1.  2003 NCCI Holdings, Inc. Workers Compensation Loss Trends Karen Ayres, FCAS, MAAA National Council on Compensation Insurance karen_ayres@ncci.com CAS Seminar on Reinsurance June 2-3, 2003 Philadelphia, Pennsylvania karen_ayres@ncci.com Done

2.  2003 NCCI Holdings, Inc. 2 Workers Compensation Results Indemnity and Medical Trends Further Insights – Claim Frequency Further Insights - Medical Costs Done Overview

3.  2003 NCCI Holdings, Inc. 3 Workers Compensation Results Done

4.  2003 NCCI Holdings, Inc. 4 2002 P&C Industry Premium Growth Highest in Sixteen Years Net Written Premium by Line—Private Carriers p Preliminary Sources: 2001, Best’s Aggregates & Averages; 2002p WC, NCCI; Other lines, annual statement data; 2002p Total, ISO 14.1% = ISO WC = NCCI Other lines = TF All Others = slack 14.1% = ISO WC = NCCI Other lines = TF All Others = slack Done

5.  2003 NCCI Holdings, Inc. 5 Combined Ratios Improved Significantly in 2002 Net Combined Ratios—Private Carriers p Preliminary Sources: 2001, Best’s Aggregates & Averages; 2002p WC, NCCI; Other lines, AM Best Review/Preview; 2002p Total, ISO 107.2% = ISO WC = NCCI Other lines = AM Best All Others = AM Best 107.2% = ISO WC = NCCI Other lines = AM Best All Others = AM Best Done

6.  2003 NCCI Holdings, Inc. 6 Workers Compensation Premium Third Consecutive Year of Growth Net Written Premium vs. Wages and Salaries—Private Carriers p Preliminary Sources: 1990-2001, Best’s Aggregates & Averages; 2002p, NCCI; Private Non-Farm Wages & Salaries, Economy.com $ Billions $ Trillions QC’d to Best on 4/11 by Novia, 2002p = NCCI Done

7.  2003 NCCI Holdings, Inc. 7 Workers Compensation Calendar Year Combined Ratio Declined in 2002 Private Carriers 1.9% Due to September 11th p Preliminary Sources: 1985-2001, Best’s Aggregates & Averages; 2002p, NCCI Percent QC’d to Best on 4/14 by Ziv, 2002p is NCCI QC’d to Best on 4/14 by Ziv, 2002p is NCCI Done

8.  2003 NCCI Holdings, Inc. 8 Calendar Year WC Loss Ratio Showing Signs of Improvement Countrywide—Net—Private Carriers Source: Best’s Aggregates & Averages, Review/Preview; 9-11 est. from NCCI 1.9 % Due to September 11 th. Done

9.  2003 NCCI Holdings, Inc. 9 WC LAE Ratios to Premium Appears to Have Leveled Off WC Loss Adjustment Expense Ratio to Net Earned Premiums Excluding State Funds Source: Best’s Aggregates & Averages, Review/Preview Done!

10.  2003 NCCI Holdings, Inc. 10 WC LAE To Loss Ratios In Recent Years Have Declined WC Loss Adjustment Expense Ratio to Losses Excluding State Funds Source: Best’s Aggregates & Averages, Review/Preview Done!

11.  2003 NCCI Holdings, Inc. 11 AY 2002 Combined Ratio Improved Relative To Record Highs In Recent Years Workers Compensation Calendar Year vs. Ultimate Accident Year Countrywide—Private Carriers Percent p Preliminary Source: CY 1992-2002p: Best’s Aggregates & Averages; AY 1992-2002p, NCCI Includes dividends to policyholders Accident Year data is evaluated as of 12/31/2002 and developed to ultimate Done

12.  2003 NCCI Holdings, Inc. 12 Workers Compensation Indemnity and Medical Trends Done

13.  2003 NCCI Holdings, Inc. 13 The Rate of Change in Workers Compensation Indemnity Claim Costs Has Accelerated Since 1995 Lost Time Claims Indemnity Claim Cost (000s) Annual Change 1991–1995: +0.3% Annual Change 1996–2002p: +6.8% p Preliminary Based on the states where NCCI provides ratemaking services Analysis on 12/02/2002 using data through 12/31/2001, developed to ultimate; 2002 based on preliminary analysis Excludes the effects of deductible policies Done Percent Changes

14.  2003 NCCI Holdings, Inc. 14 Workers Compensation Indemnity Severity Is Outpacing Wage Inflation Lost Time Claims p Preliminary Based on the states where NCCI provides ratemaking services, excludes the effects of deductible policies Source for Indemnity Severity: NCCI, based on data through 12/31/2001, developed to ultimate; analysis as of 12/02/2002 Source for CPS (Consumer Population Survey): Economy.com as of 03/06/2003 Done Percent Change

