1.  2002 National Council on Compensation Insurance, Inc. 1 Casualty Actuarial Society The Changing Insurance Market Workers’ Compensation Issues Monday, April 15, 2002 Barry I. Llewellyn, NCCI Harry Shuford, NCCI

2.  2002 National Council on Compensation Insurance, Inc. 2 WHAT WE’LL COVER TODAY Financial Overview of WC Line Residual Market Activity System Cost Drivers Frequency Research Terrorism Issues

3.  2002 National Council on Compensation Insurance, Inc. 3 FINANCIAL OVERVIEW OF WC LINE

4.  2002 National Council on Compensation Insurance, Inc. 4 WC Calendar Year Combined Ratios Continue To Deteriorate Combined Ratio p Preliminary NCCI estimate Source: AM Best Aggregates & Averages 8% Due to Sept. 11

5.  2002 National Council on Compensation Insurance, Inc. 5 WC Calendar Year 2001 Results Deteriorated, While Accident Year Results Remain Steady Calendar Year vs. Ultimate Accident Year Countrywide—Private Carriers CY 2001p estimate from AM Best Review/Preview, January, 2002; AY 2001p estimate from NCCI AM Best Aggregates & Averages (Historical CY Ratios) Includes dividends to policyholders. Accident year data is evaluated as of 12/31/00 and developed to ultimate. Combined Ratio 8% Due to Sept. 11

6.  2002 National Council on Compensation Insurance, Inc. 6 Preliminary 2001 Results WC Pretax Operating Gain/Loss Ratio p Preliminary. Investment gain includes investment income and realized gains. * Adjusted to include realized capital gains to be consistent with 1992 and after. 8% Due to Sept. 11 -5.1

7.  2002 National Council on Compensation Insurance, Inc. 7 Cumulative Rate/Loss Cost Departure, Schedule Rating, and Dividends NCCI States—Private Carriers Based on data through 12/31/2000 for the 37 states where NCCI provides ratemaking services. Rate states are: AZ, FL, ID, IL, IN, IA, NV, RI, TX, and WI. Dividend ratios are based on calendar year statistics.

8.  2002 National Council on Compensation Insurance, Inc. 8 -4.1% -3.5% 3.5% 4.9% 0.1% 7.5% 13.6% 9.0% 4.4% 3.9% 8.0% 4.1% 5.9% 11.5% 5.8% 11.8% -5% 0% 5% 10% 15% 1st Qtr2nd Qtr3rd Qtr4th Qtr1st Qtr2nd Qtr3rd Qtr4th Qtr New Business Policies Experienced Greater Average Reported Rate Changes Compared to Renewals NCCI States Renewals New Business Avg Reported Rate Chg 20002001

9.  2002 National Council on Compensation Insurance, Inc. 9 Average Reported Rate Changes NCCI States Renewals New Business 2000 2001 -5.0% 0.0% 5.0% 10.0% 15.0% 1Q2Q3Q4Q1Q2Q3Q4Q Percent Change to Prior Year

10.  2002 National Council on Compensation Insurance, Inc. 10 p Preliminary (states approved to date in 2002). Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization. Following Six Years of Decreases, the Average Approved Bureau Rate/Loss Cost Changes Have Been Increases for the Last Three Years History of Average Bureau Rate/Loss Cost Level Changes

11.  2002 National Council on Compensation Insurance, Inc. 11 RESIDUAL MARKET ACTIVITY

12.  2002 National Council on Compensation Insurance, Inc. 12 * Excludes Maine Residual Market Pool. ** Projected to ultimate. Residual Market Premium Volume on the Rise... as of 9/30/2001 $530,000

13.  2002 National Council on Compensation Insurance, Inc. 13 * Excludes Maine Residual Market Pool. ** Projected to ultimate. Residual Market Combined Ratios Continue to Grow as of 9/30/2001

14.  2002 National Council on Compensation Insurance, Inc. 14 Residual Market Activity Four Quarters 2001 vs. Four Quarters 2000 Number of applications assigned is up +35% (59,289 vs. 44,102) Assigned premium is up +92% (333,670,974 vs. 173,993,838)

