MegaTrends Affecting the Workers Compensation Insurance Industry Challenges Amid the Economic Crisis

1
Mega-Trends Affecting the Workers Compensation
Insurance IndustryChallenges Amid theEconomic
Crisis

• 6th Annual National Workers Compensation
  ExecuSummit
• Uncasville, CT
• February 2, 2009

Robert P. Hartwig, Ph.D., CPCU,
President Insurance Information Institute ? 110
William Street ? New York, NY 10038 Tel (212)
346-5520 ? Fax [phone] ? bobh_at_iii.org ?
www.iii.org
2
Presentation Outline

• Economic Factors Affecting Exposure in WC
• Economic Downturn and Inflation
• Overall P/C Insurance Industry Performance Cycles
• Profitability
• Underwriting
• Premium Growth Drivers
• Investment Performance
• Workers Comp Performance Review
• Underwriting performance
• Premium Drivers
• Frequency Severity Trends
• Predictive Modeling and Workers Comp
• Mega-Trends/Emerging Issues Affecting Workers
  Comp
• The Aging Workforce
• The Obesity Epidemic Non-English Speaking Workers
• Other Trends Concerns
• QA

3
THE ECONOMIC STORMWhat a Weakening Economy
Rising Unemployment Mean for Workers Comp
Insurers
4
Real GDP Growth
Recession began in December 2007. Economic toll
of credit crunch, housing slump, labor market
contraction is growing
The Q42008 decline was the steepest since the
Q11982 drop of 6.4
Yellow bars are Estimates/Forecasts from Blue
Chip Economic Indicators. Source US Department
of Commerce, Blue Economic Indicators 1/09
Insurance Information Institute.
5
Length of US Recessions,1929-Present
Months in Duration
Current recession began in Dec. 2007 and is
already the longest since 1981. If it extends
beyond April, it will become the longest
recession since the Great Depression.
As of February 2009 Sources National Bureau of
Economic Research Insurance Information
Institute.
6
Workplace Injury Incidence Rates Declined in Last
4 Economic Downturns
p Preliminary Source US Department of Labor,
Bureau of Labor Statistics (BLS), National Bureau
of Economic Research NCCI Frequency and
Severity Analysis
7
Unemployment RateOn the Rise
January 2000 through December 2008
Dec. 2008 unemployment jumped to 7.2, exceeding
the 6.3 peak during the previous cycle
Previous Peak 6.3 in June 2003
Trough 4.4 in March 2007
Unemployment will likely peak above 8 or 9
during this cycle, impacting payroll sensitive
p/c and non-life exposures
Average unemployment rate 2000-07 was 5.0
Dec-08
Source US Bureau of Labor Statistics Insurance
Information Institute.
8
U.S. Unemployment Rate,(2007Q1 to 2010Q4F)
Rising unemployment will erode payrolls and
workers comps exposure base. Unemployment is
expected to peak above 8 in the second half of
2009.
Blue bars are actual Yellow bars are
forecasts Sources US Bureau of Labor Statistics
Blue Chip Economic Indicators (1/09) Insurance
Info. Inst.
9
Monthly Change Employment(Thousands)
Job losses in 2008 totaled 2.589 million, the
highest since 1945 at WW IIs end 11.1 million
people are now defined as unemployed.
The Nov./Dec. 2008 losses were the largest since
May 1980 loss of 431,000, but less than the Dec.
1974 loss of 602,000
Source US Bureau of Labor Statistics
http//www.bls.gov/ces/home.htm Insurance Info.
Institute
10
Years With Job Losses 1939-2008(Thousands)
The US has seen net job losses in only 16 of the
70 years since 1939
2008s job losses were exceeded only by 1945, at
the conclusion of WW II
Source Insurance Information Institute research
from US Bureau of Labor Statistics data
http//www.bls.gov/ces/home.htm.
11
New Private Housing Starts,1990-2010F (Millions
of Units)
Exposure growth forecast for HO insurers is dim
for 2009 with some improvement in 2010. Impacts
also for comml. insurers with construction risk
exposure
New home starts plunged 34 from 2005-2007 Drop
through 2009 trough is 65 (est.)a net annual
decline of 1.35 million units
I.I.I. estimates that each incremental 100,000
decline in housing starts costs home insurers
87.5 million in new exposure (gross premium).
The net exposure loss in 2009 vs. 2005 is
estimated at about 1.2 billion.
Source US Department of Commerce Blue Chip
Economic Indicators (1/09) Insurance Information
Inst.
12
Auto/Light Truck Sales,1999-2010F (Millions of
Units)
Weakening economy, credit crunch are hurting auto
sales Gas prices less of a factor now.
New auto/light trick sales are expected to
experience a net drop of 5.7 million units
annually by 2009 compared with 2005, a decline of
20.7
Impacts of falling auto sales will have a less
pronounced effect on auto insurance exposure
growth than problems in the housing market will
on home insurers
Source US Department of Commerce Blue Chip
Economic Indicators (1/09) Insurance Information
Inst.
13
Total Industrial Production,(2007Q1 to 2010Q4F)
Obama stimulus program is expected benefit impact
industrial production and therefore insurance
exposure both directly and indirectly
Industrial production began to contract sharply
during H2 2008 and is expected to shrink through
the first half of 2009
Figures for H209 and 2010 revised sharply
upwards to reflect expected impact of Obama
stimulus program
Sources US Bureau of Labor Statistics Blue Chip
Economic Indicators (1/09) Insurance Info. Inst.
14
Wage Salary Disbursements (Payroll Base) vs.
Workers Comp Net Written Premiums
Wage Salary Disbursement (Private Employment)
vs. WC NWP
Billions
Billions
12/07-?
7/90-3/91
3/01-11/01
Weakening wage and salary growth is expected to
cause a deceleration in workers comp exposure
growth
Shaded areas indicate recessions
9-month data for 2008 Source US Bureau of
Economic Analysis Federal Reserve Bank of St.
Louis at http//research.stlouisfed.org/fred2/seri
es/WASCUR I.I.I. Fact Books
15
U.S. 825B Economic Stimulus Package, By Category
Billions
I.I.I. Estimate Every 1 million jobs created or
preserved will increase (or preserve) as much as
1 billion in workers comp premium. Obama
stimulus target is 3-4 million jobs.
Commercial insurance lines that will benefit from
the Obama stimulus plan include workers comp,
commercial property, commercial auto, surety,
inland marine and others
Sources House Appropriations Committee Wall
Street Journal, January 16, 2009
16
Real GDP Growth vs. Real P/C Premium Growth
Modest Association
P/C insurance industrys growth is influenced
modestly by growth in the overall economy
Sources A.M. Best, US Bureau of Economic
Analysis, Blue Chip Economic Indicators, 8/08
Insurance Information Inst.
17
Total Private Employment Grew by25½ Million
Workers from 1991 to 2008
Millions
The US economy added 25.5 million jobs between
1991 and 2008, but job growth has recently
stagnated, impacted payrolls and the workers comp
exposure base
seasonally adjusted at mid-yearSource U.S.
Bureau of Labor Statistics, at http//data.bls.gov
/cgi-bin/surveymost
18
Average Weekly Real Earnings in Private
Employment Were Flat from 1999 to 2008
(at mid-year)
Constant 1982 dollars
Virtually all of the real wage growth occurred
between 1995 and 1999 and has now stagnated
Sources U.S. Bureau of Labor Statistics I.I.I.
19
New Private Housing Starts,1990-2014F (Millions
of Units)
Exposure growth forecast for HO insurers is dim
for 2008/09 Impacts also for comml. insurers with
construction risk exposure
New home starts plunged 34 from 2005-2007 Drop
through 2008 trough is 54 (est.)a net annual
decline of 1.11 million units
I.I.I. estimates that each incremental 100,000
decline in housing starts costs home insurers
87.5 million in new exposure (gross premium).
The net exposure loss in 2008 vs. 2005 is
estimated at 971 million.
Source US Department of Commerce Blue Chip
Economic Indicators (10/07), except 2008/09
figures from 8/08 edition of BCEF Insurance
Info. Institute
20
Nonresidential Fixed Investment, 2003 2009F
(Billions of 2000 )
Nonresidential Fixed Investment ( Bill)
Sharp dip in business investment growth in
2007-2009 will slow commercial exposure growth
Nonresidential fixed investment consists of
structures, equipment and software. Sources US
Bureau of Economic Analysis (Historical), Blue
Chip Economic Indicators (7/08) for forecasts.
21
Total Industrial Production,(2007Q1 to 2009Q4F)
Industrial production affects exposure both
directly and indirectly
Industrial production shrank during Q1 2008 and
is expected to shrink again in Q2, growing very
slowly thereafter
Sources US Bureau of Labor Statistics Blue Chip
Economic Indicators (7/08) Insurance Info. Inst.
22
Medical Tort Cost Inflation Amplifiers of
Inflation, Major Insurance Cost Driver
23
Consumer Price Index for Medical Care vs. All
Items, 1960-2008
(Base 1982-84100)

