1.  2003 NCCI Holdings, Inc. 1 CAS Ratemaking Seminar Barry Lipton NCCI March 28, 2003 New Catastrophe Exposure For Workers Compensation

2.  2003 NCCI Holdings, Inc. 2 Impact of 9/11 on Workers Compensation Initial WC Loss Estimates (6,000 deaths) Morgan Stanley:$3 billion Tillinghast:$3 billion–$5 billion Current NCCI WC Loss Estimates (3,047 deaths excl hijackers; 2,250 injuries) Self-insured losses 15% (includes NY Firefighters/PD) Losses not covered by WC 5% Fatalities w/o dependents 20% (lump-sum $50k payment per person) Ultimate Direct Losses$1.3 B–$2.0 B Ultimate Net Losses$0.3 B–$1.2 B Impact on Net Acc Yr Combined Ratio 1%–4%

3.  2003 NCCI Holdings, Inc. 3 Unique Challenges of Workers Compensation and Terrorism Coverage  Coverage mandated by law, exclusions are not possible  Benefits are defined by law, limits aren’t possible  Risks that aren’t written voluntarily will be backed by the entire market through the involuntary pool

4.  2003 NCCI Holdings, Inc. 4 Objectives of NCCI’s Terrorism Modeling Efforts  Support the industry in developing a course of action for terrorism response  Develop actuarial methods for technical analysis of extreme events other than natural disasters

5.  2003 NCCI Holdings, Inc. 5 NCCI’s Partner in Terrorism Modeling  NCCI’s partner is EQECAT, an Oakland firm with a strong track record in catastrophe modeling  They do the modeling for the California earthquake authority  They are certified by the Florida DOI to do hurricane modeling in support of rate filings  EQECAT is a subsidiary of ABS consulting, one of the largest risk management firms who has been assessing terrorist threats for many years  EQECAT is the ABS consulting division serving the insurance/reinsurance/financial markets

6.  2003 NCCI Holdings, Inc. 6 What NCCI/EQECAT Terrorism Modeling Demonstrates  Although predicting frequency is difficult, modeling is a strong analytic tool to help us understand these extreme events  The workers compensation losses alone from a single event could have a devastating impact on segments of the Property/Casualty Industry  This is a problem for all regions of the country— not just major metropolitan areas

7.  2003 NCCI Holdings, Inc. 7 Overview of Modeling Method  Modeled at the local level, peril by peril  Provisional nationwide assessment of frequency done by ABS consulting with outside expert input  Provisional local assessment of frequency made by allocation of nationwide frequency to state

8.  2003 NCCI Holdings, Inc. 8 Overview of Modeling Method (Continued)  Many scenarios run at local level to get distribution of expected losses for a given event  Scenarios aggregated to get statewide expected losses  Aggregation can be extrapolated to get regional results and then combined to get nationwide results

9.  2003 NCCI Holdings, Inc. 9 Perils Modeled  Blasts  Chemical agents  Biological agents  Radiological agents  Dam breaks

10.  2003 NCCI Holdings, Inc. 10 Size of Events  Only large events modeled (a priori expectation of $15 million to $20 million in WC losses)  Large is defined by the size of agent rather than dollar threshold  400 lbs. equivalent TNT rather than 1 stick  One ounce of anthrax (letters have significantly less)

11.  2003 NCCI Holdings, Inc. 11 Blasts  Car bombs  Small truck bombs  Large truck bombs  1 kiloton nuclear bomb  10 kiloton nuclear bomb  Aircraft impact

12.  2003 NCCI Holdings, Inc. 12 Frequency  Frequency is extremely difficult to assess  EQECAT estimates that the frequency of a large terrorist event is between 1 and 5 per year nationwide  The model was calibrated to one nationwide event per year and the result was scaled as necessary  EQECAT analyzed potential target locations, difficulty of using a given weapon, and various theories on how terrorists choose their targets to develop the stochastic event set.

13.  2003 NCCI Holdings, Inc. 13 Frequency  National threat level allocated to state based on state characteristics (urban density, industrial targets, etc).  State threat level distributed to peril categories based on past terrorist events, degree of difficulty and potential impact

14.  2003 NCCI Holdings, Inc. 14 From Peril Event to Injury  A footprint is established for each peril  The footprint defines the intensity of peril based on distance, size of source and wind conditions  Injury distributions (as a function of peril intensity) are combined with worker density to get the number of injuries  Calculations done at the census block level

15.  2003 NCCI Holdings, Inc. 15 Terrorism Model Overview Blast or explosion outside buildings Blast or explosion inside buildings Chemical release outside buildings Chemical release inside buildings Biological release outside buildings Biological release inside buildings Radioactive material release Blast Biological Radioactive Chemical severity Location specific Local Conditions Location of hazards facilities Location of high profile facilities Frequency Employment Database Building Stock Database #of Employees by zip code by SIC class by construction class Hazard Severity % Injury/Death Rate Severity 1 Severity 2 Severity 3 Severity 4