15.  2002 National Council on Compensation Insurance, Inc. 15 Residual Market Total Applications Bound 2001 vs. 2002 Note: 9/11 Incident– WK36 9/11 All Plan States

16.  2002 National Council on Compensation Insurance, Inc. 16 Residual Market Application Premium Bound 2000 vs. 2001 vs. 2002

17.  2002 National Council on Compensation Insurance, Inc. 17 Residual Market Application Premium Bound 2001 vs. 2002 Note: 9/11 Incident – WK36 9/11

18.  2002 National Council on Compensation Insurance, Inc. 18 Average Residual Market Premium Size YearSize 1999$2,141 2000$2,957 2001$4,199 2002 (YTD)$5,691

19.  2002 National Council on Compensation Insurance, Inc. 19 Residual Market Policyholders Size of Premium: $100,000 and Greater YearAmount 1999247 2000184 20011,232

20.  2002 National Council on Compensation Insurance, Inc. 20 SYSTEM COST DRIVERS

21.  2002 National Council on Compensation Insurance, Inc. 21 The Rate of Change in WC Indemnity Claim Costs Has Accelerated Since 1995 NCCI States - Private Carriers Based on data through 12/31/2000, developed to ultimate. CPS (Current Population Survey) Bureau of Labor Average Weekly Wages Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. 1990-1995: -0.2% annual change 1995-2000: +6.8% annual change Indemnity Claim Cost (000s) CPS Index to 1990

22.  2002 National Council on Compensation Insurance, Inc. 22 WC Medical Claim Costs Have Also Continued Their Consistent Upward Trend NCCI States - Private Carriers Based on data through 12/31/2000, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. 1990-1995: +2.4% annual change 1995-2000: +7.6% annual change Medical Claim Cost (000s) Medical CPI Index to 1990

23.  2002 National Council on Compensation Insurance, Inc. 23 The Frequency of Lost-Time Claims Has Continued to Fall Through 2000 Cumulative Change in Frequency - Private Carriers Based on data through 12/31/2000, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. Cumulative change of -35.5% since 1990

24.  2002 National Council on Compensation Insurance, Inc. 24 FREQUENCY RESEARCH

25.  2002 National Council on Compensation Insurance, Inc. 25 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Using Data from the Bureau of Labor Statistics on Workplace Injuries - 1992-1999 presentation to the Casualty Actuarial Society Seminar on The Changing Insurance Market April 15, 2002

26.  2002 National Council on Compensation Insurance, Inc. 26 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Using Data from the Bureau of Labor Statistics on Workplace Injuries - 1992-1999 Outline 1.Key Findings 2.Back Injuries – Great Improvement Everywhere; Room for More 3.A Long-term View - Trends and Cycles in Frequency 4.The Special Case of the 1990s – Less Cycle, More Down Trend 5.Board-based Movements – It’s Everywhere – Industries & Occupations 6.Board-based Movements – It’s Everywhere – Injury Characteristics 7.Board-based Movements – It’s Everywhere – Age, Gender, Job Tenure

27.  2002 National Council on Compensation Insurance, Inc. 27 Searching for the Factors Driving the Change in Frequency Looking at Three Decades of Experience The key findings include:  Frequency changes are cyclical around a long-term tendency to decline.  Over long periods of time the relative importance of these two factors varies considerably.

28.  2002 National Council on Compensation Insurance, Inc. 28 Searching for the Factors Driving the Change in Frequency Looking at Three Decades of Experience The key findings include: Swings in the business cycle, especially as reflected in changes in employment, are associated with similar swings in frequency – downward pressure in recession upward pressure during periods of robust growth.

29.  2002 National Council on Compensation Insurance, Inc. 29 Searching for the Factors Driving the Change in Frequency Looking at Three Decades of Experience The key findings include: The 1990s diverge from earlier periods; the business cycle effects were present but were overcome by changes in the workplace as reflected by marked improvements in productivity.

30.  2002 National Council on Compensation Insurance, Inc. 30 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Using Data from the Bureau of Labor Statistics on Workplace Injuries - 1992-1999 What Happened in the 1990s? Can It Continue? The Approach – Compare Areas with Dramatic Declines vs. Those with Limited Declines and Increases – Identify Key Underlying Differences It Didn’t Get Us Very Far!