• Inflation for Medical Care has been surging ahead
  of general inflation (CPI) for 25 years. Since
  1982-84, the cost of medical care has more than
  tripled

Soaring medical inflation is among the most
serious long-term challenges facing casualty,
disability and LTC insurers
Source Department of Labor (Bureau of Labor
Statistics Insurance Information Institute.
24
Tort Cost Growth Medical Cost Inflation vs.
Overall Inflation (CPI-U), 1961-2008
Tort System is an Inflation Amplifier Avg. Ann.
Change 1961-2008 Torts Costs 8.4 Med Costs
6.0 Overall Inflation 4.2
Tort costs move with inflation but at twice the
rate
Medical cost and CPI-U from BLS. Tort figure is
for full-year 2008 from Tillinghast.
Sources US Bureau of Labor Statistics,
Tillinghast-Towers Perrin, 2007 Update on U.S.
Tort Costs Insurance Info. Inst.
25
Inflation OverviewPressures Claim Costs via
Medical and Tort Channels
26
Annual Inflation Rates(CPI-U, ), 1990-2010F
Inflation spiked through August 2008 on the
strength of a commodities and oil bubble, then
dropped rapidly as the recession took hold,
depressing demand for most goods and services.
Prices in 2009 are actually expected to decline.
Sources US Bureau of Labor Statistics Blue
Chip Economic Indicators, January 10, 2009.
(forecasts)
27
Comparative 2008 Inflation Statistics Important
to Insurers ( )
CPI and Core CPI are not representative of many
of the costs insurers face
Medical/Legal costs typically run well ahead of
inflation
Core CPI is the Consumer Price Index for all
Urban Consumers (CPI-U) less food and energy
costs. Source US Bureau of Labor Statistics
Insurance Information Institute.
28
P/C INSURANCE FINANCIAL PERFORMANCEA Resilient
Industry in Challenging Times
29
P/C Net Income After Taxes1991-2009F (
Millions)

• 2001 ROE -1.2
• 2002 ROE 2.2
• 2003 ROE 8.9
• 2004 ROE 9.4
• 2005 ROE 9.4
• 2006 ROE 12.2
• 2007 ROAS1 12.3
• 2008 ROAS 1.1

