Severity in Workers Comp Loss Drivers of Severity

Severity in Workers Comp

Loss Drivers of Severity ¡Medical severity ¡Legal inflation ¡Co-morbidity factors ¡History of drug dependency ¡History of depression ¡Lack of family support ¡Legislative risk Catlin, Inc. 3

Loss Drivers of Severity ¡ Medical severity § Diagnostic expense § Cost shifting on severe claims § Prescription drugs • Narcotics over prescribed • Lack of generic alternatives on severe cases § Technological advances • Technology is keeping people alive longer and at greater expense • $6 M Dollar man a reality? Catlin, Inc. 4

$6 Million Dollar Man a Reality? 36 year old window cleaner, DOL- 2008 Accident Description: Lost his balance and fell into electrical power lines touched lines with metal pole in his hands Injury Details: burns to both arms – double amputation Subrogation: third party claim against power company going to trial Settlement: No settlement discussions to date – attorney waiting till stable condition Prognosis: 100% disabled, expected to live a full life. Claimant has steel hook prosthesis, titanium hook prosthesis and being fitted for myoelectric arm. May need revision surgery in future Catlin, Inc. 5

$6 Million Dollar Man a Reality? Paid to Date Incurred Total Indemnity $58, 380 $856, 620 $915, 000 Medical $966, 069 $4, 308, 931 $5, 275, 000 Expense $40, 780 $9, 220 $50, 000 $6, 240, 000 Average Cost projected to be $2, 041, 640 for 2 arms plus maintenance (estimate only) Catlin, Inc. 6

Loss Drivers of Severity ¡ Legal Inflation § Jurisdiction and regional differences ¡ Co-morbidity factors § Diabetes § High blood pressure § Obesity • • Twice as many filed claims Filed Claims Work Days Normal Obese Cost Year 1 13 X more work days lost Claims open for 1 year: 3 X as much Cost Year 5 Claims open for 5 years: 5 X as much 0 Catlin, Inc. 5 10 15 20 25 30 7

Loss Drivers of Severity ¡ History of drug dependency § Abusers have 300% higher medical costs § Abusers account for over 38% of all W. C. claims § Claimants prescribed narcotics have a greater chance of PTD ¡ History of depression § Longer disability periods § High rate of co-morbid health disorders § Average annual cost is 4. 2 times greater than normal ¡ Lack of Family Support § Increased cost of attendant care § Higher skilled nursing facility usage and costs ¡ Legislative Risk § Potential rollback of reforms EX) California: Ogilvie, Almaraz and Guzman Catlin, Inc. 8

Dealing with Severity ¡ Underwriting § Recognize: retrospective claims review • Accident type • Class code • Diagnosis type § Identify • Are supplemental questionnaires used? q Heights q Motor vehicle q Subterranean q Explosive q Dust Exposure • Tools to assist in identifying severity classes • Pre binding audit Catlin, Inc. 9

Dealing with Severity § Control • Mitigate exposure with workplace safety programs? Ex: Drug Free Workplace q 60% of world’s illegal drugs are consumed in the US q Nearly 70% of current users are employed q 90% of large business have drug free workplace programs q Only 5 -10% of small-medium employers have similar programs q 75% of employed Americans work for small to medium employers • Use underwriting manual to restrict or exclude exposure • Escalate review to more senior underwriter § Price • Comfort with R. I. C. dictates pricing flexibility Catlin, Inc. 10

Dealing with Severity ¡ Claims § 24 hour reporting procedures § On site loss investigation report • Visit site within 48 hours • Standardize basics q Depositions q Pictures q Sequester broken equipment § Large Case Management • Catlin, Inc. Already a focus with industry standards 11

Dealing with Severity § Surrounding Psych and social information • Co-morbidity, dependency, depression, family support • Gather information and escalate § Subrogation • Claims examiners – first line of defense • Better chance with timely loss site investigation § Settlement Catlin, Inc. • Determine valid ultimate loss • Understand adverse development potential • Catlin provides reserve review to clients 12

