Title: Principal and Consulting Actuary, Perr & Knight
Resume: Before taking his current position with Perr & Knight in 2002, Lenz was a managing actuary with the TIG Insurance Group and a consulting actuary with KPMG Peat Marwick prior to that. He has also been an actuarial analyst for the Transamerica Insurance Group and the TIG Insurance Group.
Schools: Lenz graduated magna cum laude from UCLA with a B.S. in applied mathematics.
Certifications: Associate of the Casualty Actuarial Society, Member of the Academy of Actuaries
Mentor: Lenz feels he has learned from many of the workers’ comp professionals he has been fortunate to work with through the years. If forced to pick a single person, it would be Sholom Feldblum, a Fellow of the Casualty Actuarial Society and actuarial educator whose technical writing gave him the foundation in workers’ comp that allowed him to get a clear understanding of the actuarial “nuts and bolts” of workers’ comp reserving and ratemaking.
Favorite Quote: “Does the human being reason? No; he thinks, muses, reflects, but does not reason...That is, in the two things which are the peculiar domain of the heart, not the mind—politics and religion. He doesn't want to know the other side. He wants arguments and statistics for his own side, and nothing more.” (Mark Twain)

With respected actuarial firm Perr & Knight, Lenz has significant experience in workers’ comp and self-insurance. During his tenure with insurance companies he has managed the actuarial aspects of a $200 million book of workers’ comp business and for the runoff of a $100 million book of large deductible, large risk retrospectively rated and captive insurance accounts. As a manager of actuaries at Perr & Knight, Lenz brings keen perspective to all aspects of California workers’ comp.

What are the top three issues in California workers’ comp today?  
I would say the first one would probably be medical inflation, for obvious reasons. Workers’ comp claims’ medical claim costs are going up faster than medical PPI, but medical severity has been the area of concern for a lot of insurers out there. Even though increases in the past couple of years weren’t as big as they have been, they’re still high enough to be a reason to worry. The second [issue] is rate and price adequacy/underwriting discipline. That goes in with the discussion of where we are in the underwriting cycle. What we’re seeing is that despite the increasing loss-ratios and despite large rate-level indications that the WCIRB has determined over the past year, insurers aren’t increasing their rates in a substantial way. We’ll have to see how that plays out, but that might be a cause for concern if loss ratios continue to climb. Deciding what the third issue is was difficult, but the issue of Medicare set-asides is a cause for worry. I’ve had plenty of people contact me about them … it’s like the issue of the month. I think that has to do with preliminary survey info that the WCIRB published. That suggested that there could be significant claims cost increases related to claims that have Medicare set-asides. I think there is a lot of uncertainty about it. There are a lot of areas where companies have to go through administrative processes that they didn’t have to go through before. That is on permanent disability claims that meet the requirements for a Medicare set-aside—they’ve got to calculate the set-aside and then submit it to the Centers for Medicare & Medicaid Services and get their sign-off on it. Every time there’s a change that requires new administrative effort, because of the learning curve, there’s a lot of cost associated. In time we may see these costs decrease as the administrative processes become more efficient. [Now] it’s a cause of worry. The idea of Medicare set-asides in the first place is that Medicare is looking for areas that they are paying money where they shouldn’t. If a Medicare set-aside is required, then a portion of the workers’ comp benefits is allocated to the set-aside. It’s a part of the settlement amount that’s supposed to represent the future medical payments for the type of services normally covered by Medicare. There’s some concern that, in theory, workers’ comp benefits are workers’ comp benefits and this shouldn’t change anything. We might be going from a situation where insurers expected that after age 65 Medicare would take over and it was reflected implicitly in their settlement amounts. Now that they have to be explicit they might be higher. If this works the way Medicare wants it to work, insurers/payers will be paying future medical costs that were previously paid for by Medicare. That’s up in the air because there’s no good study on it. The WCIRB survey was on one accident year, and there’s not enough good data… Hopefully sometime in the next year we’ll see good data.