Insurer profits peaked in 2006.
ROE figures are GAAP 1Return on avg. surplus.
2008 numbers are annualized based on 9-mos.
Actual of 4.066 billion. Sources A.M. Best,
ISO, Insurance Information Inst.
29
30
P/C Insurance Industry ROEs,1975 2008E
198717.3
197719.0
200612.2
199711.6
10 Years
10 Years
9 Years
2008F 1.1
1975 2.4
1984 1.8
1992 4.5
2001 -1.2
Note 2008 figure is actual 9-month
result. Sources ISO Insurance Information
Institute.
30
31
ROE vs. Equity Cost of CapitalUS P/C
Insurance1991-2008Q3
The p/c insurance industry fell well short of is
cost of capital in 2008
2.3 pts
-1.7 pts
-9.0 pts
-13.2 pts
-9.7 pts
US P/C insurers missed their cost of capital by
an average 6.7 points from 1991 to 2002, but on
target or better 2003-07
The cost of capital is the rate of return
insurers need to attract and retain capital to
the business
31
Excludes mortgage and financial guarantee
insurers. Source The Geneva Association, Ins.
Information Inst.
32
P/C Insurance Combined Ratio, 1970-2008F
Combined Ratios 1970s 100.3 1980s 109.2 1990s
107.8 2000s 102.0
32
Sources A.M. Best ISO, III
A.M. Best year end estimate of 103.2 Actual
9-mos. result was 105.6.
33
P/C Insurance Industry Combined Ratio, 2001-2009E
As recently as 2001, insurers paid out nearly
1.16 for every 1 in earned premiums
Relatively low CAT losses, reserve releases
Including Mortgage Fin. Guarantee insurers
2005 ratio benefited from heavy use of
reinsurance which lowered net losses
Cyclical Deterioration
Best combined ratio since 1949 (87.6)
33
Includes Mortgage Financial Guarantee
insurers. Sources
A.M. Best.
34
U.S. Insured Catastrophe Losses
Billions
100 Billion CAT year is coming soon
2008 CAT losses exceeded 2006/07 combined. 2005
was by far the worst year ever for insured
catastrophe losses in the US, but the worst has
yet to come.
Excludes 4B-6b offshore energy losses from
Hurricanes Katrina Rita. Based on PCS data
through Dec. 31. PCS 2.1B loss of for Gustav.
10.655B for Ike of 12/05/08. Note 2001 figure
includes 20.3B for 9/11 losses reported through
12/31/01. Includes only business and personal
property claims, business interruption and auto
claims. Non-prop/BI losses 12.2B. Source
Property Claims Service/ISO Insurance
Information Institute
34
35
Commercial Lines Combined Ratio, 1993-2009F
Commercial coverages have exhibited significant
variability over time.
Mortgage and financial guarantee may account for
up to 4 points on the commercial combined ratio
in 2008
2006/07 benefited from favorable loss cost
trends, improved tort environment, low CAT
losses, WC reforms and reserve releases. Most of
these trends reversed in 2008 and mortgage and
financial guarantee segments have big influence.
2009 is transition year.
Sources A.M. Best (historical and forecasts)
36
Underwriting Gain (Loss)1975-2008Q3
Insurers earned a record underwriting profit of
31.7 billion in 2006, the largest ever but only
the second since 1978. Cumulative underwriting
deficit from 1975 through 2007 is 422 billion.
Billions
19.877 Bill underwriting loss in 089M incl.
mort. FG insurers
Source A.M. Best, ISO Insurance Information
Institute Includes mortgage finl.
guarantee insurers
36
37
Number of Years With Underwriting Profits by
Decade, 1920s 2000s
Number of Years with Underwriting Profits
Underwriting profits were common before the 1980s
(40 of the 60 years before 1980 had combined
ratios below 100)but then they vanished. Not a
single underwriting profit was recorded in the 25
years from 1979 through 2003.
37
Note Data for 1920 1934 based on stock
companies only. Sources Insurance Information
Institute research from A.M. Best Data.
2000 through 2008.
38
Strength of Recent Hard Marketsby NWP Growth
1975-78
1984-87
2000-03
Shaded areas denote hard market periods
Net written premiums fell 1.0 in 2007 (first
decline since 1943) and by 0.4 in 2008, the
first back-to-back decline since 1930-33
38
Sources A.M. Best, ISO, Insurance Information
Institute
39
Year-to-Year Change in Net Written Premium,
2000-2008E
P/C insurers are experiencing their slowest
growth rates since 1930-33 Slow growth means
retention is critical
Protracted period of negative or slow growth is
possible due to soft markets and slow economy
39
2008 figure is 9-month actual result from
ISO. Source A.M. Best (historical)
40
Distribution of P/C Insurance Industrys
Investment Portfolio
As of December 31, 2007

• Portfolio Facts
• Invested assets totaled 1.3 trillion as of
  12/31/07
• Insurers are generally conservatively invested,
  with 2/3 of assets invested in bonds as of
  12/31/07
• Only about 18 of assets were invested in common
  stock as of 12/31/07
• Even the most conservative of portfolios was hit
  hard in 2008