15.  2003 NCCI Holdings, Inc. 15 Workers Compensation Medical Claim Cost Trends Continue to Accelerate Lost Time Claims Annual Change 1991–1995: +4.0% Annual Change 1996–2002p: +8.1% p Preliminary Based on the states where NCCI provides ratemaking services Analysis on 12/02/2002 using data through 12/31/2001, developed to ultimate; 2002 based on preliminary analysis Excludes the effects of deductible policies Done Percent Changes Medical Claim Cost (000s)

16.  2003 NCCI Holdings, Inc. 16 WC Medical Severity Has Also Been Growing Faster than the Medical CPI Lost Time Claims Done p Preliminary Based on the states where NCCI provides ratemaking services, excludes the effects of deductible policies Source for Medical Severity: NCCI, based on data through 12/31/2001, developed to ultimate; analysis as of 12/02/2002 Source for CPI: Economy.com as of 03/06/2003 Percent Change

17.  2003 NCCI Holdings, Inc. 17 The Frequency of Lost-Time Claims Has Continued to Fall Through 2002 Workers Compensation Cumulative Change of –38.8% (1990-2002p) p Preliminary Based on the states where NCCI provides ratemaking services Analysis on 12/02/2002 using data through 12/31/2001, developed to ultimate; 2002 based on preliminary analysis Excludes the effects of deductible policies Done Percent Change

18.  2003 NCCI Holdings, Inc. 18 To Date, Falling Frequency Has Largely Offset Rising Claim Costs Accident Year Lost-Time Claim Costs Index 1994 = 1.00 Done p Preliminary Based on the states where NCCI provides ratemaking services Analysis on 12/02/2002 using data through 12/31/2001, developed to ultimate; 2002 based on preliminary analysis Excludes the effects of deductible policies

19.  2003 NCCI Holdings, Inc. 19 Workers Compensation Further Insights - Claim Frequency

20.  2003 NCCI Holdings, Inc. 20 Frequency Trends and Patterns Previously Reported Findings on Frequency Changes By State Changes By Size of Loss and Injury Type

21.  2003 NCCI Holdings, Inc. 21 Frequency Trends and Patterns Previously Reported Findings on Frequency

22.  2003 NCCI Holdings, Inc. 22 The Data Using Data from the Bureau of Labor Statistics Linked to OSHA Reporting Incidence Rates for Workplace Injuries Resulting in Lost Time on the Job This Underlies but Is More Comprehensive than WC Frequency

23.  2003 NCCI Holdings, Inc. 23 Rate of Work-Related Injuries Decreases Over Time Due to Improved Working Conditions Rate of Injury per 100 FTE Workers 19801983198619891992199519982001 Sources: U.S. Department of Labor, Bureau of Labor Statistics Done Injuries and Illness per 100 Full-Time Equivalent Workers - All Industries Injuries and Illness per 100 Full-Time Equivalent Workers - Manufacturing

24.  2003 NCCI Holdings, Inc. 24 Workplace Injury Incidence Rate— Decreases During Recessions and Increases in Recovery Incidence Rates Per 100 FTE Workers–Countrywide 0 5 10 15 20 25 196019611962196319641965196619671968196919701971197219731974197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001 Sources: U.S. Department of Labor and National Bureau of Economic Research Done Recessions Injuries and illnesses per 100 Full-Time Equivalent workers in manufacturing Injuries and illnesses per 100 Full-Time Equivalent workers in private industry

25.  2003 NCCI Holdings, Inc. 25 Recent Decline in Frequency This is a long-term trend driven by technology and economic incentives Continued Emphasis on Workplace Safety Robotics Modular Design and Construction Power-Assisted Processes Ergonomic Design Cordless Tools Stronger, Lighter-Weight Materials (e.g., fiberglass rather than wooden ladders) More and Better Training Clerical Support Aids Fraud Initiatives Done

26.  2003 NCCI Holdings, Inc. 26 What Is the Source of this Downtrend? Strong Growth Typically Is Accompanied by Investment in New Processes and Equipment Improvements Are Less Likely In Slow Growth Situations Things that Enhance Productivity also Improve Workplace Safety