31.  2002 National Council on Compensation Insurance, Inc. 31 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s The key findings include: The decline is broad-based – across industries and occupations and across virtually all injury “demographics” including age, gender, event, source, body part injured, Tenure with employer.

32.  2002 National Council on Compensation Insurance, Inc. 32 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s The key findings include: In spite of the dramatic declines  there is virtually no change in the relative position of industries and occupations. In general the most risky remain the most risky; the safest are still the safest.

33.  2002 National Council on Compensation Insurance, Inc. 33 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s The key findings include: In spite of the diverse nature of the decline at least one clear factor stands out the dramatic decline in back injuries outstrips the declines in all other injury categories.

34.  2002 National Council on Compensation Insurance, Inc. 34 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Check Out the Decline in Back Injuries This Seems to be the Most Dramatic Feature of the Improvement in the 1990s

35.  2002 National Council on Compensation Insurance, Inc. 35 Reduction in Back Injuries is Significant All Industries Down 32% vs. 22% for All Other

36.  2002 National Council on Compensation Insurance, Inc. 36 Reduction in Back Injuries is Significant for All Major Industry Groups

37.  2002 National Council on Compensation Insurance, Inc. 37 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Check Out the Decline in Back Injuries More on This Later – First the Longer Term View

38.  2002 National Council on Compensation Insurance, Inc. 38 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Trends and Cycles in Frequency

39.  2002 National Council on Compensation Insurance, Inc. 39 The Rate of Work Related Injuries Has Trended Downward Slowly since the 1920s

40.  2002 National Council on Compensation Insurance, Inc. 40 Or The Rate of Work Related Injuries Has Trended Downward Dramatically since the 1920s

41.  2002 National Council on Compensation Insurance, Inc. 41 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s What can explain this tendency for frequency to decline over extended periods of time? According to the Federal Reserve Bank of Dallas – Competitive labor markets require continuing improvement in working conditions and productivity Source: “Have a Nice Day”, Annual Report 2000, Federal Reserve Bank of Dallas Reflected in technological advances

42.  2002 National Council on Compensation Insurance, Inc. 42 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s What can explain this tendency for frequency to decline over extended periods of time? Technological advances - Key concepts: –Robotics –Modular design and construction –Power assisted processes –Ergonomic design –Cordless tools –Stronger, lighter weight materials (e.g. fiber glass rather than wooden ladders) –More and better training

43.  2002 National Council on Compensation Insurance, Inc. 43 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Technological advances - Examples: Manufacturing – Robotics Warehouse, trucking, garbage collection, etc.Power assisted – fork lifts, Power tail gates Transportation Bigger trucks, Power assisted handling Repair service – auto, appliance, etc.Power tools, Snap-in modular parts Communications Head sets vs. hand held ConstructionModular units and offsite prefabrication Clerical supportComputer assisted typing, calculating, filing Food serviceMicrowaves and prepared frozen meals in place of hot surfaces and open flames Disposable plates and utensils vs washing

44.  2002 National Council on Compensation Insurance, Inc. 44 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s OK – the Long Term Decline Makes Sense How about Short Term Movements? ________________________________ Frequency Typically Tracks with the Business Cycle

45.  2002 National Council on Compensation Insurance, Inc. 45 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s What’s This about Frequency and the Business Cycle Moving Together? Surely Frequency Will Start Rising Now that the Strong Economic Growth of the 1990s Has Eased.

46.  2002 National Council on Compensation Insurance, Inc. 46 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Possibly but Probably Not ________________________________________ Frequency Tracks with the Business Cycle Looking at Forty Years of History

47.  2002 National Council on Compensation Insurance, Inc. 47 Frequency Typically Falls During Recessions but Seems to Increase during Strong Recovery and Expansion __________ Changes in Direction Track with Peaks and Troughs in Economic Cycles

48.  2002 National Council on Compensation Insurance, Inc. 48 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Frequency Tracks with the Business Cycle Probably the Cost of Inexperienced Workers but The Decline in the 1990s Seems to be Different

