Posted Date: May 9, 2023
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 2023 State of the Line presentation highlighted:
We hope you find the 2023 State of the Line Guide both a beneficial and informative resource.
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.
The value for the most recent year is preliminary because the NAIC may still receive additional data submissions.
Combined ratios in the underlying table are in percentages.
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.
The value for the most recent year is preliminary because the NAIC may still receive additional data submissions.
This slide shows workers compensation combined ratios. See the Background section of Net Combined Ratio (By Year) for more information.
The value for the most recent year is preliminary because the NAIC may still receive additional data submissions.
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 the NAIC may still receive additional data submissions.
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 the NAIC may still receive additional data submissions.
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 the NAIC may still receive additional data submissions.
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 Net Combined Ratio (By Year) for more information.
The CY value for the most recent year is preliminary because the NAIC may still receive additional data submissions.
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 Net Combined Ratio (By Year) 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 occurs when NCCI’s selected net loss and LAE ratio is higher than the reported value by carriers; a redundancy occurs when 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 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 with each valuation as loss experience matures.
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) and the current report (as of year-end 2022).
Net loss and LAE ratios in the underlying table are in percentages.
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 with each valuation as loss experience matures.
For each AY, the blue lines represent the NCCI-selected net loss and LAE ratios, as of the first report (the first year-end valuation for each corresponding AY) and the current report (as of year-end 2022).
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 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.
Redundancies and deficiencies in the underlying table are in billions of dollars.
This slide summarizes some key observations of WC COVID-19 claims reported on NCCI’s Financial Call #31 evaluated as of 12/31/2022 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. Accident Year 2020 is evaluated at a third report, Accident Year 2021 is evaluated at a second report, and Accident Year 2022 is evaluated at a first report.
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 12/31/2021. However, Accident Year 2022 is based on preliminary data, valued as of 12/31/2022. Accident Years 2010–2011 and 2019–2022 show adjusted values, primarily due to significant changes in audit activity. All years exclude high-deductible policies.
Values in the underlying table are in percentages.
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 2021 are displayed by Industry Group. Data is included for all jurisdictions where NCCI provides ratemaking services. All years exclude high-deductible policies.
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 2021 are displayed by Cause of Injury groupings. Data is included for all jurisdictions where NCCI provides ratemaking services. All years exclude high-deductible policies.
This slide shows the paid share of Medical by cost category for Service Year 2021. Physician services include medical doctors, physician assistants, nurse practitioners, physical therapists, and other professional service providers.
This slide shows average inflation experienced by each medical cost category from 2021 to 2022.
This slide displays average medical lost-time claim severity based on data for all jurisdictions where NCCI provides ratemaking services. Accident Years prior to 2004 exclude Nevada, prior to 2008 exclude Texas, and prior to 2012 exclude West Virginia. All years exclude high-deductible policies. Severity represents ultimate medical losses divided by ultimate lost-time claim counts. Data is valued as of 12/31/2021. However, Accident Year 2022 is based on preliminary data valued as of 12/31/2022.
The underlying table shows two medical lost-time claim severity values for Accident Years 2004, 2008, and 2012. Accident Year 2004 is restated to exclude Nevada in order to match the states included in Accident Year 2003. Accident Year 2008 is restated to exclude Texas in order to match the states in Accident Year 2007. Accident Year 2012 is restated to exclude West Virginia in order to match the states in Accident Year 2011. This restatement ensures that each year’s severity change is based on the same group of states.
This slide compares the growth in average medical lost-time claim severity with the growth in the Personal Health Care (PHC) Chain-Weighted Price Index from 2002 to 2022. The PHC Chain-Weighted Price Index 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, it may influence the countrywide severity change from the prior year. Both the average medical lost-time claim severity and the PHC Chain-Weighted Price Index trend lines are indexed to 2002. All years exclude high-deductible policies.
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 2004 exclude Nevada, prior to 2008 exclude Texas, and prior to 2012 exclude West Virginia. All years exclude high-deductible policies. Severity represents ultimate indemnity losses divided by ultimate lost-time claims. Data is valued as of 12/31/2021. However, Accident Year 2022 is based on preliminary data valued as of 12/31/2022.
The underlying table shows two indemnity severity values for Accident Years 2004, 2008, and 2012. Accident Year 2004 is restated to exclude Nevada in order to match the states included in Accident Year 2003. Accident Year 2008 is restated to exclude Texas in order to match the states in Accident Year 2007. Accident Year 2012 is restated to exclude West Virginia in order to match the states in Accident Year 2011. 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 across the time period of 2002 to 2022. An adjustment to average weekly wages between 2008 and 2011 compensates 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, it may influence the countrywide severity change from the prior year. Both the WC average indemnity claim severity and average weekly wage trend lines are indexed to 2002. All years exclude high-deductible policies.
Values in the underlying table are in percentages.
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.
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 policies 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—The 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—The 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—The 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 (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 \[ =\frac{ \begin{bmatrix} \begin{align} & \small\text{Commissions and Brokerage Expenses Incurred} \\ & \small\text{+ Taxes, Licenses, and Fees Incurred} \\ & \small\text{+ Other Acquisitions, Field Supervision, and Collection Expenses Incurred} \\ & \small\text{+ General Expenses Incurred} & \end{align} \end{bmatrix} } {\small\text{Written Premium}} \]