1. Midwest Actuarial Forum THE WHY, WHO, WHAT, and HOW of the WCRA September 18, 2015

2. WHY the WCRA was Created WHO the WCRA Is WHAT the WCRA Does HOW the WCRA is Funded, Reserved, and Priced

3. WHY was the WCRA Created? Dramatic changes in Minnesota’s workers’ compensation system took place in the 1970s Workers’ compensation costs were rapidly escalating: increasing inflation, no benefit caps Workers’ compensation reinsurers couldn’t reliably project their costs Workers’ compensation reinsurance was either unavailable or extremely costly

4. Result? WCRA established by the Legislature in 1979 to Assure availability of work comp reinsurance Maintain reasonable work comp reinsurance costs Provide expert claim management of serious work comp claims Gather and share data on long-term work comp claims

5. WHO We’re Not Not a State agency No State appropriations/no State obligations No State ownership

6. WHO Is the WCRA? The WCRA is an independent nonprofit association composed of all Minnesota workers’ compensation insurers and self-insurers (currently have 644 members) Insurers 73% 73% Private self-insurers 11% 11% Public self-insurers 16% 16% WCRA members

7. WCRA Governance WCRA governed by Board of Directors consisting of insurer, self-insurer, employee, employer, public, and state official representatives WCRA management reports to the WCRA Board of Directors 25 staff members Claims, premium, actuarial, finance and investments, information systems, support Annual expense ratio: < 9%

8. WCRA Regulator WCRA is regulated by the Commissioner of Labor and Industry, who Approves all members of the Board of Directors and appoints five positions Approves WCRA rates Approves surplus distributions or assessments of members Approves changes in the WCRA Plan of Operation and Reinsurance Agreement

9. WCRA REINSURANCE WORKERS’ COMP INSURER covers the first $490,000, $980,000, or $1,960,000 of WC benefits and buys WCRA reinsurance to cover larger claims EMPLOYER buys workers’ compensation insurance or self- insures Seriously injured EMPLOYEE WCRA covers ALL other WC medical and indemnity benefits WC INSURANCE WCRA Reinsurance Protection

10. WHAT Does the WCRA Do? Provides members with 100 percent reimbursement of statutory losses in each loss occurrence in excess of the low, high, or super retention limit, whichever is selected by the member * Retentions are indexed to the state average weekly wage Low$490,000 High$980,000 Super$1,960,000 2015 Retention Levels*

11. Key Features of WCRA Coverage Unlimited statutory coverage per occurrence Full terrorism coverage including NBCR Covered by TRIA No MAOLs (maximum any one life) No reporting cutoffs

12. WHAT the WCRA Does (and Doesn’t) Do WCRA doesn’t manage claims; members do WCRA claims staff audits and reimburses claims to members for amounts in excess of their selected retention limits WCRA provides members with expert advice on claims management, medical treatment, and rehabilitation for severe injuries WCRA provides various calculators to assist members in claim evaluation/settlement review

13. Available Calculators on WCRA Website

17. Since 1979, more than 22,000 claims have been filed with the WCRA on behalf of seriously injured workers, and more than $1.20 billion in claims has been reimbursed.

18. Key Financial Results : 1979-2014 COST Total premiums paid by members$1.6billion BENEFITS Total claims paid to date$1.2billion Net capital distributions/assessments$1.0billion PAID BENEFITS$2.2billion Discounted Reserves$1.8billion TOTAL BENEFITS$4.0billion

19. HOW is the WCRA Funded? No state appropriations Members pay annual premiums based on exposure Premiums invested; expected rate of return of 6.5 percent per year Actual average rate of return: ~10 percent per year since 1979

20. HOW is the WCRA Reserved? Unique to WCRA: Case reserves are established for all claims using WCRA cash flow model Provides for consistency Key assumptions include claimant age, projected indemnity payments, projected medical payments, mortality, escalation rates (trend) for indemnity and medical, discount rate Use of cash flow model provides ability to re-reserve individual claims rather than using aggregate adjustment methods.

