© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 1 The New NCCI Hazard Groups Presented by: Jonathan Evans, FCAS, MAAA Actuary NCCI

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 2 Today’s Outline:  Background on Hazard Groups  Item B-1403 and Subsequent Annual Updates  Impact of the New Hazard Groups  Next Steps—USL&HW

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 3 Today’s Outline:  Background on Hazard Groups  Item B-1403 and Subsequent Annual Updates  Impact of the New Hazard Groups  Next Steps—USL&HW

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 4 What Are Hazard Groups?  Each class code is assigned to a hazard group (HG)  HGs capture the variation in large loss potential among class codes  Classes in HG A—least likelihood for large claims  Classes in HG G—greatest likelihood for large claims HG A … … … … HG G Likelihood of Large Claims

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 5 What Are Hazard Groups Used For? Retrospective Rating  Excess Loss Factors (ELFs), used to determine the charge for an optional claim limit  State Hazard Group Relativities (SHGRs), used in determining the insurance charge

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 6 What Are Hazard Groups Used For? Deductible Credits  NCCI files small deductible programs based on hazard groups in the voluntary market in just over 20 states  NCCI does not file large deductible programs

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 7 What Are Hazard Groups Used For? Other Miscellaneous Uses for Hazard Groups:  Profiling premium distribution for reinsurance purposes  Reinsurance pricing  Underwriting guidelines  Predictive modeling

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 8 Today’s Outline:  Background on Hazard Groups  Item B-1403 and Subsequent Annual Updates  Impact of the New Hazard Groups  Next Steps—USL&HW

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 9 Item B-1403 Filing Contents  New mapping to both four and seven hazard groups  ELFs for most states  State Hazard Group Relativities (SHGRs)  Expected Loss Groups (ELGs)  Deductible credits not included  Approved in all states

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 10 Interaction of HG and Rate Filings  ELFs and deductible credits in rate filing depend on HG filing (B-1403)  New HGs took effect with approval of the first rate or loss cost filing on or after January 1, 2007* * Separate effective dates were filed in CO and ME due to no loss cost filings in 2007 and in SC due to a delayed loss cost effective date

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 11 ELFs Effective in 2007  Loss cost states effective in first half of year –AK, AL, AR, CO*, CT, GA, HI, IL, IN, KS, LA, MD, ME*, MO, MS, MT, NC, NE, NH, NM, NV, OK, OR, RI, SC*, SD, TN, VA, VT –ELFs were in HG filing and loss cost filing  Loss cost states effective in second half of year –DC, KY, UT –ELFs were in loss cost filing  Rate states –AZ, FL, IA, ID –ELFs were in rate filing * No loss cost filing made in CO and ME with 2007 eff date; SC eff date delayed

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 12 ELFs Effective in 2008 and Subsequent  Loss cost states –ELFs filed annually in ELG/SHGR filing (mid-year) –Effective with loss cost filing –Continue to appear in loss cost filings as well  Rate states –ELFs in rate filing –Same as current practice

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 13 ELGs/SHGRs Effective in 2008 and Subsequent  File annually at mid-year  Single January 1 effective date for all states

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 14 The New Hazard Groups  The old four hazard groups labeled I through IV were replaced with seven hazard groups labeled A through G  To accommodate carriers that preferred a four-hazard group system, there was also a new four-hazard-group option labeled 1 through 4

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved HG Option  Made available primarily for carriers who could not update their system in the time required.  Carriers that elected to use the new four-hazard- group option had to make a filing in each state to adopt it. Otherwise they are considered to have adopted the seven HGs.  New 7 Hazard Groups collapse into new 4. –New HG 1 = HGs A & B –New HG 2 = HGs C & D –New HG 3 = HGs E & F –New HG 4 – HG G

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 16 Hierarchical Collapsing of New HGs AB C DEF G

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 17 Today’s Outline:  Background on Hazard Groups  Item B-1403 and Subsequent Annual Updates  Impact of the New Hazard Groups  Next Steps—USL&HW

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 18 Old Hazard Groups HG Number of Classes Standard Premium % of Total Premium I 401,262,958,3740.9% II 41766,637,777, % III 30374,858,646, % IV 1003,633,449,4342.5% Total ,392,832, %

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 19 Old Mapping II 417 III 303 IV 100 I New Mapping G 123 F 67 E 198 D 67 C 193 A B Number of Classes per Hazard Group Old vs. New

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 20 New A B 14% C 26% D 12% E 20% F 19% G 5% Old II 46% III 51% IV: 2% I: 1% 4% Percentage of Premium per Hazard Group Old vs. New

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 21 New Hazard Groups Before Underwriting Review Each symbol represents a class Each color represents a HG

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 22  Member companies surveyed  101 classes had full credibility, of which 53 received comments  61 classes had credibility of 75%–99%, of which 30 received comments  Of the remaining 700 classes, 200+ also received comments Underwriting Review of Hazard Group Assignments

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 23 Underwriting Review of Hazard Group Assignments  Much feedback pertained to dangers faced by employees, such as: – Extensive driving – Heavy machinery – Dangerous materials  Feedback also reflected reasoning by analogy: – Suggesting classes with similar operations be assigned to the same HG – Suggesting a small class be mapped to the same HG as a larger class with similar operations

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 24  Final HG assignments based on: –Statistically indicated mapping –Survey comments –Internal Underwriting review –Statistical credibility of class –Statistical ambiguity of class (e.g., was indicated mapping between 2 HGs?) Underwriting Review of Hazard Group Assignments

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 25 Class Movement From Old to New 4 HGs Number of Classes

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 26 Revenue Neutrality  General increase in ELFs when comparing the old 4 HGs to the new 4 HGs (e.g., old HG I to new HG 1).  General movement of classes to lower HGs.  These two results offset each other, and the overall average ELFs are unaffected across all hazard groups and prior to trend. Therefore, there is no overall premium effect.

