Severity in Workers Comp

Catlin, Inc. 3

Loss Drivers of Severity

Medical severityLegal inflationCo-morbidity factorsHistory of drug dependencyHistory of depressionLack of family supportLegislative risk

Catlin, Inc. 4

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

• $6M Dollar man a reality?

Catlin, Inc.

$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

5

Catlin, Inc.

$6 Million Dollar Man a Reality?

6

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. 7

Loss Drivers of Severity

Legal Inflation Jurisdiction and regional differences

Co-morbidity factors Diabetes High blood pressure Obesity

• Twice as many filed claims

• 13X more work days lost

• Claims open for 1 year: 3X as much

• Claims open for 5 years: 5X as much Cost Year 5

Cost Year 1

Work Days

Filed Claims

0 5 10 15 20 25 30

Normal

Obese

Catlin, Inc.

Loss Drivers of Severity

8

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.

Dealing with Severity

9

Underwriting Recognize: retrospective claims review

• Accident type• Class code• Diagnosis type

Identify

• Are supplemental questionnaires used? Heights Motor vehicle Subterranean Explosive Dust Exposure

• Tools to assist in identifying severity classes

• Pre binding audit

Catlin, Inc.

Dealing with Severity

10

Control

• Mitigate exposure with workplace safety programs?

Ex: Drug Free Workplace 60% of world’s illegal drugs are consumed in the US Nearly 70% of current users are employed 90% of large business have drug free workplace programs Only 5-10% of small-medium employers have similar programs 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.

Dealing with Severity

11

Claims 24 hour reporting procedures On site loss investigation report

• Visit site within 48 hours• Standardize basics

Depositions Pictures Sequester broken equipment

Large Case Management• Already a focus with industry standards

Catlin, Inc.

Dealing with Severity

12

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• Determine valid ultimate loss• Understand adverse development potential• Catlin provides reserve review to clients

Catlin, Inc.

Interesting Comments that Reinsurers Hear

13

“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.

Interesting Comments that Reinsurers Hear

14

If you are reserving to true ultimate, and still have not had a historic loss excess $1 Million…

You are LUCKY

Catlin, Inc.

Can’t Underwrite Away from Severity

15

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 24hr skilled nursing facility. She is not expected to ever reach an independent state or able to reside in a home

Catlin, Inc.

Can’t Underwrite Away from Severity

16

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.

Can’t Underwrite Away from Severity

17

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.

Can’t Underwrite Away from Severity

18

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.

Interesting Comments that Reinsurers Hear

19

“We have strengthened our balance sheet, so we

don’t need reinsurance.”

Question: Penny Wise and Pound Foolish?

Catlin, Inc.

Interesting Comments that Reinsurers Hear

20

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Ris

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Lo

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Profit

Loss

Where are we now? Competitive primary pricing Payroll deflation Rising medical severity Low investment returns Rising expense ratios

Catlin, Inc.

Interesting Comments that Reinsurers Hear

21

Where are we headed?• 2008/2009 combined ratios @ 100% and climbing• Reserve deterioration• Filed rates increasing

What are actual street rates? Are we any smarter?

There is lots of capital chasing same dollar• Rate of insolvency & acquisition

WATCH

WATCH

WATCH

Catlin, Inc. 22

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

Different policy sizes Expanded classes MGA/MGU New jurisdictions

• Reducing expense Consolidating operations Lay off’s Reign in spending (ex: reduce reinsurance spend)

Interesting Comments that Reinsurers Hear

Catlin, Inc.

Interesting Comments that Reinsurers Hear

23

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

We help absorb long tail variability Inflation/Deflation Legislative risk Economic cycles Market shifts

Catlin, Inc.

Interesting Comments that Reinsurers Hear

24

Management has a choice: Save money now, or Level long tail volatility through reinsurance

Given the current and future unknowns, is saving money now“Penny wise and pound foolish?”

Catlin, Inc.

Using Reinsurance to mitigate Severity and Volatility