21. HOW is the WCRA Reserved? Reserves are determined by retention based upon a variety of methods: Accident year multiplicative approach Report year method Case reserve development by report year PLUS provision for “true” IBNR Pricing model method Reserves are analyzed at 3 rd quarter and year-end and projections are reviewed by Actuarial Committee and approved by Board of Directors for inclusion in financials. Financial statements carry discounted reserves. Follow GAAP not statutory accounting rules.

22. HOW is the WCRA Reserved? Unique to WCRA: Loss development triangles are “restated” or adjusted to provide development that best matches attributes of claims at various points in time, e.g.: Adjust reserves to current trend and mortality assumptions Adjust for benefit level changes (e.g., pre-10/1/1995 law, indemnity benefits did not terminate at age 67) Adjust for known reporting backlogs, etc. The restatement process removes distortions so that “full” triangles can be used for developing any given accident year.

23. HOW is the WCRA Reserved? High Retention AYAge 15Age 16Age 17Age 18Age 19Age 20Age 21Age 22Age 23Age 24 1991141,424145,591143,230149,889143,804141,512134,166133,190132,001139,158 199296,33498,066100,740106,12895,45289,76986,91789,36485,733 199367,41556,31257,87460,13857,52954,61957,95158,903 199452,35455,57455,87059,95455,49855,64752,473 199569,43175,13467,43765,59667,79668,945 199625,63824,27728,16428,02027,609 199732,92831,34527,13128,658 199835,76135,33232,282 199935,83436,716 200044,475

24. HOW is the WCRA Reserved? High Retention Restated for ‘95 Law AYAge 15Age 16Age 17Age 18Age 19Age 20Age 21Age 22Age 23Age 24 199177,99081,24780,18386,53182,57184,72781,47983,61480,67787,161 199248,54854,83258,10961,21352,54950,01549,32052,44851,371 199354,69842,92944,28749,42447,42244,44747,19547,606 199440,21542,81442,55747,15143,45843,38638,371 199557,65864,13657,45654,80653,86655,317 199625,63824,27728,16428,02027,609 199732,92831,34527,13128,658 199835,76135,33232,282 199935,83436,716 200044,475

25. HOW is the WCRA Reserved? High Retention AY15-1616-1717-1818-1919-2020-2121-2222-2323-24 19911.030.981.050.960.980.950.99 1.05 19921.021.031.050.900.940.971.030.96 19930.841.031.040.960.951.061.02 19941.061.011.070.931.000.94 19951.080.900.971.031.02 19960.951.160.99 19970.950.871.06 19980.990.91 19991.02 Wtd Avg1.000.981.040.950.980.971.010.981.05 Cum0.96 0.980.940.991.011.041.031.05

26. HOW is the WCRA Reserved? High Retention Restated for ‘95 Law AY15-1616-1717-1818-1919-2020-2121-2222-2323-24 19911.040.991.080.951.030.961.030.961.08 19921.131.061.050.860.950.991.060.98 19930.781.031.120.960.941.061.01 19941.060.991.110.921.000.88 19951.110.900.950.981.03 19960.951.160.99 19970.950.871.06 19980.990.91 19991.02 Wtd Avg1.010.981.050.940.990.971.030.971.08 Cum1.031.021.030.981.041.051.081.051.08

27. HOW is the WCRA Reserved? High Retention Effect of Restating for ‘95 Law Cumulative LDFs AgeRawRestated% Diff 23-241.051.082% 22-241.031.052% 21-241.041.084% 20-241.011.054% 19-240.991.046% 18-240.940.984% 17-240.981.036% 16-240.961.026% 15-240.961.037%

28. HOW does the WCRA Price? Rates are determined for each retention Exposure to which rates are applied is Designated Statistical Reporting Premium (DSR) x 1.2 DSR = Payroll x MWCIA published loss costs x experience rating mod For self insurers, same formula but experience rating mod is calculated by WCRA 2015 exposure: $1,348,000,000

