1. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 1 Workers Compensation Update Spring Midwestern Actuarial Forum March 7, 2008 Barry Lipton, Practice Leader and Senior Actuary NCCI

2. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 2 Workers Compensation Results

3. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 3 Workers Compensation Premium Volume Level: A Modest Increase Private Carriers $ Billions Calendar Year Source: 1990-2006, A.M. Best Aggregates & Averages

4. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 4 1.9% Due to September 11 Percent WC Calendar Year Combined Ratio: A Continued Period of Decline Private Carriers Calendar Year Source: 1990-2006, A.M. Best Aggregates & Averages

5. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 5 1990 and 1991 adjusted to include realized capital gains to be consistent with 1992 and after Investment Gain on Insurance Transactions includes Other Income Source: 1990-2006, A.M. Best Aggregates & Averages Percent Low Workers Compensation Investment Returns Continued in 2006 Investment Gain on Insurance Transactions to Premium Ratio Private Carriers Calendar Year

6. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 6 1990 and 1991 adjusted to include realized capital gains to be consistent with 1992 and after Operating Gain equals 1.00 minus (Combined Ratio less Investment Gain on Insurance Transactions and Other Income) Source: 1990-2006, A.M. Best Aggregates & Averages Percent Calendar Year 2006 Workers Compensation Results Continue to Improve Pre-Tax Operating Gain Ratio—Private Carriers

7. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 7 Workers Compensation Residual Market

8. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 8 Workers Compensation Residual Market Premium Volume NCCI-Serviced Workers Compensation Residual Market Pools as of September 30, 2007 $ Billions Policy Year *Incomplete Policy Year Projected to Ultimate

9. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 9 *Incomplete Policy Year Projected to Ultimate Workers Compensation Residual Market Combined Ratios NCCI-Serviced Workers Compensation Residual Market Pools as of September 30, 2007 Percent Policy Year

10. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 10 Workers Compensation Accident Year Results And Reserve Estimates

11. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 11 Accident Year Combined Ratio Another Underwriting Profit in 2006 Workers Compensation Calendar Year vs. Ultimate Accident Year – Private Carriers Percent Accident Year data is evaluated as of 12/31/2006 and developed to ultimate Source:Calendar Years 1997-2006, A.M. Best Aggregates & Averages; Accident Years 1997-2006, NCCI analysis based on Annual Statement data Includes dividends to policyholders

12. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 12 *include Maine and Minnesota state funds Considers all reserve discounts as deficient Figures are based on the respective Annual Statement data for each evaluation date and NCCI latest selections $ Billions Comparison of the Deficiency at Different Evaluation Dates WC Loss and LAE Reserves—Private Carriers*

13. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 13 Direct Combined Ratios by State Accident Year 2006 Percent Source: NCCI Financial Calls, valued as 12/31/2006 South Carolina is not yet available

14. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 14 Change in Direct Combined Ratio From Accident Year 2004 to 2006 Percent Source: NCCI Financial Calls, valued as 12/31/2006 South Carolina is not yet available

15. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 15 Largest Improvement in Direct Combined Ratio Accident Year 2004 to 2006 Source: NCCI Financial Calls, valued as 12/31/2006 South Carolina is not yet available StateAY 2004AY 2006Change New Mexico9982-17 Alaska8671-15 Kentucky115100-15 Arkansas9379-14 Utah10694-12 Nebraska10594-11 Idaho10092-8 Mississippi10193-8

16. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 16 Change in Direct Combined Ratio From Accident Year 2002 to 2006 Percent Source: NCCI Financial Calls, valued as 12/31/2006 South Carolina is not yet available

17. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 17 Largest Improvement in Direct Combined Ratio Accident Year 2002 to 2006 Source: NCCI Financial Calls, valued as 12/31/2006 South Carolina is not yet available StateAY 2002AY 2006Change Alaska12571-54 Kentucky151100-51 Montana165114-51 Idaho12392-31 Utah12594-31 Vermont12092-28 New Mexico10982-27 Hawaii8762-25

18. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 18 Workers Compensation Premium Drivers

19. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 19 Cumulative 1990-1993 +36.3% Cumulative 1994-1999 -27.8% Average Approved Bureau Rates/Loss Costs History of Average WC Bureau Rate/Loss Cost Level Changes Percent Cumulative 2000-2003 +17.1% Cumulative 2004-2008 -20.3% Calendar Year *States approved through 1/17/2008 Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization

20. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 20 Current NCCI Voluntary Market Filed Rate/Loss Cost Changes Excludes Law-Only Filings Percent States filed through 01/11/2007

21. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 21 Percent Impact of Discounting on Workers Compensation Premium NCCI States — Private Carriers NCCI benchmark level does not include an underwriting contingency provision Dividend ratios are based on calendar year statistics Based on data through 12/31/2006 for the states where NCCI provides ratemaking services Policy Year

22. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 22 Workers Compensation Loss Drivers

23. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 23 Indemnity Claim Cost (000s) 1991-2006: Based on data through 12/31/2006, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Workers Compensation Indemnity Claim Costs Lost–Time Claims Accident Year Annual Change 1991–1996:+1.2% Annual Change 1997–2005:+6.2%

24. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 24 1991-2005: Based on data through 12/31/2006, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Workers Compensation Medical Claim Costs Lost–Time Claims Medical Claim Cost (000s) Accident Year Annual Change 1991–1996:+4.5% Annual Change 1997–2005:+8.9%

25. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 25 Workers Compensation Medical Losses Are More Than Half of Total Losses All Claims—NCCI States Based on data through 12/31/2006, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies 1986 Medical Indemnity 1996 Indemnity Medical 2006 Indemnity Medical

26. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 26 Percent Change Workers Compensation Lost-Time Claim Frequency Continues Its Decline Lost-Time Claims Accident Year 1991-2006: Based on data through 12/31/2006, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Cumulative Change of –52.3% (1991-2006)

27. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 27 Prescription Drug Study 2007 Update

28. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 28 How Are Workers Compensation Drug Costs Changing? What percentage of workers compensation (WC) medical costs are prescription drugs? How has the percentage changed over time? Do WC prescription drug costs differ by state? What types of drugs are prescribed most often?

29. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 29 WC Prescription Drug Cost Containment Options Prescription drug-fee schedules Used in a majority of states Many use Average Wholesale Price (AWP) Most also add a dispensing fee Negotiation of lower prices Mandated use of generic drugs Pharmacy Benefit Managers (PBMs) Formularies

30. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 30 Key Findings There are some signs that the WC prescription drug share of medical costs is leveling off, at least temporarily Some states’ WC prescription drug costs vary significantly from average Utilization is the significant driving force behind total cost

31. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 31 Key Findings Anti-inflammatories and painkillers represent about half of total amount paid for drugs in 2005, and comprise 6 of the top 10 drugs For drugs with generic equivalents, generics were prescribed 87% of the time in Service Year 2005 Additional savings of about 12% of total drug costs can be realized from using generic equivalents

32. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 32 Study Design Data includes a nationwide sample Data covers claims from 1994 to 2005 and services from years 1996 to 2005 “Prescription drug” is defined as a transaction identified with a National Drug Code (NDC) or with carrier specialized codes

33. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 33 Nationwide View

34. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 34 Is the WC Ratio of Prescription Drug Costs to Medical Costs Stabilizing? Ratio of Costs Paid in Period Injury Year

35. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 35 Is the Share of Prescription Drug Costs to Medical Costs Stabilizing? Ratio of Costs Paid in Period Injury Year

36. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 36 Forecasting Rx Share of Medical Cost Three scenarios naturally arise Latest year is representative of the trend Latest year is an aberration; trend will continue at historical rates Trends will continue at historical rates only after the fifth service year We forecasted the Rx share under these three scenarios

37. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 37 Is the Rx Share of Medical Costs Stabilizing in WC? Ultimate Projected Rx to Medical Ratio Injury Year

38. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 38 Utilization Is a Bigger Cost Driver Than Price Drug Cost Breakdown Service Year p Preliminary

39. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 39 Regional View

40. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 40 WC Rx Cost per Claim Below Average Average Above Average OR MT KS NE OK LA MS KY TN FL WI IN GA MN TX CO ID UT AR AL SC VA NC AZ IL MI IA MO CA NH MA CT MD PA DE

41. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 41 Utilization Is the Cost Driver 4-Year Average Cost Breakdown

42. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 42 Utilization Is the Cost Driver 4-Year Average Cost Breakdown

43. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 43 Detailed View

44. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 44 Top Drugs for 2005 Most Prescribed Drugs by Total Paid in WC Drug NameFDA Approval Ranking 2005200420032001–2005 Hydrocodone/Acetaminophen7/85134 3 Gabapentin9/03237* 17 OxyContin ® 12/95311 1 Carisoprodol <1/82466 6 Celebrex ® 12/98522 2 Lidoderm ® 3/9961015 11 Skelaxin ® 4/647910 9 Mobic ® 8/0082125 18 Oxycodone HCL<1/8292783 24 Naproxen ® 3/9410119 8 Actiq ® 11/98111530 20 * Gabapentin was released in late 2003

45. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 45 Anti-Inflammatories Are a Declining Share of the Total Dollars Paid Service Year

46. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 46 Age of Claim (in Years) Shares Change as Claims Age Claims for Service Years 2004

47. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 47 Shares Change as Claims Age Claims for Service Years 2004–2005 Age of Claim (in Years) 100% 80% 60% 40% 20% 0% 20042005

48. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 48 September 2004—Merck & Company voluntarily withdrew Vioxx ® from the market April 2005—At the request of the FDA, Pfizer voluntarily suspended sales of Bextra ® April 2005—The FDA allowed Pfizer to keep Celebrex ® on the market, but with expanded risk information included in the labeling The Fall of the Big Three Anti-Inflammatories In 2003, Vioxx® ranked 5 th, Bextra® ranked 7 th, and Celebrex® ranked 2 nd in terms of total dollars paid.

49. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 49 The Fall of the Big Three Anti-Inflammatories Celebrex, Vioxx, and Bextra Through 2005 Injury Year Relative Service Year Paid Per Claim

50. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 50 Use of Mobic Is Rising Mobic ® Through 2005 Injury Year Relative Service Year Paid Per Claim

51. © Copyright 2008 NCCI Holdings, Inc. All Rights Reserved. 51 Comments & Discussion