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Liability for Unpaid Losses and Loss Adjustment Expenses
 12 Months Ended
Dec. 31, 2021
Liability for Unpaid Losses and Loss Adjustment Expenses [Abstract]  
Liability for Unpaid Losses and Loss Adjustment Expenses Liability for Unpaid Losses and Loss Adjustment Expenses 
Accounting for workers' compensation insurance requires the Company to estimate the liability for the expected ultimate cost of unpaid losses and LAE (loss reserves) as of a balance sheet date. Loss reserve estimates are inherently uncertain because the ultimate amount the Company will pay for many of the claims it has incurred as of the balance sheet date will not be known for many years. The estimate of loss reserves is intended to equal the difference between the expected ultimate losses and LAE of all claims that have occurred as of a balance sheet date and amounts already paid. The Company establishes loss reserves based on its own analysis of emerging claims experience and environmental conditions in its markets and review of the results of various actuarial projections. The Company's aggregate carried reserve for unpaid losses and LAE is the sum of its reserves for each accident year and represents its best estimate of outstanding loss reserves.
The amount by which estimated losses in the aggregate differ from those previously estimated for a specific time period is known as reserve "development." Reserve development is unfavorable when losses ultimately settle for more than the amount estimated or subsequent estimates indicate a basis for reserve increases on open claims, causing the previously estimated loss reserves to be ''deficient.'' Reserve development is favorable when estimates of ultimate losses indicate a decrease in established reserves, causing the previously estimated loss reserves to be ''redundant.'' Development is reflected in the Company's operating results through an adjustment to incurred losses and LAE during the period in which it is recognized.
Although claims for which reserves are established may not be paid for several years or more, the Company does not discount loss reserves in its financial statements for the time value of money, in accordance with GAAP.
The three main components of reserves for unpaid losses and LAE are case reserves, incurred but not reported (IBNR) loss reserves, and LAE reserves.
When claims are reported, the Company establishes individual estimates of the ultimate cost of each claim (case reserves). These case reserves are continually monitored and revised in response to new information and for amounts paid.
In addition to case reserves, the Company establishes a provision for IBNR. IBNR is an actuarial estimate composed of the following: (a) future payments on claims that are incurred but have not yet been reported to the Company; (b) a reserve for the additional development on claims that have been reported to the Company; and (c) a provision for additional payments on closed claims that might reopen. IBNR reserves apply to the entire body of claims arising from a specific period, rather than a specific claim. Most of the Company's IBNR reserves relate to estimated future claim payments on recorded open claims.
LAE reserves are the Company's estimate of the future expense to manage, investigate, administer, and settle claims that have occurred, and include legal expenses. LAE reserves are established in the aggregate, rather than on a claim-by-claim basis. LAE reserves are categorized between defense and cost containment, and adjusting and other.
A portion of the Company's obligations for losses and LAE are ceded to unaffiliated reinsurers. The amount of reinsurance that will be recoverable on losses and LAE reserves includes both the reinsurance recoverable from excess of loss reinsurance contracts, as well as reinsurance recoverable under the terms of the LPT Agreement.
The Company uses actuarial methods to analyze and estimate the aggregate amount of unpaid losses and LAE. Management considers the results of various actuarial methods and their underlying assumptions, among other factors, in establishing reserves for unpaid losses and LAE.
Judgment is required in the actuarial estimation of loss reserves, including the selection of various actuarial methodologies to project the ultimate cost of claims. Specifically, judgment is required in the following areas: the selection of parameters utilized in the various methodologies; the use of industry data and other benchmarks; and the weighting of differing reserve indications resulting from alternative methods and assumptions.
The Company's Internal Actuary prepares reserve estimates for all accident years using our own historical claims data, industry data and many of the generally accepted actuarial methodologies for estimating loss reserves, such as paid loss development methods, incurred loss development methods, and Bornhuetter-Ferguson methods. These methods vary in their responsiveness to different information, characteristics, and dynamics in the data, and the results assist the actuary in considering these characteristics and dynamics in the historical data. The methods employed for each segment of claims data, and the relative weight accorded to each method, vary depending on the nature of the claims segment and on the age of the claims.
Each actuarial methodology requires the selection and application of various parameters and assumptions. The key parameters and assumptions include the future payment and emergence patterns of our aggregate claims data; the magnitude and changes in claim settlement activity; the effects of legislative benefit changes and/or judicial decisions; and trends in the frequency and severity of claims.
The following table represents a reconciliation of changes in the liability for unpaid losses and LAE.
Years Ended December 31,
202120202019
(in millions)
Unpaid losses and LAE at beginning of period$2,069.4 $2,192.8 $2,207.9 
Less reinsurance recoverable, excluding CECL allowance, on unpaid losses and LAE497.0 532.5 504.4 
Net unpaid losses and LAE at beginning of period1,572.4 1,660.3 1,703.5 
Losses and LAE, net of reinsurance, incurred during the period related to:
Current year366.5 395.9 456.1 
Prior years(39.8)(81.6)(77.5)
Total net losses and LAE incurred during the period326.7 314.3 378.6 
Paid losses and LAE, net of reinsurance, related to:
Current year76.6 83.6 106.6 
Prior years318.2 318.6 315.2 
Total net paid losses and LAE during the period394.8 402.2 421.8 
Ending unpaid losses and LAE, net of reinsurance1,504.3 1,572.4 1,660.3 
Reinsurance recoverable, excluding CECL allowance, on unpaid losses and LAE476.9 497.0 532.5 
Unpaid losses and LAE at end of period$1,981.2 $2,069.4 $2,192.8 
Total net losses and LAE included in the above table excludes the impact of the amortization of the Deferred Gain and LPT Reserve Adjustments (See Note 10).