Are we headed for a hard market, and if so, when will it come? How long should we expect it to last? What are the repercussions?  
I think we probably are headed to a hard market, but it’s still at least a year away in my opinion. One of the things I look at to get a feel for this information in California worker’s comp is a database of all the rate filings submitted to the Department of Insurance. I summarized all of the 2010 rate fillings and did a quick calculation of the weighted average rate impact of all these filings. It’s only roughly plus 2% or 3%. It’s a pretty small increase… if you put that into context of the rate-need indications that the WCIRB calculated for January 1, 2010 filing and their indication for July 1, 2010. They were both 20%. That’s the picture of a pretty soft market. People I’ve talked to are saying pretty much the same thing. It’s not recklessly soft like the last underwriting market, but we’re already looking at combined ratio of 120 right now. We don’t have the investment gains that we had way back when. 120 now is a lot worse than 120 was a decade ago. Hopefully that will get companies to realize that writing to a reasonable gain or not a loss is a good idea. I don’t see us racing into a hard market. [Hurricane] Katrina didn’t do much to affect the underwriting cycle and that was a big catastrophe. If you’re talking about the cycle changing due to capacity concerns, there’s still a lot of capacity out there. It would take something really bad to change that. I see it hardening at the end of next year but not before then.

It’s no longer a question of if but when we enter a hard market, so what is in the future of State Compensation Insurance Fund? Will its market share climb back to historic levels? Do you think that further reforms are needed for the governance of State Fund, for example, does it make sense to have Senate confirmation for board members?  
I don’t think the State Fund market share will be as high as in 2003. That was a unique time in the history of California workers’ comp, in that it was preceded by the very long and costly soft market that brought down so many workers’ comp insurers. The reaction to that soft market was very extreme and a lot of insurers fled the market. I don’t see that repeating itself this time around. Combined ratios are around 120 percent now and they were around 180 percent in 2003. While I expect that at some point carriers will decide they’d rather lose market share than write to an underwriting loss, I don’t think there will be the exodus from the market that there was last time. We’re in a more stable environment than we were back then.

What needs to be done to improve return-to-work?  
I see return-to-work from the perspective of an actuary who works a lot with self-insured employers, not so much from the insurance company perspective. What I observe about this is fairly simple and intuitive. That is: there is a wide range of effectiveness in return-to-work programs, but it seems the one thing that matters the most is the company’s commitment to [return-to-work.] I don’t know what ideas you can put forth that someone implementing a return-to-work program could use in every situation. There are a handful of companies that I work for who decide to make their return-to-work programs a priority. Either they have good modified positions available or they create them. It does so much for the morale of injured workers that it gets them to come back to work.

What do you see, other than medical, as the next big cost driver?  
I’m expecting that in the next year we’ll see indemnity severity pick up. That’s expected just because of the knowledge of what’s happened following the past few recessions. What usually happens is that there’s a lag in the effect of higher wages leading up to recession. In the boom leading up to recess wages go up and they don’t make their way into claims values until later. There tends to be an increase during recessions due to wage increase prior to the recession. I’m expecting that to happen. I don’t expect that to change the market entirely, but it will show up.
[As mentioned before] Medicare set-asides [are another cost driver:] there’s a potential for that to drive up costs both on the expense side and potentially on the claims severity side for permanent disability claims.

Is it realistic to deal for more cost-cutting reforms in exchange for increasing PD benefits?  
It seems like a good idea to me. I don’t understand what goes on at a political level to get these done. It seems like a reasonable proposition. I think that everybody knows that permanent disability benefits are low in California right now. It’s an issue of fairness. At some point there will be the political will to deal with that, but… is there fat to cut from the system to compensate for them? I don’t know the answer to that.

Now that the federal health care bill has become law, what impact, if any, do you see that having on workers’ comp and do you have any concerns?  
That’s a tough one, obviously one that people are really interested in understanding. There are people out there who have opinions on the topic that run the gamut. There is one main reason why it might result in cost decreases and one main reason why it might result in cost increases and then there are a bunch of lesser reasons that could affect it either way. The first has to do with the fact that the federal health care reform bill becoming law is going to result in previously uninsured people becoming insured. Employees who have health insurance typically file fewer workers’ comp claims. There’s less incentive to file a claim that didn’t take place in the workplace to get workers’ comp coverage. There’s a chance that workers’ comp claims that shouldn’t be workers’ comp claims will go away. If health care reform results in substantial adjustments to reimbursement levels on the health care side, then there will be an incentive for medical providers to cost-shift to the workers’ comp system if workers’ comp benefits are richer than what is in the Medicare benefits, for instance. Whether that happens or not depends on whether there’s coordination between benefits of Medicare and workers’ comp. This mostly has to do with fee schedules. That’s been an issue before for workers’ comp benefits that are tied to Medicare fee schedules. There’s a burden on the workers’ comp system to keep abreast of everything that’s happening with Medicare benefits to make sure there are no significant inconsistencies to incentivize providers to cost-shift. These are both cost-shifting scenarios, one shifts one way, one shifts the other. [As for which will happen,] it’s too early to know. It’s really hard to see what the health care world is going to look like 2-3 years down the road when it’s better understood.