27.  2003 NCCI Holdings, Inc. 27 What Is the Source of this Downtrend? Examples offered by Wal-Mart include: Inventory management - Analyzed peak sales days for tins of popcorn in the Christmas season. Then spoke with supplier to increase the number of deliveries from 2 to 4. They then didn't need to store and move tins of popcorn to make room for other merchandise. This saved over $1 million in labor costs, but also reduced their risk exposure. Inventory handling - Redesigned the back room and purchased new equipment called a walker stacker. This is a walk behind machine with a mast that allows employees to put merchandise up high out of the way without climbing a ladder. The redesign and new equipment also has allowed them to start unloading trucks at 4pm instead of 10pm, which reduces the rush. This was rolled out to 2600 stores over 18 months. Stocking shelves - Pulled out normal shelving for dog food and instead just drop in the pallet. Check out - Developed a new carousel/lazy Susan for bagging that reduces reaching and lifting. The bag to be loaded is on the carousel right next to the scanner. Once it is loaded, the cashier turns the lazy Susan toward the customer and starts filling a new bag that is then right next to the scanner. This reduces reaching since the bags are located next to the scanner, and it reduces lifting because 80% of the customers will pick up their own bags when they are turned toward them. It also improves cashier efficiency.

28.  2003 NCCI Holdings, Inc. 28 What Is the Source of this Downtrend? Similar Examples of Process Redesigns in Other Industries Ligon Brothers Aventis Honda Toyota Honeywell Textron TRW DENSO (source: www.humantech.com)

29.  2003 NCCI Holdings, Inc. 29 Workers Compensation Frequency for Selected Classes Done *Actual policy expiration between 09/30/2000 and 08/31/2001 **Actual policy expiration between 09/30/1996 and 08/31/1997 Frequency = Lost-Time Claims/Payroll; payroll adjusted for inflation

30.  2003 NCCI Holdings, Inc. 30 Frequency Trends and Patterns Changes by State

31.  2003 NCCI Holdings, Inc. 31 Change in Cases/Employment Controlling for Change in Occupational Mix Using US Mix 1992-2000

32.  2003 NCCI Holdings, Inc. 32 Top 3 rd Mid 3 rd Bot 3 rd Declines In Frequency 1992-2000 Adjusted for Change in Occupation Mix AK OR UT WY MT SD ND KS NE OK NM MO AR LA MS KY TN AL FL WI IN OH PA NY ME WV NC SC GA VA IL MI IA MN TX CO AZ ID NV CA WA MA RI CT VT HI DE DC MD

33.  2003 NCCI Holdings, Inc. 33 Looking at States There Appears to Be a Clear but Modest Regional Pattern Change in Occupation Mix from Higher to Lower Risk “Explains” about 10% to 15% of the Frequency Improvement Countrywide Frequently Economic Growth Appears to Play a Role Several States that Experienced Strong Economic Growth Had Some of the Greatest Improvements in Workplace Injury Rates No High Growth States Had Markedly Low Declines in Injury Rates

34.  2003 NCCI Holdings, Inc. 34 Frequency Trends and Patterns Changes by Size of Loss and Injury Type

35.  2003 NCCI Holdings, Inc. 35 Claim Frequency by Claim Size and Injury Type Lost time claim frequency declined by nearly 20% for policies expiring in 2001 compared to policies expiring in 1997 Smaller lost time claims experienced greater claim frequency decline than larger lost time claims Even the large claims experienced some frequency decline (after adjusting for inflation)

36.  2003 NCCI Holdings, Inc. 36 Claim Frequency by Claim Size and Injury Type (continued) Claim frequencies declined for all injury types This shift in the claim frequency distribution accounts for some of the recent severity increases The shift impacts severity trends but doesn ’ t impact loss ratio trends

37.  2003 NCCI Holdings, Inc. 37 Average Claim Size Why Does it Change Over Time? Inflation Wage Inflation Medical Price Inflation Utilization Increases in duration Changes in thresholds for permanent disability More Medical Treatments per claim New medical procedure

38.  2003 NCCI Holdings, Inc. 38 Average Claim Size Why Does it Change Over Time? (Continued) Changes in injury rates that differ between small and large injuries If small claims and large claims experience different frequency changes over time, the mix will change Relatively fewer small claims translates into in an increase in average claim size

39.  2003 NCCI Holdings, Inc. 39 Frequency by Loss Range Without Inflation Adjustment (Lost Time Claims) Source: NCCI * Actual policy expiration between 9/30/1996 and 8/31/1997 ** Actual policy expiration between 9/30/2000 and 8/31/2001 Percent Change for Policies Expiring in 1997 versus 2001