40
Source NAIC Insurance Information Institute
research.
41
Property/Casualty Insurance Industry Investment
Gain1994- 2008Q3 1
Investment gains are off sharply in 2008 due to
lower yields and poor equity market conditions.
1Investment gains consist primarily of interest,
stock dividends and realized capital gains and
losses. 2006 figure consists of 52.3B net
investment income and 3.4B realized investment
gain. 2005 figure includes special one-time
dividend of 3.2B. Sources ISO Insurance
Information Institute.
41
42
P/C Insurer Net Realized Capital Gains,
1990-2008Q3
Billions
Realized capital gains exceeded 9 billion in
2004/5 but fell sharply in 2006 despite a strong
stock market. Nearly 9 billion again in 2007,
but -9.7 billion in 2008 through Q3.
42
Sources A.M. Best, ISO, Insurance Information
Institute.
43
Total Returns for Large Company Stocks 1970-2008
SP 500 was down 38.5 in 2008
The market crash of 2008 was the largest since
1931
43
Source Ibbotson Associates, Insurance
Information Institute. Through
December 31, 2008.
44
VIX Volatility Index Stock Market Volatility at
Record Highs in 2008
Stock market volatility is at its highest levels
since the 1930s, pushing the VIX Volatility Index
(a.k.a. Investor Fear Gauge) to record highs in
2008
VIX Interpretation VIX 30 Extreme
Volatility VIX1990-2008 19.49
VIX is an indicator of market volatility over the
next 30 days
Through December 31, 2008.
44
Sources Chicago Board Options Exchange
http//www.cboe.com/micro/vix/historical.aspx
45
Workers Compensation ReviewUnderwriting
andOperating Performance
46
Workers Comp Combined Ratios, (Calendar Year,
Private Carriers) 1994-2007p
WC insurers lopped 30 points off the combined
ratio in just 5 years
Percent
p Preliminary. Sources Calendar Years
1994-2006, A.M. Best Aggregates Averages
Calendar Year 2007p NCCI Includes dividends to
policyholders
47
WC Calendar Year Combined Ratio On the Rise
Again? Private Carriers
Percent
P Preliminary Source 19902006, Best's
Aggregates Averages 2007p, NCCI
Calendar Year
48
Workers Comp Combined Ratios, 1994-2008F
Percent
A.M. Best expects 2008 combined ratio to rise by
2.5 points
p Preliminary AY figure. Accident Year data is
evaluated as of 12/31/2007 and developed to
ultimate Source Calendar Years 1994-2006, A.M.
Best Aggregates Averages Calendar Year 2007p
and Accident Years 1994-2007pbased on NCCI Annual
Statement Analysis. Includes dividends to
policyholders 2008 figure from A.M.
Best.
49
California Workers CompensationCY Combined Loss
and Expense Ratios
Percent
As of December 31, 2007
Calendar Year
2007 Combined Loss and Expense Ratio is
preliminary Data includes State Compensation
Insurance Fund Source WCRIB California via NCCI

50
California Workers CompensationAY Combined Loss
and Expense Ratios
Percent As of December 31, 2007
Accident Year
2007 Other Expenses are preliminary Data
includes State Compensation Insurance
Fund Source WCIRB California
51
Calendar Year Reserve Deficiencies Continue to
Decline
Billions
WC Loss and LAE Reserve Deficiency Private
Carriers
2007 Tabular Discount Is 5.5 Billion
Calendar Year
Considers all reserve discounts as
deficiencies Loss and LAE figures are based on
NAIC Annual Statement data for each valuation
date and NCCI latest selections Source NCCI
analysis
52
Workers Comp Pre-Tax Operating Gain Ratio Strong
But Slipping?
Percent
Calendar Year
Adjusted to include realized capital gains to be
consistent with 1992 and after. Sources
1990-2006, Bests Aggregates and Averages 2007p,
NCCI
53
WC Investment Income Has Been Less Helpful Lately
in Producing Profits
As u/w results strengthened, investment results
weakened, producing only a modest operating gain
ratio
Adjusted Combined Ratio (ACR) translates
combined ratio into typical percentage terms.
For example, a combined ratio of 107.0 becomes a
-7.0 ACR.
Source NCCI
54
Workers CompCost DriversMedical/Indemnity
Frequency Severity Trends
55
Workers Compensation Medical Claim Trends
56
Workers Comp Medical Claims Costs Continue to
Climb
Medical Claim Cost (000s)
Annual Change 19911993 1.9 Annual Change
19942001 8.9 Annual Change 2002-2006 7.8
Cumulative Change 200 (1993-2007p)
Accident Year
2007p Preliminary based on data valued as of
12/31/2007 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
57
WC Medical Severity Rising at Double the Medical
CPI Rate
Average annual increase in WC medical severity
from 1995 through 2007 was more than twice the
medical CPI rate (8.2 vs. 4.0)
Sources Med CPI from US Bureau of Labor
Statistics, WC med severity from NCCI based on
NCCI states.
58
Med Costs Share of Total Costs is Increasing
Steadily
2007p
1997
1987
Source NCCI (based on states where NCCI
provides ratemaking services).
59
WC Med Cost Will Equal 70 of Total by 2017 if
Trends Hold
2017 Estimate
This trend will likely be supported by the
increased labor force participation of workers
age 55 and older.
Source Insurance Information Institute.
60
Indemnity Claim Cost Trends
61
Workers Compensation IndemnityClaim Costs Growth
Is ModerateLost-Time Claims
Indemnity Claim Cost ( 000s)
Annual Change 19911993 -1.7 Annual Change
19942001 7.3 Annual Change 20022006 3.1
Accident Year
2007p Preliminary based on data valued as of
12/31/2007 19912006 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
62
Workers Comp Indemnity Claims Cost Growth Has
Moderated Recently
Indemnity Claim Cost (000s)
Annual Change 19911993 -1.7 Annual Change
19942001 7.3 Annual Change 20022006 3.1
Cumulative Change 110.6 (1993-2007p)
Accident Year
2007p Preliminary based on data valued as of
12/31/2007 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 Source NCCI
63
WC Indemnity Severity vs. Wage Inflation
WC indemnity severity is once again outpacing
wage inflation
2006p Preliminary based on data valued as of
12/31/2006 1991-2005 Based on data through
12/31/2005, developed to ultimate. Based on the
states where NCCI provides ratemaking services.
Excludes the effects of deductible policies. CPS
Current Population Survey. Source NCCI
64
Residual Market Overview
65
WC Residual Market Shares Continue to Decline
Workers Compensation Insurance Plan States
Premium as a Percentage of Direct Written Premium
Percent