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 27 Percentage Change in Average Cost per Case Old vs. New 4 HGs Injury Type Hazard Group 1234 Fatal+48.6%+14.0%+2.2%-5.3% PT+18.7%+4.0%+3.4%+29.2% PP+2.1%+9.1%+2.8%-6.0% TT-3.3%+4.8%+1.1%-5.8% Med Only -6.8%+2.9%+1.4%-9.5%

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 28 PT Average Cost per Case Old HG IV vs. New HG 4 HG IV $413,376 HG 4 $533,913 $ 214,619$ 573,275$ 450,789

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 29 Percentage Change in Injury Type Weights Old vs. New 4 HGs Injury Type Hazard Group 1234 Fatal+133.3%+30.0%+3.8%-23.4% PT+12.1%+8.2%0.0%+39.4% PP-1.6%+2.7%+0.7%-1.5% TT-4.7%-3.3%-1.3%-2.3% Med Only+15.2%-13.2%-5.2%-29.2%

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 30 PT Weight Old HG IV vs. New HG 4 HG IV 10.4% HG % 4.1%15.7%12.0%

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 31 Change in Excess Ratios Old to New 4 HGs Each symbol represents a state

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 32 Change in Excess Ratios HG I to HG 1

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 33 Change in Excess Ratios HG II to HG 2

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 34 Change in Excess Ratios HG III to HG 3

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 35 Change in Excess Ratios HG IV to HG 4

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 36 Old and New HGs Countrywide Average Excess Ratios

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 37 Key Transitions Old Mapping Hazard GroupIIIIIIIVTotal Number of Classes Percent of Premium 0.9%45.5%51.1%2.5%100% Hazard Group %3.9%0.0% 4.3% % 13.0% 0.1%0.0%13.6% % 21.7% 3.7%0.0%25.5% %5.2%7.1%0.0%12.3% %1.5% 18.4% 0.0%19.9% %0.2% 18.9% 0.3%19.3% % 2.9%2.2%5.1% New Mapping F G A B C D E

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 38 Largest Class Codes Transitioning From II to B Class Code Description Premium Size (8810 = 1000) 8017Store: Retail NOC451* 8018Store: Wholesale NOC College: Professional Employees and Clerical Hotel: All Other Employees and Salespersons, Drivers College or School: All Other Employees 162 *Indicates premium 45.1% of 8810 premium.

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 39 Largest Class Codes Transitioning From II to C Class Code Description Premium Size (8810 = 1000) 8810Clerical Office Employees NOC Convalescent or Nursing Home—All Employees Store: Meat, Grocery and Provision (Combined)—Retail—NOC Hospital: Professional Employees Buildings—Operation by Contractors 189

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 40 Change in Excess Ratios From Old HG II to … Change Due to New Mapping … excluding trendChange Due to New Mapping—Excluding Trend Each symbol represents a state

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 41 Largest Class Codes Transitioning From III to E Class Code Description Premium Size (8810 = 1000) 8742 Salespersons, Collectors or Messengers— Outside Electrical Wiring—Within Buildings and Drivers Plumbing NOC and Drivers Trucking—Local Hauling Only—All Employees and Drivers Concrete or Cement Work—Floors, Driveways, Yards or Sidewalks—and Drivers 250

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 42 Largest Class Codes Transitioning From III to F Class Code Description Premium Size (8810 = 1000) 5645 Carpentry—Detached One or Two Family Dwellings Trucking—Long-Distance Hauling— All Employees and Drivers Carpentry NOC Masonry NOC Machinery or Equipment Erection or Repair NOC and Drivers 272

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 43 Change in Excess Ratios From Old HG III to … Change Due to New Mapping—Excluding Trend Each symbol represents a state

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 44 Impact on Small Deductibles  NCCI files deductible credits that vary by HG in just over 20 states in the voluntary market and in just over 10 states in the residual market  For deductibles of $5,000 or less, the impact of the revised credit on the loss cost premium of most risks is less than 5%

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 45 Countrywide Average $500 Deductible Credits

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 46 Today’s Outline:  Background on Hazard Groups  Item B-1403 and Subsequent Annual Updates  Impact of the New Hazard Groups  Next Steps—USL&HW

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 47 Current USL&HW ELFs  Countrywide  Last filed in 1999  Not updated annually  Based on F-class data

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 48  Countrywide vs. state-specific ELFs –USL&HW indemnity benefits are countrywide, but medical probably varies by state –Even half of the indemnity losses are paid at state benefit level in typical F-class  Minimal data available  Minimal use expected –Very few retro policies with USL exposure are being written Key Considerations

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 49  Use state ELFs –Typically half of indemnity paid at state level –Medical probably varies by state and accounts for majority of large losses  Make use of USL percentage to derive state- specific USL ELFs –USL ELFs that vary by state could be derived by assuming USL costs exceed each specific state’s costs by the USL percentage, or some portion of the USL percentage Possible Options

© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. 50 Summary of New HGs  New 7 HGs provide a greater spread in ELFs  Classes are more evenly spread across the new HGs vs the old  General increase in ELFs, partly due to inflation over time  Increase in ELFs offset by movement to lower HG for many classes