40.  2003 NCCI Holdings, Inc. 40 Frequency by Loss Range With Inflation Adjustment (Lost Time Claims) Source: NCCI * Actual policy expiration between 9/30/1996 and 8/31/1997 ** Actual policy expiration between 9/30/2000 and 8/31/2001 Loss ranges have been adjusted for indemnity (4%) and medical (3%) inflation. Percent Change for Policies Expiring in 1997 versus 2001

41.  2003 NCCI Holdings, Inc. 41 Claim Frequencies by Injury Type Source: NCCI * Actual policy expiration between 9/30/1996 and 8/31/1997 ** Actual policy expiration between 9/30/2000 and 8/31/2001 Percent Change for Policies Expiring in 1997 versus 2001

42.  2003 NCCI Holdings, Inc. 42 Claim Frequency & Severity Open Issues How much of the increase in average severity is due to a greater decline in injury rates for less severe injuries How much of the increase in average severity is due to indemnity and medical utilization effects

43.  2003 NCCI Holdings, Inc. 43 Workers Compensation Further Insights – Medical Costs

44.  2003 NCCI Holdings, Inc. 44 Tracking Utilization Trends in Consumers’ Medical Spending The Central Observation: Spending = Price times Utilization Utilization = Quantity adjusted for Quality/Mix therefore If You Have Price and Spending Data You Can Estimate Quantity/Utilization Changes

45.  2003 NCCI Holdings, Inc. 45 Estimating Changes in Utilization Using Data on Consumer Medical Expenditures Source: Bureau of Economic Analysis, Bureau of Labor Statistics Calendar Year

46.  2003 NCCI Holdings, Inc. 46 The Conclusion: Medical Care “Utilization” Has Increased Significantly Since the Early 1990s Source: Bureau of Economic Analysis, Bureau of Labor Statistics Calendar Year

47.  2003 NCCI Holdings, Inc. 47 The Role of "Utilization" Has Doubled Since the Early 1990’s Bureau of Labor Statistics, Bureau of Economic Analysis, and NCCI

48.  2003 NCCI Holdings, Inc. 48 Using Inflation of the MedCPI as a Proxy for WC Medical Price Changes Suggests That Changes in “Utilization” Have Contributed an Even Larger Share of the Increases in WC Medical Costs

49.  2003 NCCI Holdings, Inc. 49 Bureau of Labor Statistics, Bureau of Economic Analysis, and NCCI "Utilization" Accounts for Nearly 60% of the Recent Growth in Medical Severity

50.  2003 NCCI Holdings, Inc. 50 The “Expenditure – Price = Utilization” Approach Appears to Work Analyzing Components of Consumer Medical Expenditures: Hospital Services – Major Surge in Utilization as Managed Care Eased Constraints Physician Services – Unintended Consequences of Restrained Fee Schedules – Utilization Up Prescription Drugs – “Utilization” Has Exploded Other Professional Services – Both Inflation and Utilization Remain Modest After a Decade of Easing

51.  2003 NCCI Holdings, Inc. 51 Hospital Services: Price Changes Remain Moderate Utilization Is on the Rise PPI Data for 1993 and prior is not available Source: Bureau of Economic Analysis, Bureau of Labor Statistics Calendar Year

52.  2003 NCCI Holdings, Inc. 52 Physician Services: Low Growth in Fees May Have Prompted Physicians to Provide More Services Source: Bureau of Economic Analysis, Bureau of Labor Statistics Calendar Year

53.  2003 NCCI Holdings, Inc. 53 A Lesson From Medicare Doctors Are Able to Partly Offset the Impact of Medicare Price Decreases By Increasing Volumes Elsewhere in Their Practice

54.  2003 NCCI Holdings, Inc. 54 The Unintended Consequence of Tightened Fee Schedules: An Increase in the Utilization of Physician Services Source: “Physician Volume and Intensity Response”, a Memorandum from the Office of the Actuary, HCFA

55.  2003 NCCI Holdings, Inc. 55 Consumers’ Expenditures on Prescription Drugs: Increased Utilization Has Surged in Recent Years Source: Bureau of Economic Analysis, Bureau of Labor Statistics Calendar Year

56.  2003 NCCI Holdings, Inc. 56 Consumer Spending on Prescription Drugs: The Growth Far Exceeds Its Share of Total Medical Expenditures Source: Bureau of Economic Analysis

57.  2003 NCCI Holdings, Inc. 57 Workers Comp Expenditures on Prescription Drugs Also Have Surged in Recent Years Source: NCCI Detailed Claims Information

58.  2003 NCCI Holdings, Inc. 58 Current Research Developing Cost Indexes for Workers Compensation Medical Costs -Prices -Quantity -Change in Mix

59.  2003 NCCI Holdings, Inc. 59 Thank You for Your Attention Questions and Comments