1. Mona Carter National Policy Executive NCCI May 25, 2010  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved.

2.  What will be the Impact of the Economic Recovery?  How do we Curtail Rising Medical Cost?  How Does The National Health Debate Impact Comp?  What is the Impact of An Aging Workforce?  What will the work world look like and are we Ready?  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 2

3. 3 Percent Calendar Year p Preliminary Source:1985–2008, Best's Aggregates & Averages; 2009p, ISO Average (1985–2008): 106.0%

4. p Preliminary Source:Workers Compensation, NCCI; All Other Lines, Best’s Review Preview and ISO 4

5. Percent Calendar Year p Preliminary Note: After-tax return on average surplus, excluding unrealized capital gains Source:1985–2008, Best's Aggregates & Averages; 2009p After-Tax Net Income, ISO; 2009p Surplus, 2008 Best's Aggregates & Averages + 2009 ISO contributions to surplus Average (1985–2008): 8.7% 5

6. Workers Compensation Results  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 6

7. Impact of National Healthcare Reform uncertain Inadequate return on industry capital State legislative changes to benefit models may increase pressure on indemnity cost Changes to the nations financial regulatory system creates uncertainty  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 7

8. Percent Calendar Year p Preliminary Source:1990–2008, Best's Aggregates & Averages; 2009p, NCCI 1.9% Due to September 11 6

9. Percent Calendar Year p Preliminary Source:1990–2008, Best's Aggregates & Averages; 2009p, NCCI Investment Gain on Insurance Transactions Includes Other Income * Adjusted to include realized capital gains to be consistent with 1992 and after Average (1990–2008): 14.8% 9

10. Percent Calendar Year p Preliminary Source:1990–2008, Best's Aggregates & Averages; 2009p, NCCI Operating Gain Equals 1.00 minus (Combined Ratio Less Investment Gain on Insurance Transactions and Other Income) * Adjusted to include realized capital gains to be consistent with 1992 and after Average (1990–2008): 6.6% 10

11. $ Billions Calendar Year p Preliminary Source:1990–2008 Private Carriers, Best's Aggregates & Averages; 2009p, NCCI 1996–2009p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements State Funds available for 1996 and subsequent 11

12. 2-Year Change in Countrywide NWP-23% Known Pricing Impacts Change in Bureau Rates and Loss Costs-7% Change in Carrier Pricing-4% Economic Impacts Change in Total Payroll-4% Impact of Recession on Industry Group Mix-4% to -6% Impact of Recession by Firm Size-4% to -6% Other Impacts+1% to -2% Source:NCCI Analysis 12

13. Percent p Preliminary Accident Year data is evaluated as of 12/31/2009 and developed to ultimate Source:Calendar Years 2000–2008, Best's Aggregates & Averages; Calendar Year 2009p and Accident Years 2000–2009p, NCCI analysis based on Annual Statement data Includes dividends to policyholders 13

14. Calendar Year $ Billions Loss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selections Source: NCCI analysis Considers all reserve discounts as deficiencies 14

15. Policy Year p Preliminary Dividend ratios are based on calendar year statistics NCCI benchmark level does not include an underwriting contingency provision Based on data through 12/31/2009 for the states where NCCI provides ratemaking services Percent 15

16. Accident Year 2009p: Preliminary based on data valued as of 12/31/2009 1991–2008: Based on data through 12/31/2008, developed to ultimate Based on the states where NCCI provides ratemaking services, including state funds Excludes high deductible policies Annual Change 1991–1993:-1.7% Annual Change 1994–2001:+7.3% Annual Change 2002–2008:+4.0% Indemnity Claim Cost (000s) 16

17. 17 Year Medical severity 2008p: Preliminary based on data valued as of 12/31/2008 Medical severity 1995–2007: Based on data through 12/31/2007, developed to ultimate Based on the states where NCCI provides ratemaking services, excludes the effects of deductible policies Source: Medical CPI—All states, Economy.com; Accident year medical severity—NCCI states, NCCI

18. 18 Year Medical severity 2008p: Preliminary based on data valued as of 12/31/2008 Medical severity 1995–2007: Based on data through 12/31/2007, developed to ultimate Based on the states where NCCI provides ratemaking services, excludes the effects of deductible policies Source: Medical CPI—All states, Economy.com; Accident year medical severity—NCCI states, NCCI Utilization a Major Factor 1996–2001

19. 19 Accident year for medical severity; calendar year for Medical Care CPI Lost-Time Claims Closed Within 24 Months of Date of Injury, NCCI States Source: NCCI; US Bureau of Labor Statistics Accident/Calendar Year “Utilization”