• p Preliminary
• NCCI Plan states plus DE, IN, MA, MI, NJ, NC
• Source NCCI

Calendar Year
66
WC Residual Market Combined Ratios NCCI-Serviced
Workers Compensation Residual Market Poolsas of
December 31, 2007
Percent
Policy Year
Incomplete Policy Year Projected to
Ultimate Source NCCI
67
Workers Compensation Residual Market Premium
Volume Declines NCCI-Serviced Workers
Compensation Residual Market Poolsas of December
31, 2007
Billions
Incomplete Policy Year Projected to
Ultimate Source NCCI
Policy Year
68
Workers Compensation Residual Market Underwriting
Results NCCI-Serviced Workers Compensation
Residual Market Poolsas of December 31, 2007
Millions
Incomplete Policy Year Projected to
Ultimate Source NCCI
Policy Year
69
Residual Markets Are Depopulating in Most
States First Quarter 2008 vs. First Quarter 2007
Total number of assigned risk policies in
force Includes residual market policies for AK,
AL, AR, AZ, CT, DC, GA, ID, IL, IA, IN, KS, MS,
NV, NH, NM, OR, SC, SD, VT, VA Source NCCI
70
Investment Performance
71
Workers Compensation InvestmentReturns Remain
Below Historical Average Investment Gain on
Insurance Transactions-to-Premium RatioPrivate
Carriers
Percent
Average (19902006) 15.3
Calendar Year
p Preliminary Adjusted to include realized
capital gains to be consistent with 1992 and
after Investment Gain on Insurance Transactions
includes Other Income Source 19902006, Best's
Aggregates Averages 2007p, NCCI
72
Premium Growth Pricing Environment
73
Total Workers Compensation Premium Declined Again
in 2007Net Written Premium
Billions
Calendar Year
p Preliminary Source 19902006 Private
Carriers, A.M. Best Aggregates Averages 2007p,
NCCI 19962007p State Funds AZ, CA,
CO, HI, ID, KY, LA, MO, MT, NM, OR, RI, TX, UT
Annual Statements State Funds
available for 1996 and subsequent
74
History of Average WC Bureau Rate/Loss Cost
Level Changes
Percent
Cumulative 2000-2003 17.1
Cumulative 1994-1999 -27.8
Cumulative 2004-2008 -24.0
Cumulative 1990-1993 36.3
Calendar Year
States approved through 4/11/2008 Countrywide
approved changes in advisory rates, loss costs
and assigned risk rates as filed by the
applicable rating organization
75
Average Approved BureauRates/Loss CostsAll
States vs. All States Excluding California
Percent
Cumulative 20002008 11.0 All States 6.1
All States Ex CA
Calendar Year
States approved through 4/11/2008 Countrywide
approved changes in advisory rates, loss costs
and assigned risk rates as filed by the
applicable rating organization Source NCCI
76
Current NCCI Voluntary MarketFiled Rate/Loss
Cost Changes Excludes Law-Only Filings
Percent
States filed through 4/18/2008 Source NCCI
77
Impact of Discounting on Workers Compensation
PremiumNCCI StatesPrivate Carriers
Percent
Policy Year
p PreliminaryNCCI benchmark level does not
include an underwriting contingency
provision Dividend ratios are based on calendar
year statistics Based on data through 12/31/2007
for the states where NCCI provides ratemaking
services Source NCCI
78
According to Goldman Sachs, Most Survey
Respondents See Declining WC Prices Agent
Responses on Policy Renewal Premiums vs. 12
Months Prior
Source Goldman Sachs Research, Independent
Insight US Insurance Non-Life, Proprietary
Survey (Exhibit 8, Workers Compensation,
Percentage of Respondents)
79
Alternative Risk Transfer MarketSaps Traditional
WC Carriers
Billions
Workers Comp account for the largest share of the
alternative market, particularly captives
Source MarketStance.
80
FREQUENCY SEVERITY TRENDS
81
Injury Fatality Incidence Rates and Claim
Cost Trends
82
Rate of Work-Related Injuries Decreases Over Time
Due to Improved Working ConditionsRate of
Injury per 100 FTE Workers
Source US Department of Labor, Bureau of Labor
Statistics NCCI
83
Workers Comp Lost-Time Claim Frequency Down More
than 50 Since 1991
Cumulative Change of 53.3 since 1991 means that
lost work time claims have been cut by more than
half
Percent Change
Accident Year
2007p Preliminary based on data valued as of
12/31/2006 1991-2006 Based on data through
12/31/2005, developed to ultimate Based on the
states where NCCI provides ratemaking
services Excludes the effects of deductible
policies Source NCCI
84
1997-2006 Claim Frequency Declined for All
Injury Types Other Than Permanent Total
Percentage Change Between Policies Expiring in
1997 and 2006Claim Frequency per 1M of
Wage-Adjusted Payroll
All NCCI states except NV and TX Source NCCI
Unit Statistical Plan data, First Report
85
Lost-Time Claim Frequency Declined for All
Industry Groups Percentage Change Between
Policies Expiring in 2002 and 2006Claim
Frequency per 1M of Wage-Adjusted Payroll
All NCCI states except NV and TX Source NCCI
Unit Statistical Plan data, First Report Source
NCCI
86
Permanent Total Claim Frequency by Industry Group
Percentage Change Between Policies Expiring in
2002 and 2006Claim Frequency per 1M of Wage
Adjusted Payroll
All NCCI states except NV and TX Source NCCI
Unit Statistical Plan data, First Report Source
NCCI
87
WHY YOU SHOULD FEEL GOOD ABOUT WHAT YOU DO
Saving Lives, Increasing Productivity and Much
MoreIts Not Just About the Money
88
Did You Know That When You Prevent a Workplace
Injury You

• Keeping Workers Comp Costs Down is Just the
  Beginning
• You Help Companies Remain Productive1
• Permanently Disabling Injuries? 565 Lost Future
  Work Days on Avg.
• Fatal Injuries? 5,850 Lost Future Work Days on
  Average
• You Increase/Preserve Worker Incomes
• Seriously Injured Workers Have Lower Lifetime
  Earnings, on Average
• Reduced Likelihood of Filing Bankruptcy
• Less Likely to Need Public Assistance
• You Maintain/Improve the Quality of Workers Home
  Life
• Higher Incidence of Divorce, Substance Abuse,
  Depression Among Seriously Injured
• ALL REASONS TO BE PROUD OF WHAT YOU DO!!

