Wednesday, December 18, 2013

Crashers Gettin' Bombed

Claim frequency is our industry's vernacular for the number of claims.

Severity talks about how bad those claims are.

The two are usually used in the same paragraph describing the amount of bad versus the amount of not-so-bad claims.

The best world is where the number of not-so-bad claims is greater than the number of bad claims and where both are less, or at least the same, as history portends.

In other words, if you're an insurance wonk, you like to see fewer claims, and of those fewer claims you like to see fewer that are bad.

We measure "severity" in terms of dollars - how much does a claim cost? It's an easier measurement than trying to say how many arms were amputated, or how many eyes were blinded, etc.

It's also a more meaningful number to employers, who are tasked with the burden of paying for these claims.

Usually there is some rationale behind these numbers, typically tied to economic trends. When more people are working then we would expect frequency to go up because there's more people that could get hurt ... and they do.

And when particularly more risky industrial segments are performing at high levels, such as construction or trucking, then severity goes up because there are more people doing more risky jobs that generate more severe injuries than, say, a desk job.

So we are all left scratching our heads when the numbers don't make sense.

The California Workers' Compensation Insurance Rating Bureau is in that quandary now - the numbers don't make sense, at least not in any historical perspective.

Yesterday the WCIRB projected a 5% increase in claim frequency during the first nine months of 2013.

The trend has been frequency dropping 3% to 4% each year since the 1960s as employers implemented better safety practices and industrial shifts led to more people working in the less-hazardous service-based sectors as opposed to manufacturing.

California frequency increased 6.7% from 2009 to 2010, following the nation and consistent with the economy as it started to come back from the recession. California frequency decreased by 1.9% from 2010 to 2011, again following the national trend.

But since then frequency has been on the rise, but it is geographically situated and in economic terms isn't making a lot of sense, at least on a cursory level.

The WCIRB is finalizing a study that will attempt to identify the factors causing the frequency increase.

The early results show that 2012 claim filings are up by 7.8% in the greater Los Angeles area – including Los Angeles, Orange, Ventura and Santa Barbara counties – while frequency is down 2.2% in the San Francisco Bay Area and down an average of 4% for all other regions of the state. The recent influx of claims also appear to be high-dollar permanent disability claims.

Claim frequency and severity are partially responsible for rate increases that have totaled 33.8% since 2009, and the increase in payrolls means that charged premiums are increasing at a faster pace. Some employers may experience a little sticker shock when renewal and/or audit time comes around.

If you're in the insurance game, though, the numbers aren't all that bad.

The higher charged rates, together with a moderate growth in wages, is driving up written premiums and bringing some improvement to insurer combined ratios.

The WCIRB says that California written premium (gross of deductible credits) for calendar year 2012 is approximately

$12.5 billion, about 16% above the written premium reported for 2011 and 42% above the written premium reported for 2009. Written premium for the first nine months of 2013 is approximately $11.2 billion, which is approximately 19% above the written premium reported for the first nine months of 2012. The WCIRB projects that total written premium for 2013 will be approximately $14.7 billion, which is the highest premium total since 2006.

With insurers collecting more in premiums, the WCIRB is projecting a combined ratio of 122% for accident year 2012, down from 141% in 2011, 142% in 2010 and 140% in 2009. The calendar year combined loss and expense ratio for 2012 reported by insurers is 114%.

Typically, when the actual numbers are released they show the State Compensation Insurance Fund skewing the combined ratio results because of its volume and its place in the industry covering all of the high risk, low payroll, small businesses that can not get coverage elsewhere. Perhaps this is indicative of what is driving frequency in the greater Los Angeles area - perhaps the economy really is recovering more robustly than thought and there are more small businesses employing more workers at the higher risk categories.

Or perhaps there are more businesses actually reporting properly their payroll and their claims.

The cynical might say that the claim mills of Los Angeles are at it again pushing claims through the system for ill begotten profit.

What I know is that, right now, we don't know.

The number people at the WCIRB will likely find what is driving these numbers, but of course by that time the impact to those who pay will have already been incurred.

Which is a big part of why workers' compensation can be so frustrating to the people who pay for the insurance - by the time we as an industry figure out what is going on, the financial damage has already occurred.

We can use "frequency" and "severity" to describe how things work, but at the end of the day it's how much the cost of the insurance is that matters to employers because it's a cost that they don't have a lot of control over other than trying to prevent claims in the first place.

I suspect the California employer community is going to be grumbling quite a bit in the coming years if projected savings from the great "reform" of 2012 don't result in lower charged premium.

The alternative rock band from the late 1970s to early 1990s, The B-52s, produced a great song (well, I think all their songs are great) called "Party Out of Bounds" in which Fred Schneider repeats, "who's to blame?" when the party gets out of bounds, when they get poorly planned:

"Who's to blame when situations degenerate? Disgusting things you'd never anticipate?"

My guess: "Bombed, crashers gettin' bombed; crashers gettin' bombed, bombed, bombed, bombed..."

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