16.  2003 NCCI Holdings, Inc. 16 Event Footprints  EQE proprietary software is used to generate footprints –BLAST –Midas AT Software

17.  2003 NCCI Holdings, Inc. 17 Blast Effects Analysis Computer Graphic Software  Blast software enables rapid, accurate, effective analyses of overpressures and structural damage

18.  2003 NCCI Holdings, Inc. Terrorist Risk—MIDAS-AT TM Software  Agents that MIDAS-AT can model releases of: –Chemical Agents –Biological Agents –Radiological  Used in nuclear power and chemical industry; and by US Marine Corps and US Embassies  Installed at over 70 sites worldwide and in use for over 20 years 17

19.  2003 NCCI Holdings, Inc. 19 Different Footprints for Different Type/amount of agent Chemical Agent Event Footprints

20.  2003 NCCI Holdings, Inc. 20 Nuclear Scenarios 1 K-ton Device (Suitcase Bomb) 50,000+ prompt deaths, Area of total destruction Area of Extensive damage damage

21.  2003 NCCI Holdings, Inc. 21 From Injury to Losses  Injury rates are combined with distribution of losses by injury type to get overall loss  Distribution of losses are those underlying NCCI ELFs in Retrospective Rating Program  State specific average benefits are used

22.  2003 NCCI Holdings, Inc. 22

23.  2003 NCCI Holdings, Inc. 23

24.  2003 NCCI Holdings, Inc. 24 From Event Losses to Annual Aggregate Losses  Census blocks are aggregated to get total loss for the event  The conditional severity of the event is multiplied by its frequency to get its annual cost  Events are aggregated to get statewide expected losses for representative states

25.  2003 NCCI Holdings, Inc. 25 NCCI Response To Terrorism Risk Insurance Act  NCCI filed terrorism loss costs in the 36 jurisdictions where we provide ratemaking services  We shared the model results and analysis with the independent workers compensation bureaus  We priced the impact of the backstop on statewide expected workers compensation losses

26.  2003 NCCI Holdings, Inc. 26 States Modeled –New York– Pennsylvania –New Jersey– Texas –California– Ohio –Washington D.C.– Georgia –Illinois– Indiana –Florida– Arizona –Michigan– Iowa –Massachusetts– North Carolina

27.  2003 NCCI Holdings, Inc. 27 NCCI Terrorism Loss Cost Filing  The filing relied on EQECAT results in modeled states  Proxy states were used for the other non- modeled states  Voluntary loss costs were filed in most NCCI states  Rates were filed in Florida, Idaho, Arizona, Illinois, Rhode Island and Iowa  Assigned Risk rates were filed in all NCCI states

28.  2003 NCCI Holdings, Inc. 28 NCCI Terrorism Loss Cost Filing  For the voluntary market, the effective date was December 20, 2002  For the residual market, most states have an effective date was January 1, 2003  The loss costs apply to new and renewal policies only  The rates/loss costs are for foreign terrorism only (net of anticipated federal recoveries)

29.  2003 NCCI Holdings, Inc. 29 NCCI Terrorism Loss Cost Filing  NCCI filed one voluntary in rate/loss cost for terrorism exposure in each state and one for the involuntary market  Rates/loss costs were filed on the Miscellaneous Values Page of NCCI’s Basic Manual  It is a rate/loss cost per $100 of total payroll  It is not subject to premium discount, experience rating, schedule rating or retrospective rating or deductible credits  Because the non-terrorism rate/loss cost for clerical risks is lower than other risks, the terrorism charge has a larger percent impact on their premium

30.  2003 NCCI Holdings, Inc. 30 Other NCCI Actions  NCCI has established a new statistical class code (9740) for these premium charges  The new code facilitates the tracking of premiums charged for terrorism exposure as defined in the federal Act  We filed a Terrorism Risk Insurance Act Endorsement for carriers to use to satisfy their policyholder disclosure obligations under the Act  The new endorsement also addresses an insurer’s limit of liability for certified terrorism losses when aggregate losses exceed $100 billion

31.  2003 NCCI Holdings, Inc. 31 Cost per Worker prior to backstop State (1) Loss Cost per Employee (excluding LAE) Lower Range* (2) Loss Cost per Employee (excluding LAE) Upper Range* (3) Illinois6.4532.27 Iowa1.718.54 New York24.76123.80 * EQECAT’s estimates assume universal Workers Compensation coverage. However, loss per worker is independent of whether the worker is covered or not.

32.  2003 NCCI Holdings, Inc. 32 What’s Next  NCCI will continue to support industry initiatives to address the unique Workers Compensation problems presented by the terrorist threat  We will annually review the terrorism loss costs  We will address domestic terrorism  We will complete our work with EQECAT to address earthquake and tsunami’s potential impact on Workers Compensation  We will expand our modeling efforts with EQECAT to address accidental disasters such as fires, industrial explosions and chemical release