1 US Census Bureau http//www.census.gov/compend
ia/statab/tables/07s0639.xls
89
Workers Comp Lost-Time Claim Frequency Down More
than 50 Since 1991
Cumulative Change of 53.3 since 1991 means that
lost work time claims have been cut by more than
half
Percent Change
Accident Year
2007p Preliminary based on data valued as of
12/31/2006 1991-2006 Based on data through
12/31/2005, developed to ultimate Based on the
states where NCCI provides ratemaking
services Excludes the effects of deductible
policies Source NCCI
90
Number of Fatal Work Injuries is Continues to
Fall, 1992 2007p
Workers comp insurers the entire workplace
safety community have contributed to the 17
decline in workplace fatalities since 1994
Source US Bureau of Labor Statistics, US
Department of Labor III. Excludes 9/11 deaths.
91
Rate of Fatal Work InjuriesContinues to Drop,
1992 2007p
Fatal Work Injuries per 100,000 Workers
Fatality rates are down 22.2 since 1994better
than the 17 decline in the number of on the job
fatalities
Source US Bureau of Labor Statistics Insurance
Information Institute. Excludes 9/11 deaths.
92
Workplace Deaths Rising Slowly (2002-2006) After
Steep Fall (1994-2002)
Number of deaths grew 1.4 per year since 2002
Source US Bureau of Labor Statistics, US
Department of Labor Insurance Information
Institute.
93
Rate of Work Fatalitiesat Historically Low Level
Fatal Work Injuries per 100,000 Workers
Fatality rates are down 26.4 since 1994nearly
double the 14 decline in the number of on the
job fatalities
Source US Bureau of Labor Statistics Insurance
Information Institute.
94
Lives Saved Due to Reduction inFatal Work Injury
Rate, 19952006
Reduction in Occupational Deaths Due to Fall in
Fatality Rate from 5.3 per 100,000 Workers in
1994 to 4.0 in 2006
Workers comp insurers are a major force in saving
worker lives
Nearly 2,000 work lives are saved annually due to
improved workplace safety!
Source Insurance Information Institute from BLS
data.
95
Cumulative Lives Saved Due toReduction in Fatal
Work Injury Rate
Cumulative Lives Saved Due to Fall in Fatality
Rate from 5.3 per 100,000 Workers in 1994 to 4.0
in 2006
Since 1994, nearly 15,000 worker lives have been
saved due to improved workplace safety!
Saving a Life, Saves a Family
Source Insurance Information Institute from BLS
data.
96
Four Most Frequent Work-Related Fatal Events,
1992-2006
Work-related homicides dropped 50 since 1994.
Highway deaths still 1 killer.
Source US Bureau of Labor Statistics, US
Department of Labor Insurance Information
Institute.
97
EMERGING TRENDS CHALLENGES IN WORKERS COMP
98
1Emerging (Mega) Trend The Obesity Epidemic
99
What Do We Mean by Obesityand How Do We
Measure It?

• Definitions
• Obesity
• Having a very high amount of body fat in relation
  to lean body mass
• Body Mass Index of 30 or higher
• Body Mass Index (BMI)
• A measure of an adults weight in relation to his
  or her height,
• Specifically, the adults weight in kilograms
  divided by the square of his or her height in
  meters

Source Centers for Disease Control and
Prevention.
100
BMIs for VariousHeights and Weights
Weight (lbs)
Obesity is defined as a BMI 30
Height (inches)
101
Obesity Trends Among U.S. AdultsBRFSS, 1990,
1998, 2006
(BMI ?30, or about 30 lbs. overweight for 54
person)
1998
1990
2006
No Data 1519 2024 2529
30
102
In Every State (except Colorado), Over 20 of the
Adult Population is Obese
Source Centers for Disease Control and
Prevention, Behavioral Risk Factor Surveillance
System www.cdc.gov/Features/dsObesity
103
For Analysis Purposes,We Create BMI Categories

• BMI Categories
• Underweight BMI
• Healthy Weight BMI18.5-24.9
• Overweight BMI25.0-29.9
• Obese
• Class I BMI30.0-34.9
• Class II BMI35.0-39.9
• Class III BMI40.0

104
The Most Obese Workers File Twice as ManyWC
Claims as Healthy-Weight Workers
The most obese have 13 times more lost workdays
than healthy weight workers!
Source Ostbye, T., et al, Obesity and Workers
Compensation, Archives of Internal Medicine,
April 23, 2007.
105
WC Medical Claims Costs are 6.8x Higher for the
Most Obese Workers
Indemnity costs are 11 times higher for the most
obese workers than for healthy-weight workers.
Source Ostbye, T., et al, Obesity and Workers
Compensation, Archives of Internal Medicine,
April 23, 2007.
106
Its Not All Because of Obesity Confounding
Factors

• Some people with high BMI also have other
  characteristics that contribute to disability
  and/or death. They
• Smoke and/or regularly drink alcohol heavily
• Are older and/or male
• Have chronic diseases (e.g., diabetes, heart
  disease)
• Have other conditions/circumstances (e.g., no
  health insurance, dont exercise) that are
  related to poor health
• Failure to adjust for these confounding factors
  likely results in overstating the effect of
  obesity.