Interesting Comments that Reinsurers Hear “We have never had a loss excess $1 Million” § Different reserving methodology? § Stair stepping § Most favorable outcome § At expected settlement value § We don’t write severity prone business Catlin, Inc. 13

Interesting Comments that Reinsurers Hear If you are reserving to true You ultimate, andare still. LUCKY have not had a historic loss excess $1 Million… Catlin, Inc. 14

Can’t Underwrite Away from Severity 38 year old cashier, DOL- 2001 Accident Description: Went to get coffee for manager. She was struck while crossing the road Injury Details: Closed head brain injury that has affected ability to speak and retain information. Multiple fractures. Undergoing psych consultation for behavioral problems Subrogation: Claimant ran out in front of car. $321, 597 from drivers auto carrier Settlement: Indemnity unlikely and cannot settle med in this state Prognosis: Expected to live a full life. Claimant in 24 hr skilled nursing facility. She is not expected to ever reach an independent state or able to reside in a home Catlin, Inc. 15

Can’t Underwrite Away from Severity Paid to Date Outstanding Incurred Indemnity $62, 579 $165, 537 $228, 116 Medical $2, 982, 680 $7, 995, 385 $10, 978, 065 Expense $52, 557 $114, 443 $167, 000 $11, 373, 181 Catlin, Inc. 16

Can’t Underwrite Away from Severity 48 Year old Sales Person for Auto Dealer, DOL- 2007 Accident Description: Manager encouraged employee to demonstrate Martial Arts moves. Employee went to show a retreat move and apparently did not retreat fast enough. Co-worker was karate kicked in the head Injury Details: TBI - vision problems, vertigo, headache pains, memory deficits and behavioral deficits. Judged to be totally disabled Treatment: 24/7 attendant care, growth hormones to reduce headaches, TBI day program to help improve daily skills Subrogation: No potential of subrogation Settlement: No negotiations to date – attorney on claim Prognosis: Normal Life expectancy Catlin, Inc. 17

Can’t Underwrite Away from Severity Paid to Date Incurred Total Indemnity $104, 081 $358, 800 $462, 881 Medical $883, 995 $6, 200, 000 $7, 083, 995 Expense $17, 560 $22, 440 $40, 000 $7, 586, 876 Catlin, Inc. 18

Interesting Comments that Reinsurers Hear “We have strengthened our balance sheet, so we don’t need reinsurance. ” § Question: Penny Wise and Pound Foolish? Catlin, Inc. 19

Interesting Comments that Reinsurers Hear § Where are we now? Profit $0 Loss Catlin, Inc. Rising XP § Low Returns § Rising Medical § Payroll Deflation § Competitive primary pricing Payroll deflation Rising medical severity Low investment returns Rising expense ratios Primary Pricing § 20

Interesting Comments that Reinsurers Hear § Where are we headed? • • Catlin, Inc. 2008/2009 combined ratios @ 100% and climbing Reserve deterioration WATCH Filed rates increasing WATCH q What are actual street rates? q Are we any smarter? Ø There is lots of capital chasing same dollar Rate of insolvency & acquisition WATCH 21

Interesting Comments that Reinsurers Hear § Variables and unknowns Economic recession over? • Inflation or deflation? • Legislative reform erosion? • Impact of healthcare? § How are W. C. companies dealing with the market? • Growing outside traditional focus q Different policy sizes q Expanded classes q MGA/MGU q New jurisdictions • Reducing expense q Consolidating operations q Lay off’s q Reign in spending (ex: reduce reinsurance spend) • Catlin, Inc. 22

Interesting Comments that Reinsurers Hear If we are grappling with today and tomorrow… § How about trying to figure out the next 30 years? • Reinsurers are on the hook for the duration of the claim q Catlin, Inc. We help absorb long tail variability Ø Inflation/Deflation Ø Legislative risk Ø Economic cycles Ø Market shifts 23

Interesting Comments that Reinsurers Hear Management has a choice: § § Save money now, or Level long tail volatility through reinsurance “Penny wise and pound foolish? ” Given the current and future unknowns, is saving money now Catlin, Inc. 24

Using Reinsurance to mitigate Severity and Volatility Catlin, Inc.