49.  2002 National Council on Compensation Insurance, Inc. 49 The Year-to-Year Changes in Injury Rates Have Tracked Closely with Year-to-Year Economic Changes - Are the 1990s an Exception? (% changes in injury rates, GDP, and Employment - Private Sector)

50.  2002 National Council on Compensation Insurance, Inc. 50 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s The 1990s May Seem Different but Frequency Still Tracks with the Business Cycle when Combined with a Powerful (Linear) Downtrend ___________________________________________________ A Regression Analysis

51.  2002 National Council on Compensation Insurance, Inc. 51 % Change in Frequency – 1977 through 1999 Estimated Values Capture the Key Turning Points in the Actual Series Due Only to the % Change in Economic Activity Actual vs. Predicted Based on % Change in GDP and a Linear Downtrend after 1990

52.  2002 National Council on Compensation Insurance, Inc. 52 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s What Is the Source of this Downtrend? Will the Improvement Hold? Will the Decline Actually Reverse?

53.  2002 National Council on Compensation Insurance, Inc. 53 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Country Wide Experience in the 1990s A Steady Decline How Remarkable Is This?

54.  2002 National Council on Compensation Insurance, Inc. 54 The Decline Country Wide Continued Unabated over the Decade

55.  2002 National Council on Compensation Insurance, Inc. 55 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s The Downtrend in Frequency in the 1990s It’s Remarkable and It’s International

56.  2002 National Council on Compensation Insurance, Inc. 56 The Incidence Rates of Workplace Injuries in Other Industrial Nations Have Also Declined Steadily During the 1990s Canada and Japan Among Others

57.  2002 National Council on Compensation Insurance, Inc. 57 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Monitoring the Experience of Major Industries The Declines Impacted All Industries

58.  2002 National Council on Compensation Insurance, Inc. 58 The Rate of Work Related Injuries Declined by More than 30% in All but One of the Major Industry Groups between 1992/93 and 1998/99

59.  2002 National Council on Compensation Insurance, Inc. 59 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Monitoring the Experience of Major Industries They All Track with the Country Wide Experience ____________________________________________________________ More Regression Analysis Actual vs. Fitted Based on Country Wide

60.  2002 National Council on Compensation Insurance, Inc. 60 All Industries Track the Country Wide Decline

61.  2002 National Council on Compensation Insurance, Inc. 61 All Industries Track the Country Wide Decline

62.  2002 National Council on Compensation Insurance, Inc. 62 As a Consequence the riskier industries remained riskier and the safer ones remained safer

63.  2002 National Council on Compensation Insurance, Inc. 63 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Monitoring the Experience of Major Occupations The Declines Impacted All Occupations

64.  2002 National Council on Compensation Insurance, Inc. 64 The Rate of Work Related Injuries Declined by More than 30% in All Major Occupations Groups between 1992/93 and 1998/99

65.  2002 National Council on Compensation Insurance, Inc. 65 As a Consequence the riskier occupations remained riskier and the safer ones remained safer

66.  2002 National Council on Compensation Insurance, Inc. 66 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Maybe the Declines Are Due to Shifts from Higher Frequency to Lower Frequency: Industries? Occupations? Workers?

67.  2002 National Council on Compensation Insurance, Inc. 67 Change in Mix Is Not Significant Industry and Occupation When controlling for changes in employment by industry and by occupation, the frequency only differs by 1 or 2 tenths of a point. Industry Summary Actual 1992-9324.7Actual 1998-9915.6 Using 1998-99 Mix24.5Using 1992-93 Mix15.8 Occupation Summary

68.  2002 National Council on Compensation Insurance, Inc. 68 Change in Mix Is Not Significant Gender (not at all) and Age (marginally) Gender Summary Actual 1992-9318.9Actual 1998-9912.9 Using 1998-99 Mix18.9Using 1992-93 Mix12.9 Age Summary Actual 1992-9318.7Actual 1998-9912.7 Using 1998-99 Mix18.3Using 1992-93 Mix12.9 When controlling for changes in employment by gender, the frequency is unaffected. Frequency calculations are most affected. when controlling for changes in the age composition of the workforce. The share of high frequency 25 to 34 year olds declined and the share of lower frequency 45 to 54 year olds increased.