Source Flegal, Graubard, Williamson, and Gail,
Excess Deaths Associated with Underweight,
Overweight, and Obesity, JAMA Vol. 293, No. 15
(April 20, 2005) pp. 1861-1867.
107
Relative Death Risk for Never-Smokers by BMI
and Age Category
Relative Risk
For never-smokers, the relative death risk
appears to be highest for ages 60-69 whose BMI is
either under 18.5 or over 34.9. The pattern
including smokers is similar.
Compared to people with BMI of 18.5-24.9.
Source Flegal, Graubard, Williamson, and Gail,
Excess Deaths Associated with Underweight,
Overweight,and Obesity, JAMA Vol. 293, No. 15
(April 20, 2005) pp. 1861-1867.
108
2Emerging (Mega)Trend The Aging Workforce
109
U.S. Workforce is Aging Significant Implications
for Workers CompMedian Age of U.S. Worker
Older and less healthy workforce
The median age of US workers as the Baby Boomer
begin to retire is about 41 years. Immigration
will hold this number down and may even lower the
figure.
Year
Source US Bureau of Labor Statistics, 2004.
110
Changes in Labor Force Participation by Gender,
1990-2006
Projected change from 2004-2014 -1.5 for men,
0.5 for women
Year
Sources US Bureau of Labor Statistics, and
Toossi, Labor Force Projections to 2014
retiring boomers, Monthly Labor Review, November
2005, pp. 25-44.
111
Male/Female Labor Force Participation Rates,
Ages 55-64, 1998-2008
During the last decade, about 68-69 of men ages
55-64 were in the labor force. But over that span
the percent of labor-force participation by women
ages 55-64 rose from 51 to 58.5.
Participation Rate
not seasonally adjusted
Source US Bureau of Labor Statistics, US
Department of Labor Rates shown are end of 2nd
quarter each year.
112
Some Workers Are Planning to Start Retirement at
a Later Age

• In January 2008, 18 percent of workers said
  that, in the past year, theyd changed their
  expected retirement start.
• 14.2 postponed retirement,
• 3.8 accelerated it.
• These percentages can change quickly in 2003
  the percent changing their planned retirement age
  in the prior year was 32.

Source EBRI Issue Brief No. 316, (April 2008),
p. 15
113
Fatal Work Injury RatesClimb Sharply With Age
Fatal Work Injuries per 100,000 Workers (2006)
The fatality rate for workers 65 and older is
triple that of workers age 35-44. The workplace
of the future will have to be completely
redesigned to accommodate the surge in older
workers.
Source US Bureau of Labor Statistics, US
Department of Labor Insurance Information
Institute.
114
Older Workers Have More Lost Time from Work Due
to Injury or Illness
Age 65 workers median lost time is 50 greater
than workers age 35-44
Median Days Away From Work (2005)
There will be more lost time as the workforce
ages in the future.
Source US Bureau of Labor Statistics, US
Department of Labor
115
Distribution of Non-Fatal Work Injury Days
AwayFrom Work, by Length of Period and Age
group,Ages 45 and over, 2005
Percentage of cases
Workers 65 more likely to be out two weeks than
one
Workers 65 more likely to be out a month or more
Source US Bureau of Labor Statistics, US
Department of Labor, Table 8 from 2005 Survey of
Nonfatal Occupational Injuries and Illnesses
Requiring Days Away from Work, Revised data
released 11-17-2006.
116
US Population2007 vs. 2025 Projection
There will be nearly as many 85 people in 2025
as there are 70-74 today
Population in each age group (in thousands)
Using the Census Bureaus Middle (i.e., most
probable) projections
Source National Projections Program, Population
Division, U.S. Census Bureau
117
At What Once Was Retirement Age, More People Are
Working
The labor force participation rate for workers
65-69 has grown considerably since 1998. It might
grow even faster in the future as seniors find
they cant fully retire on their meager
retirement savings.
People born 1939-1943
Labor Force participation rate
People born 1929-1933
Source US Bureau of Labor Statistics, US
Department of Labor Insurance Information
Institute.
118
Quarterly Labor Force Participation Rate, Ages
70-74, 1998-2008
People born 1934-1938
The labor force participation rate for workers
70-74 has also grown considerablyby about
50since 1998. It too might grow even faster in
the future as seniors find they cant fully
retire on their meager retirement savings.
Labor Force participation rate
People born 1924-1928
Source US Bureau of Labor Statistics, US
Department of Labor Insurance Information
Institute.
119
Quarterly Labor Force Participation Rate, Ages 75
and Over, 1998-2008
People born 1933 and earlier
The labor force participation rate for workers 75
and over has grown slowly in absolute termsbut
relatively by about 50since 1998.
Labor Force participation rate
People born 1923 and earlier
Source US Bureau of Labor Statistics, US
Department of Labor Insurance Information
Institute.
120
Workers 65 by Work Schedule,1977-2007
The percent working full time grew from 44 in
1995 to 56 in 2007
121
Why Elderly Stop Working, byAge Group 2002
Percent whostop working
Age 80 workers not retiring due to poor health!
Source Growing Older in America, US Department
of Health and Human Services, p 47.
122
Workers Compensationand Medicare

• No Help from Medicare
• Medicare law has long specified that
• If Workers Compensation is available, Medicare
  will pay nothing,
• Medicare will pay if costs remain after all WC
  medical benefits are exhausted, and
• If Medicare does pay a bill, it has a right of
  recovery from the employer or WC insurer.

Source Title 42 Code of Federal Regulations,
Section 411 et seq.
123
Workers Compensationand Medicare

• and Maybe a Fight from Medicare
• Medicare is worried that, for workers who are
  covered by, or eligible for, Medicare, it will be
  stuck with costs shifted from those responsible
  for paying WC costs.So, in those cases,
• It wants to review, and maybe disapprove, Workers
  Compensation settlements, if it believes there is
  insufficient WC money to pay for future medical
  costs,
• This may align Medicare with workers against
  employers and WC insurers
• This will increase WC administration costs

124
Workers Compensation andSocial Security

• Effect on WC Claims of Social Security
  Retirement Income
• When a SS DI recipient reaches the full benefit
  retirement age, the DI benefit becomes a
  retirement benefit
• Social Security Retirement Income is not offset
  for WC indemnity payments
• So disabled workers age 66 and over can collect
  both moral hazard?

