Virginia in order to match the states in Accident Year 2010. This restatement ensures that each year’s severity change is based on the same group of states.

Medical Lost-Time Claim Severity vs. Price Inflation

Key Insight

  • Changes in medical lost-time claim severity in NCCI states has generally tracked closely with medical price inflation from 2012 through 2019. Pandemic-related impacts contributed to a slowdown in medical lost-time severity growth in 2020 and 2021.

Background

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. Both the average medical lost-time claim severity and the PHC trend lines have been indexed to 2012. High-deductible policies are excluded from all years.

Data

  • Medical lost-time claim severity is derived from NCCI’s Financial Call data. COVID-19 claims are excluded.
  • PHC Chain-Weighted Price Index is from the Centers for Medicare & Medicaid Services.

Values in the underlying table are in percentages.

Appendices

Appendix A—Definitions

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:

  • Fees of adjusters and settling agents (but not if engaged in a contentious defense)
  • Attorney fees incurred in the determination of coverage, including litigation between the insurer and the policyholder

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:

  • Surveillance expenses
  • Fixed amounts for cost containment expenses
  • Case management expenses for managing the overall cost of a claim
  • Litigation management expenses
  • Fees or salaries for appraisers, private investigators, hearing representatives, reinspectors, and fraud investigators, if working in defense of a claim
  • Attorney fees incurred owing to a duty to defend
  • Cost of engaging experts

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.

Exposure Accident Year (EAY):

  • Claims/Losses–Are on an accident year basis
  • Earned Premium–Final audited premium for each policy is allocated to the appropriate calendar year based on the period of exposure

General Expenses Incurred—Overhead expenses incurred in the insurer’s operations, other than those included in the other expense categories. Examples:

  • Salaries
  • Rent and rent items
  • Equipment

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:

  • Salaries
  • Equipment
  • Advertising
  • Employee relations and welfare
  • Allowance to managers and agents
  • Postage, telephone, and express
  • Rent and rent items

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:

  • Premium taxes
  • Second Injury Fund assessments
  • General administration funds
  • Guaranty funds

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.

Appendix B—Formulas

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 (IGIT) 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 \[ =\frac{ \begin{bmatrix} \begin{align} & \small\text{Commissions and Brokerage Expenses Incurred} \\ & \small\text{+ Taxes, Licenses, and Fees Incurred} \\ & \small\text{+ Other Acquisitions, Field Supervision, and Collection Expenses Incurred} \\ & \small\text{+ General Expenses Incurred} & \end{align} \end{bmatrix} } {\small\text{Written Premium}} \]