20. Accident Year Annual Change 1991–1993:+1.9% Annual Change 1994–2001:+8.9% Annual Change 2002–2008:+6.6% Medical Claim Cost (000s) 2009p: Preliminary based on data valued as of 12/31/2009 1991–2008: Based on data through 12/31/2008, developed to ultimate Based on the states where NCCI provides ratemaking services, including state funds Excludes high deductible policies 20

21. Percent Accident Year 2009p: Preliminary based on data valued as of 12/31/2009 1991–2008: Based on data through 12/31/2008, developed to ultimate Based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies Frequency is the number of lost-time claims per 100,000 workers as estimated from reported premium Cumulative Change of –54.7% (1991–2008) 21

22. p Preliminary Source:US Department of Labor, Bureau of Labor Statistics (BLS), National Bureau of Economic Research NCCI Frequency and Severity Analysis; based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies 22

23. Direct Impacts 1.Changes to Federal Black Lung Benefit Entitlement Provisions ** a.Reinstates the 15-year rebuttable presumption of total disability for benefits b.Eliminates the requirement to prove that death of miner was due to occupational disease for survivor benefits 2.Changes to Medicare reimbursement levels; potential impacts will depend on: a.Potential modifications to Medicare reimbursements b.How the states react to those potential changes * HR3590 as amended by HR4872 ** Section 1556: Federal Coal Mine Health and Safety Act 23

24. Provisions Worth Watching  Increased healthcare coverage in general population  Wellness initiatives  Consumer access to more generic drugs  New taxes on medical devices, pharmaceutical manufacturers, and health insurance companies  Fraud and abuse provisions Other Areas of Interest  Electronic transaction standards  Coordination, subrogation, and reimbursement issues  Medicare as a secondary payer * HR3590 as amended by HR4872 24

25.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. All Other includes Paid Leave, Supplemental Pay, Insurance (other than Health), Social Security, Retirement and Savings Source:US Department of Labor, Bureau of Labor Statistics 25

26.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 26

27.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. Year Medical severity 2008p: Preliminary based on data valued as of 12/31/2008 Medical severity 1995–2007: Based on data through 12/31/2007, developed to ultimate Based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies Source:Medical CPI—All states, Economy.com; Accident year medical severity—NCCI states, NCCI Percent Change 27

28.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 1989 Medical Indemnity 1999 Indemnity Medical 2009p Indemnity Medical Accident Year 2008p: Preliminary based on data valued as of 12/31/2009 1989, 1999: Based on data through 12/31/2008, developed to ultimate Based on the states where NCCI provides ratemaking services, including state funds Excludes high deductible policies 28

29.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. Percent Accident Year 2008p: Preliminary based on data valued as of 12/31/2008 1991–2007: Based on data through 12/31/2007, developed to ultimate Based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies Frequency is the number of lost-time claims per 100,000 workers as estimated from reported premium Cumulative Change of –54.9% (1991–2008) 29

30.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. Change in Frequency -22% -10% -28% -40% -37% All NCCI States Source:NCCI Unit Statistical Plan data, First Report. 30

31.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. Percentage Change Between Policies Expiring in 2003 and 2007 +100% +12% +68% All NCCI States Source:Sample data 31

32. Falls/slips/trips are by far the greatest cause of injury among older workers. Indemnity severity is less for older workers, largely because of the lower average weekly wage of such workers. There is a distinct (downward) break in indemnity severity between ages 60–64 and 65 and older. Medical severity is higher for older workers, although the differential between workers aged 65 and older and nearby age cohorts is small. Shares of indemnity and medical payments of older workers have a close relationship to their share of claims. Frequency is less for older workers, especially in the more hazardous manufacturing and construction-related industries and occupations. In contrast, claim frequency is higher for older workers in the leisure and hospitality industry and food preparation and service occupations (as well as in sales and related occupations).  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 32

33.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. All NCCI States Percentage change between policies expiring in 2003 and 2007 Source:NCCI Unit Statistical Plan data, First Report. 33

34.  Job creation and job destruction increase frequency  During recessions, job creation slows dramatically  The rate of job creation bottoms at the trough of economic activity and rises sharply during the ensuing economic recovery  During recession, job destruction increases  NCCI’s statistical modeling shows that the decline in job creation dominates quantitatively  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 34