29. 2015 WCRA Rates as Percent of Exposure Low Retention ($490,000): 9.35% High Retention ($980,000): 5.55% Super Retention ($1,960,000): 2.75% All rates include a subsidy for Assigned Risk Plan experience Premium for 2015 = $67.8 million based upon 27/17/56 percent exposure mix for low, high, and super retentions, respectively

30. HOW Does the WCRA Price? Rates are determined using a frequency x severity approach Frequency derived based upon WCRA experience Severity determined by simulation model

31. HOW Does the WCRA Price? Pricing model input assumptions nonfatal claims severity: Empirical distribution for medical benefits based upon MWCIA and WCRA data Worker age Life expectancy Minimum weekly benefit (PT claims) Probability of settlement and settlement percentages

32. HOW Does the WCRA Price? Pricing model input assumptions fatal claims severity: Average medical expense Life expectancy for spouse Dependency status Worker age Dependent(s) age(s) Age children’s benefits end (21 or 25) Minimum indemnity benefits

33. HOW Does the WCRA Price? Output of pricing model: Probability of exceedance for each retention and accident year Excess severity by retention and accident year

34. HOW Does the WCRA Price? Output of Pricing Model Undiscounted Mean--Nonfatal Claims AYLowHighSuper Prob ExceedXS SeverityProb ExceedXS SeverityProb ExceedXS Severity 20140.88 1,699,0000.58 1,979,0000.27 2,778,000 20150.89 1,798,0000.59 2,077,0000.29 2,879,000 20160.89 1,895,0000.61 2,168,0000.30 2,965,000 Discounted Mean--Nonfatal Claims AYLowHighSuper 20140.88 281,0000.58 218,0000.27 215,000 20150.89 297,0000.59 228,0000.29 221,000 20160.89 316,0000.61 241,0000.30 232,000

35. HOW Does the WCRA Price? Determining frequency: Frequency assumptions for pricing year are derived as we don’t have enough information to directly determine ground up frequencies.

36. HOW Does the WCRA Price? Determining frequency: For each accident year within retention: 1.Ultimate loss*/Pricing model excess severity = Implied # of excess claims 2.Implied # of excess claims/Probability of exceedance = Implied # of ground-up claims 3.Implied # of ground-up claims/Exposure = Frequency Frequencies by accident year within retention are then exponentially trended to pricing year. * From prior year-end reserve study.

37. HOW Does the WCRA Price? Determining frequency : (A)(B)(C)(D)(E)(F)(G)(H) Nonfatal Pricing--Low RetentionFrequency ExcessImpliedProbabilityImplied AccidentWorkersUltimateSeverityXSofGround upClaims /Exponential Year(100,000's)Loss(000)Claim CntsExceedanceClaim CntsWorkerFitted 19964.9830,22651558.70.7677.515.5616.64 20113.7144,1551,16937.80.8445.012.1211.81 20123.4438,7621,23131.50.8537.110.8011.54 20133.5342,9151,31532.60.8638.010.7811.28 20143.6255,8211,43638.90.8844.312.2511.03 Trend:-2.3% 2016 Frequency:10.54

38. HOW Does the WCRA Price? Nonfatal Claims Per Worker/Low Retention :

39. HOW Does the WCRA Price? Determining Rates (projected): Nonfatal Projected Loss = Projected Nonfatal Frequency x Number of Workers x Probability of Exceedance x Discounted Excess Nonfatal Severity PLUS Fatal Projected Loss = Projected Fatal Frequency x Number of Workers x Probability of Exceedance x Discounted Excess Fatal Severity PLUS Loss Expense and General Expense ALL DIVIDED BY Projected Exposure EQUALS Indicated Rate (before credibility)

40. FINAL NOTES WCRA losses are discounted for reserving and pricing purposes using a portfolio rate of return (6.5%) With average payouts of 30 years or more, pricing year discounted loss is 9% to 19% of undiscounted loss Key factor in WCRA having the ability to charge less to members than traditional reinsurers The WCRA targets capital between -10% and +60% of discounted reserves. Capital levels outside this band may result in assessments or distributions of/to members.

41. FINAL NOTES For additional information about WCRA operations, services, calculators, governance, etc.: www.wcra.biz