Governor Schwarzenegger signed bills maintaining the right of injured workers to predesignate their own physicians (SB 186), tweaking utilization, and limiting the denial of benefits (AB 1093). What impact could these, if any, have on costs?  
I don’t expect that they will have a significant effect on costs. I think that, basically, the SB 186 takes the predesignation component of prior reform and either extends or makes it permanent. It’s ensuring that nothing changes from the way it is now; in that sense, it will keep things the same. My understanding is that with predesignation, in the past, costs were no different with employees that predesignated a physician and those that didn’t. I’m not sure it’s that important an issue.

What is the effect of more than $1 billion in payroll being absorbed by the self-insured groups?  
That’s something that I have not studied. I know self-insured groups have steadily become a larger component of the total insurance solutions for workers’ comp in the state. I do quite a bit of self-insured work. The only possibility I can see, and I haven’t read any studies on this, is that employers that would seek self-insurance might be ones that are prone to be more effective in controlling their own costs, an incentive for self-insuring. The pool of employers left in the commercial insurance market place may be, on average, not as good a risk as those that are self-insured. On the other hand, I’m not sure that’s necessarily true. I know self-insured groups have been started for difficult classes of companies that have a hard time getting insurance in the commercial market place. It’s going to make the commercial market place smaller and that could decrease competition. I don’t know if $1 billion in such a big market place will do that.

Are loss adjustment expenses leveling out or are they still climbing? What is the cause?  
For loss-adjustment expenses the increases are getting smaller, but they’re probably still climbing slightly. A lot of it, if you look at the industry statistics that are out there, they’re hard to read and draw conclusions from. One reason is that the State Fund is included in a lot of them and they’re loss adjustment expenses are getting really high. If you look just at private carriers it appears to be a little more stable. The other thing that makes it hard, a lot of ratios cited out there are ratios to loss or to premium. If premium goes down 20% but the loss adjustment stays the same, then the loss adjustment ratio will look a lot higher, even though loss adjustment didn’t change. There’s a tendency to misread the statistics and jump to conclusions about their significance. If you look at loss-adjustment expenses on a per-claim basis, this is done for allocated loss adjustment expenses, in the last couple years it is still going up. There are probably a number of reasons for that. Number one: claims are closing more slowly than they used to. If you look at the past several years and then look at years prior to that, the percent of claims that are still open are higher than before. If you’re an insurance company, everything else being equal, your inventory of claims is going to be higher. You just have more work to do. There are a couple of things that drove up loss adjustment expenses due to the reform we had several years ago. They relate to things like increased disputes over treatment, disputes over apportionment, and now over permanent disability rating schedule, which there are more of due to the WCAB decisions. These are factors resulting in greater amounts of effort in the claims process. Anything that makes the claims process more complicated results in higher loss-adjustment expenses. On the other hand the number of claims goes down; working opposite to the greater length of time it’s taking to close claims and the burden that’s putting on claims adjusters. That drives down the total costs. Total costs won’t change too much over the next year, but cost per claim will go up.

Is medical severity going to continue to climb or is it just a blip?  
I think it’s still going up. It won’t go up at the rate that it went up at immediately after the reform legislation in 2004, but it’ll continue to go up. It’s gone up except for immediately after reform legislation or because of reform legislation for decades. It’s going to go up, unless there is additional reform or benefit reductions. That’s something that everybody expects; it’ll probably go up at a greater rate than the medical CPI. We already can see in the data that the latest couple of years’ increases weren’t nearly as high as the years prior to that.

Are there any changes to claims frequency?  
Yes, one of the big things here that is that in recessions, typically workers’ comp claim frequencies go down. The reason is that there are fewer new hires in an economic downturn when employment is low. Experienced workers tend to make fewer claims, and the average experience level of the workforce is greater, so frequencies decline. The flipside is that when the economy picks back up and we see employment back up again, we’ll see claims frequencies increase. I would expect low frequencies to prevail through 2010 and that should keep costs down.