In 2021, the Company had $39.8 million of net favorable prior accident year loss reserve development, which included $38.0 million of favorable development on its voluntary risk business and $1.8 million on its assigned risk business. In 2020, the Company had $81.6 million of net favorable prior accident year loss reserve development, which included $80.2 million of favorable development on its voluntary risk business and $1.4 million on its assigned risk business. In 2019, the Company had $77.5 million of net favorable prior accident year loss reserve development.
The net favorable development recognized in 2021 on voluntary business was primarily the result of observed favorable paid loss cost trends predominantly related to accident years 2017 and prior, due primarily to decreasing medical costs and defense and cost containment, partially offset by: (i) $10.0 million of unfavorable development related to accident year 2019, which is reflective of more weight being placed on now sufficiently seasoned loss trends and patterns originating in part from business written in our newer territories; and (ii) $8.0 million of unfavorable loss development associated with two catastrophic non-COVID claims in accident year 2020.
The net favorable development recognized in 2020 on voluntary business was primarily the result of observed favorable paid loss cost trends predominantly related to accident years 2018 and prior, due primarily to decreasing medical costs, partially offset by $13.3 million of adverse development on accident year 2019 partially due to an inability to fully execute its claims initiatives to reduce loss costs as a result of the COVID-19 pandemic.
The net favorable development recognized in 2019 was primarily the result of observed favorable paid loss cost trends predominantly related to accident years 2018 and prior, due primarily to decreasing medical costs and accelerated claims settlements. Loss reserves shown in the Company's Consolidated Balance Sheets are net of $105.6 million and $28.1 million for anticipated subrogation recoveries as of December 31, 2021 and 2020, respectively.
The Company compiles and aggregates its claims data by grouping the claims according to the year in which the claim occurred ("accident year") when analyzing claim payment and emergence patterns and trends over time. Reported claims include any claim that has case reserves and/or loss and LAE payments associated with them.
The Company analyzed the usefulness of disaggregation of its results and determined the characteristics associated with the policies and the related unpaid loss reserves, incurred losses, and payment patterns are similar in nature. As such, the following tables show the Company's historical incurred and cumulative paid losses and LAE development, net of reinsurance, as well as IBNR loss reserves and the number of reported claims on an aggregated basis as of December 31, 2021 for each of the previous 10 accident years.
Incurred Losses and LAE, Net of Reinsurance
Years Ended December 31,As of December 31, 2021
Accident Year
2012(1)
2013(1)
2014(1)
2015(1)
2016(1)
2017(1)
2018(1)
2019(1)
2020(1)
2021IBNRCumulative number of reported claims
(in millions, except claims counts)
2012$348.8 $359.9 $360.9 $386.4 $388.2 $382.8 $379.8 $378.5 $372.4 $369.4 $23.5 26,046 
2013452.6 460.6 478.6 472.6 468.9 464.6 459.3 446.8 440.9 28.2 28,927 
2014463.4 445.8 432.9 434.6 430.5 424.7 415.5 406.0 34.6 28,594 
2015422.2 425.8 423.9 419.6 408.7 396.7 384.9 33.4 27,264 
2016419.0 414.6 395.4 375.0 364.6 354.8 35.6 25,806 
2017412.4 391.3 358.3 337.9 329.8 43.0 25,091 
2018422.5 424.6 407.7 400.6 52.2 27,977 
2019422.4 435.7 448.5 83.2 32,885 
2020365.7 374.0 94.6 23,948 
2021339.2 163.0 19,287 
Total$3,848.0 
Cumulative Paid Losses and LAE, Net of Reinsurance
Years Ended December 31,
Accident Year
2012(1)
2013(1)
2014(1)
2015(1)
2016(1)
2017(1)
2018(1)
2019(1)
2020(1)
2021
(in millions)
2012$58.6 $148.3 $214.2 $261.4 $289.9 $305.0 $316.9 $324.3 $328.4 $332.3 
201368.5 184.4 263.8 317.4 346.1 365.9 379.3 386.6 391.3 
201465.3 172.7 248.9 297.2 323.4 342.1 351.4 357.7 
201565.5 174.5 246.9 290.5 311.2 322.2 329.3 
201665.6 166.8 227.7 261.2 278.3 290.0 
201763.5 160.2 215.7 243.7 260.0 
201877.9 189.9 254.2 293.6 
201988.8 212.6 285.2 
202071.9 175.6 
202166.1 
Total$2,781.1 
All outstanding liabilities for unpaid losses and LAE prior to 2012, net of reinsurance374.4 
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance$1,441.3 
(1)Data presented for these calendar years is required supplementary information, which is unaudited.
The following table represents a reconciliation of claims development to the aggregate carrying amount of the liability for unpaid losses and LAE:
December 31, 2021
(in millions)
Liabilities for unpaid losses and LAE, net of reinsurance$1,441.3 
Reinsurance recoverable, excluding CECL allowance, on unpaid losses476.9 
Unallocated LAE (adjusting and other)63.0 
Total liability for unpaid losses and LAE$1,981.2 
The following table presents the average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2021 and is presented as required supplementary information, which is unaudited:
Average Annual Percentage Payout of Claims by Age, Net of Reinsurance
Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10
18.0 %27.4 %17.5 %10.8 %6.0 %3.9 %2.6 %1.7 %1.1 %1.1 %