69.  2002 National Council on Compensation Insurance, Inc. 69 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s If the Decline Is Broadly Based Are There Any Meaningful Patterns? Changes in the Characteristics of Work Related Injuries: Part of Body Event Source

70.  2002 National Council on Compensation Insurance, Inc. 70 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Part of Body

71.  2002 National Council on Compensation Insurance, Inc. 71 Part of Body Injured – Declines in All Major Categories Trunk includes Back Injuries

72.  2002 National Council on Compensation Insurance, Inc. 72 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Event or Cause

73.  2002 National Council on Compensation Insurance, Inc. 73 Event or Cause of Injury – Declines in All Categories

74.  2002 National Council on Compensation Insurance, Inc. 74 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Source of Injury

75.  2002 National Council on Compensation Insurance, Inc. 75 Source of Injury – Declines in All Categories

76.  2002 National Council on Compensation Insurance, Inc. 76 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s There Has Been a Slight Reduction in Severity – Relatively Fewer Injuries Result in More Than 1 or 2 Days Away from Work But All Categories Were Down by More than 30%

77.  2002 National Council on Compensation Insurance, Inc. 77 Severity Down Based on Days Away from Work The Frequency of Injuries Resulting in Only 1 to 2 Days Away from Work Declined the Least

78.  2002 National Council on Compensation Insurance, Inc. 78 Changes in the Demographics of Work Place Injuries Time with Current Employer – Experience Matters Inexperienced Have a Disproportionately High Share of Total Injuries Least Experienced Had the Lowest Decline in Total Injuries

79.  2002 National Council on Compensation Insurance, Inc. 79 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Noted Earlier Frequency Tracks with the Business Cycle Probably the Cost of Inexperienced Workers

80.  2002 National Council on Compensation Insurance, Inc. 80 Searching for the Factors Driving the Change in Frequency Looking at Three Decades of Experience The key findings include: Frequency changes are cyclical around a long-term tendency to decline. Over long periods of time the relative importance of these two factors varies considerably. Swings in the business cycle, especially as reflected in changes in employment, are associated with similar swings in frequency – downward pressure in recession and upward pressure during periods of robust growth. The 1990s diverge from earlier periods;the business cycle effects were present but were overcome by changes in the workplace as reflected by marked improvements in productivity.

81.  2002 National Council on Compensation Insurance, Inc. 81 Searching for the Factors Driving the Change in Frequency with Special Interest in the Decline of the 1990s Using Data from the Bureau of Labor Statistics on Workplace Injuries - 1992-1999 The key findings include: The decline is broad-based – across industries and occupations and across virtually all injury “demographics” including age, gender, event, source, body part injured. In spite of the dramatic declines there is virtually no change in the relative position of industries and occupations. In general the most risky remain the most risky; the safest are still the safest. In spite of the diverse nature of the decline at least one clear factor was readily apparent – the dramatic decline in back injuries.

82.  2002 National Council on Compensation Insurance, Inc. 82 TERRORISM ISSUES

83.  2002 National Council on Compensation Insurance, Inc. 83 TERRORISM ISSUES NCCI’S 4Q2001 ACTIVITIES Data Reporting Requirements for 9-11 Claims Experience Rating Filing to Exclude Cat 48 Losses Filed 4% Terrorism Load in all NCCI States

84.  2002 National Council on Compensation Insurance, Inc. 84 WHY DID NCCI FILE TERRORISM LOAD IN DECEMBER? Terrorism Losses are Covered Under WC Policy Exclusion Could Not Be Approved Without Statutory Changes Congress Adjourned Without Enacting Federal Backstop Current Rates Do Not Reflect Terrorism Exposure

85.  2002 National Council on Compensation Insurance, Inc. 85 STATUS OF TERRORISM LOAD FILINGS No State Approvals to Date Reasons for Inaction 14% Not Acceptable 2Flat % for All Classes 3Co-Mingling of Collected Funds 4Retroactive Application Unfunded Exposure Still Remains

86.  2002 National Council on Compensation Insurance, Inc. 86 CURRENT ACTIVITIES Terrorism/Catastrophe Modeling Analyzing Data Needs

87.  2002 National Council on Compensation Insurance, Inc. 87 QUESTIONS ??????????