California’s Workers’ Compensation Insurance Rating Bureau has released a study that notes that following workers’ comp reform, statewide average ratios of loss adjustment expense (LAE) to loss per claim have increased. However, depending on how various legal issues are resolved and whether reforms are rolled back, that LAE costs could increase.
WCIRB conducted an analysis of LAE trends and projection methodologies, given the increase in LAE to loss ratios, as well as other factors. The resultant report, titled, “Analysis of Loss Adjustment Expense Trends,” found that:
– Following the reforms, LAE amounts did not decline and, as a result, LAE increased significantly as a percentage of calendar year losses.
-State Compensation Insurance Fund’s LAE experience now differs from that of the average LAE experience of private insurers and it is not clear whether the circumstances that produced these differences will continue into the future. As a result, excluding SCIF’s historical LAE experience when projecting future overall LAE provisions may, at least temporarily, be appropriate.
-Changes in calendar year LAE have historically not tracked well with changes in calendar year losses.
-Recent workers’ comp reforms included tools for insurers to reduce the cost of claims. However, implementation of these tools has increased the complexity of administering and adjusting claims, thereby increasing the related costs.
-Among the reform-related factors that would tend to increase allocated loss adjustment expenses are increased disputes over medical treatment, disputes related to apportionment, issues related to the Jan. 1, 2005, Permanent Disability Rating Schedule (PDRS), and litigation related to other reform issues.
-Among the reform-related factors that would tend to increase unallocated loss adjustment expense are the medical treatment review process, additional complexities related to the indemnity benefit process, and changes in average claim adjuster case loads.
-Statewide average ratios of LAE per claim have increased following the reforms. However, LAE costs per indemnity claim excluding State Fund’s experience increased immediately following the reforms, but have recently begun to decline modestly.
-LAE costs per claim could continue to decline in subsequent years as more of the legal challenges to the reform provisions are resolved and the remaining significant uncertainties surrounding the reforms are alleviated. However, it is also possible, depending on how various legal issues are resolved, that LAE costs could increase.
Based on the report, the WCIRB has recommended consideration of additional methodologies that relate LAE amounts to components other than incurred losses to augment its current LAE projection methodologies. To view the report and a complete list of conclusions and recommendations, visit https://wcirbonline.org/resources/data_reports/wcirb_reports.html.
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