125
3Emerging Trend Returning InjuredWar
Veterans to the Workforce
126
Non-Fatal Injuries to Military Personnel Deployed
in Iraq
30,480 military personnel were reported wounded
through July 2008 in Operation Iraqi Freedom.
There are important employer issues associated
with their return to work
Injury counts can fluctuate dramatically from
month to month but are now near their lowest
levels since the start of the war
Source Brookings Institution, Iraq Index
Archive, updated August 18, 2008.
127
Non-Fatal Physical Injury Rates Among Troops in
Iraq
About 1-in-300 troops is wounded in any given
month. On an annual basis, a soldier in Iraq has
about a 4 chance of being wounded
Source Insurance Information Institute
calculations based in data from the Brookings
Institution, Iraq Index Archive, updated August
18, 2008.
128
Troop Strength Levels in Iraq Guarantee
Significant Flow of Injured
(Thousands)
Approximately 30 - 40 of deployed troops are
National Guard or Reservists, meaning up to
200,000 people have been or will be returned to
the workforce soon
Source Brookings Institution, Iraq Index
Archive, updated August 18, 2008.
129
Status of Personnel Deployed to Iraq and
Afghanistan
Nearly 40 of Army and 30 of Air Force personnel
deployed to Iraq and Afghanistan are National
Guard or Reservists
September 2001 through January 2005. (latest
available). Source Brookings Institution, Iraq
Index Archive, updated June 5, 2006.
130
Total Number of U.S. Army Troops Deployed to Iraq
(Thousands)
There have been more than a half million Iraq
deployments since 2003 (as of August 2008). Many
troops are deployed multiple times. The
likelihood of exhibiting symptoms of PTSD
increase with each deployment
Source Brookings Institution, Iraq Index
Archive, updated August 18, 2008.
131
Percentage of Non-Commissioned Officers Suffering
from Symptoms of PTSD by Number of Deployments
Symptoms of PTSD are 54 more likely to be
observed in second deployments and 125 higher in
third or fourth deployments
Source Brookings Institution, Iraq Index
Archive, updated August 18, 2008.
132
U.S. Troops Deployed to Iraq or Afghanistan
Deemed Medically Unfit for Combat, 2003-2007
The number of troops declared medically unfit for
duty increased 69 from 2005 to 2007
Source Brookings Institution, Iraq Index
Archive, updated August 18, 2008.
133
3Emerging (Mega) Trend Non-EnglishSpeaking
Workers
134
Fatal Worker Injury Rates byRace and Ethnicity,
2006
Fatality Rate per 100,000 Workers Employed
Hispanic workers experience highest rate of fatal
injuries on the job
Source U.S. Dept. of Labor, Bureau of Labor
Statistics, Census of Fatal Occupational
Injuries, 2006
135
Fatal Worker Injury Rates byRace and Ethnicity,
2002
Latino workers experience highest rate of fatal
injuries on the job, 25 more than whites, 61
more than blacks and more than double the rate
for Asians
Fatality Rate per 100,000 Workers Employed
Source Worker Health Chart Book, 2004 Centers
for Disease Control and III calculations.
136
Non-Fatal Worker Injury Rates by Race and
Ethnicity, 2002
Injury Rate per 100,000 Workers Employed
Latino workers experience highest rate of
non-fatal injuries on the job as well 46 more
than whites, 34 more than blacks and 150 the
rate for Asians
Source Worker Health Chart Book, 2004 Centers
for Disease Control and III calculations.
137
Fatality Rates in Construction 1992-2001
Fatality Rate per 100,000 Workers Employed
Persistent gap (average 60) between Latino and
non-Latino fatality rates in construction
attributed to (1) language gap between workers
and managers and (2) overrepresentation of
Latinos in construction
Source Worker Health Chart Book, 2004 Centers
for Disease Control and authors calculations.
138
Employment and Non-Fatal Injuryby Race, 2002
Latino workers experience a disproportionate
share of non-fatal injuries relative to their
share of employment as compared to all other
groups
Source Worker Health Chart Book, 2004 Centers
for Disease Control and authors calculations.
139
A Look Ahead

• Rapid rise in Latino population over the next
  decade (including a substantial share of
  undocumented workers) suggests increasing worker
  injury and death in industries where Latinos are
  over-represented.
• Shift of Latino populations to lower risk jobs
  due to improvements in educational attainment
  will reduce Latino workplace injury and deaths
  rates.

140
Not a Mega-Trend Yet, but Other things to
keep aware of
141
Terrorism Risk InsuranceProgram Provisions
142
The Terrorism Risk Insurance Program
Reauthorization Act of 2007

• 7-Year Extension, expiring 12/31/14
• Keeps Federal governments cap at 100 billion
• Keeps 20 Direct Earned Premium Deductible (about
  35B)
• Eliminates
• distinction between foreign and domestic acts of
  terrorism
• requirement that terrorist act be on behalf of
  foreign person or foreign interest
• Changes in definition of terrorist act require
  substantial rate and form filings in states
• Requires Comptroller General to issue report
  within 180 days on obstacles in development of
  private sector market for terror insurance
• NBCR
• NBCR risks remain excluded
• Requires Comptroller General to issue report
  within 1 year on feasibility of NBCR insurance
  market

Source Insurance Information Institute
143
Insured Loss Estimates Large NBCR Terrorist
Attack ( Bill)
Source American Academy of Actuaries, Response
to Presidents Working Group, Appendix II, April
26, 2006.
144
Summary

• Workers Compensation Has Benefited from Favorable
  Underlying Claims Trends, but this might not
  continue
• WC Premium Trends have followed the trend for
  Commercial Insurance generally
• Trends in Medical and Indemnity Cost are
  Worrisomeand Have Historically Been Sensitive to
  Increases in the Rate of Inflation
• The Aging of the Population and the Obesity
  Epidemic could cause WC claims to explode

145
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