35.  Countrywide frequency continued its long- term decline  Frequency changes vary considerably by type of injury  “Likely-to-Develop” claims exhibited a larger frequency decline than “Not-Likely-to- Develop”  Frequency changes are relatively consistent by size of loss for claims under $250,000  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 35

36.  Temporary Total Disability claim frequency declined more than Permanent Partial Disability claim frequency  Injury type changes notwithstanding, frequency changes are relatively consistent in all size of loss ranges below $250,000  Fatal claim frequency declined less than overall frequency  Permanent Total Disability claim frequency increased. The growth of Permanent Total Disability claim frequency is concentrated in a few carriers  Fatal and Permanent Total claims also exhibited more year-to-year volatility than other injury types, possibly due to the smaller number of these claims  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 36

37.  Overall lost-time claim frequency declined 17%  Frequency of lower back claims declined 27%  Frequency of claims involving multiple body parts declined 24%  Frequency of carpal tunnel syndrome claims declined 46%  Frequency of cumulative injury claims declined 40%  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 37

38. As medical costs escalate, states seek effective medical cost containment measures States depend on relevant, reliable information to determine cost containment solutions When data is not available, states may be forced to develop their own solutions Through the EDI project, the IAIBC has developed standards (i.e., 837) for the collection and electronic transmission of several types of data Several states have implemented medical data calls already, including adoption of the IAIABC 837 38

39.  Legislative/regulatory landscape has been changing ◦ States are proposing/enacting more comprehensive cost controls:  Medical Fee Schedules  Healthcare Networks  Utilization Guidelines  Physician Choice 39

40. Over the past five years, approximately 30% of the legislative activity contained a medical component ◦ 2005: 45 bills priced (excluding TX)  approx impact $1.9B ◦ 2006: 46 bills priced  approx impact $1.3B ◦ 2007: 53 bills priced  approx impact $1.3B ◦ 2008: 33 bills priced  approx impact $762M ◦ 2009: 45 bills priced  approx impact $777M 40

41.  Conclusions: ◦ Medical is more than half of the total WC benefits ◦ 30% of legislative pricing contains a medical component, and that number continues to rise ◦ Medical data detail will better assist NCCI in pricing legislation, ensuring the credibility of our analyses ◦ Medical Data Call will begin with medical transactions occurring in the 3rd Quarter of 2010 41

42. Medicare pays a significant share of overall US medical costs. As a result, Medicare reimbursement rates influence prices generally paid for medical services, including prices paid for medical services for workers compensation. Many states base their workers compensation medical fee schedules on the Medicare physician reimbursement schedule. Some states control costs for services provided by facilities through systems based on either Medicare’s DRG system for hospital stays or Medicare’s APC system for services provided at ambulatory surgical centers.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 42

43. Workers compensation fee schedules will need to react appropriately to ongoing changes in Medicare methodology. To maintain the effectiveness of medical fee schedules, workers compensation might consider using Medicare billing approaches for hospital stays (DRG) and ambulatory services (APC), but in doing so should adapt Medicare models to workers compensation priorities. As the workforce ages, workers compensation might focus safety initiatives toward falls and hip injuries, where Medicare protocols should provide valuable insight in designing treatment guidelines. Medicare faces enormous demographic and fiscal challenges. Workers compensation shares some of those challenges, and Medicare’s response might offer suggestions to enhance workers compensation medical cost containment.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 43

44.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. Slowing of Decline in Employment in 2010 still Suggests Downward Pressure on Both Exposure and Claim Frequency Slowing Wage Gains May Dampen Increases in Indemnity Severity Accelerating Medical Care Price Increases in 2010 Suggest Further Upward Pressure on Medical Severity Financial Market Outlook May Brighten a Bit in 2010 for P&C Portfolio Managers 44

45.  Premium—likely to fall due to the drop in employment and the easing of the growth in wage rates.  Frequency—likely to experience increased downward pressure due to the marked drop in the number of new hires and reduced levels of job creation.  Indemnity severity—growth typically eases in recessions due to the easing in the growth of wage rates and the impact on Average Weekly Wage, but growth remains positive.  Medical Severity—medical price inflation is expected to continue relatively unabated; thus, medical severity will continue to grow.  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 45

46. Negatives  Low investment returns continue to put pressure on underwriting result s  Potential reform erosion  Uncertain impact from health care reform  Unknown scope of future Federal actions  Underwriting cycle Positives  Industry’s capital position  Frequency continues to decline  Residual market depopulation continues  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. ‹#› 46

47. VISIT NCCI.COM  Copyright 2010 National Council on Compensation Insurance, Inc. All Rights Reserved. 47