State of the Workers Compensation Insurance Industry: Calm Amid the Storms

1
State of theWorkers Compensation Insurance
Industry Calm Amid the Storms?

• 2006 AASCIF Annual Conference
• Branson, MO
• June 19, 2006

Robert P. Hartwig, Ph.D., CPCU, Senior Vice
President Chief Economist Insurance Information
Institute ? 110 William Street ? New York, NY
10038 Tel [phone] ? Fax [phone]
? bobh_at_iii.org ? www.iii.org
2
Presentation Outline

• P/C Insurance Industry Financial Update
• Profitability
• Underwriting, Pricing Trends Investment
• Ratings, Solvency Financial Strength
• Capacity, Capital Policyholder Surplus
• Workers Comp Operating Environment
• Calm Amid the Storm?
• Emerging Issue in Workers Comp
• TRIA/Terrorism Update
• Q A

3
P/C FINANCIALOVERVIEW Mega-CATs Affect
theEntire Industry
4
Highlights Property/Casualty,2005 vs. 2004
Growth rate lowest since late 1990s
Investment Income Rebound?
Source ISO, Insurance Information
Institute Comparison is with year-end 2004 value.
5
Strength of Recent Hard Markets by NWP Growth
1975-78
1984-87
2001-04
2006-2010 (post-Katrina) period will resemble
1993-97 (post-Andrew)
2005 biggest real drop in premium since early
1980s
2006-10 figures are III forecasts/estimates.
2005 growth of 0.4 equates to 1.8 after
adjustment for a special one-time transaction
between one company and its foreign parent.
Note Shaded areas denote hard market
periods. Source A.M. Best, Insurance
Information Institute
6
P/C Net Income After Taxes1991-2005 ( Millions)

• 2001 ROE -1.2
• 2002 ROE 2.2
• 2003 ROE 8.9
• 2004 ROE 9.4
• 2005 ROAS 10.5

2005 Net Income only now exceeding levels of
mid-1990s
ROE figures are GAAP Return on avg. surplus.
ROAS 9.8 after adj. for one-time special
dividend paid by the investment subsidiary of one
company. Sources A.M. Best, ISO, Insurance
Information Inst.
7
ROE vs. Equity Cost of Capital US P/C
Insurance 1991 2005E
The p/c insurance industry achieved will come
close to achieving its cost of capital in 2005
/-0.5 pts
-1.7 pts
-0.5 pts
-13.2 pts
US P/C insurers missed their cost of capital by
an average 6.7 points from 1991 to 2002, but just
0.6 pts from 2003-05E
-9.0 pts
Source The Geneva Association, Ins. Information
Inst.
8
ROE P/C vs. All Industries 19872005
2004/5 ROEs excl. hurricanes
Sept. 11
Hugo
Katrina, Rita, Wilma
Lowest CAT losses in 15 years
Andrew
Northridge
4 Hurricanes
Source Insurance Information Institute Fortune
9
RETURN ON EQUITY (Fortune)Stock Mutual vs.
All Companies
Stock insurer ROEs consistently above mutuals
The gap between stock and mutual profitability
has been narrowing
Fortune 1,000 group. Source Fortune Magazine,
Insurance Information Institute.
10
RNW for Major P/C Lines,1995-2004 Average
Workers Comp performance has been about average
in recent years, though now superior relative to
CAT-impacted lines
Source NAIC Insurance Information Institute
11
Workers Comp Underwriting Performance and
Profitability
2005 ROE figure is III estimate 2005 Combined
Ratio is NCCI estimate Source A.M. Best, NCCI
12
CATASTROPHEREVIEW Workers Comp is Lost in the
Background
13
U.S. InsuredCatastrophe Losses ( Billions)
Billions
100 Billion CAT year is coming soon
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. 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
14
Insured Property Catastrophe Losses as Net
Premiums Earned, 19832005E
US CAT losses were a record 13.8 of net premiums
earned in 2005 and were 4.2 times the 1984-2004
average of 3.3. Anything left to pay WC claims?
Insurance Information Institute figure of 13.8
for 2005 based estimated 2005 DPE of 417.7B and
insured CAT losses of 57.7B. Sources ISO, A.M.
Best, Swiss Re Economic Research Consulting
Insurance Information Institute.
15
Top 10 Most Costly Hurricanes in US History,
(Insured Losses, 2005)
Seven of the 10 most expensive hurricanes in US
history occurred in the 14 months from Aug. 2004
Oct. 2005 Katrina, Rita, Wilma, Charley, Ivan,
Frances Jeanne
Sources ISO/PCS Insurance Information
Institute.
16
Insured Loss Claim Count for Major Storms of
2005
Hurricanes Katrina, Rita, Wilma Dennis produced
a record 3.3 million claims
Property and business interruption losses only.
Excludes offshore energy marine losses. Source
ISO/PCS as of June 8, 2006 Insurance Information
Institute.
17
Outlook for 2006 Hurricane Season
Just 16 left to go!!
Average over the period 1950-2000. Source Dr.
William Gray, Colorado State University, May 31,
2006.
18
WALL STREETMAINTAINING THE CONFIDENCE OF WALL
STREET IS CRITICAL FOR MANY INSURERS
19
Change in YTD Stock Performance by Sector Pre-
Post-Katrina/Rita/Wilma
P/C reinsurer stocks hurt but now fully
recovered. Brokers rose on expectation of tighter
conditions and demand for broker services
closure of Spitzer issues.
Katrina Aug. 29
Rita comes ashore Sept. 24
Wilma landfall Oct. 24
Source SNL Securities Insurance Information
Institute
20
P/C Insurance Stocks Off to a Slow Start in 2006
Total YTD Returns Through June 16, 2006
P/C insurer stocks are flat so far in 2006.
Investors worried about potential hurricane
losses, price weakness.
Source SNL Securities, Standard Poors,
Insurance Information Institute
21
UNDERWRITING Surprisingly Strong in 2005,
Stage is Set for a Good 2006!
22
P/C Industry Combined Ratio
2005 figure reflects heavy use of reinsurance
which lowered net losses, but still a substantial
deterioration from first half 2005
Expectation is for an underwriting profit in 2006
Sources A.M. Best ISO, III. III forecast for
2006
23
Commercial Lines Combined Ratio, 1993-2006E
Outside CAT-affected lines, commercial insurance
is doing fairly well. Caution is required in
underwriting long-tail commercial lines.
2006 results dependent on a return to normal
catastrophe loss levels
Source A.M. Best Insurance Information
Institute Fitch estimate for 2005. Actual
1H05 combined ratio all lines was 92.7.
24
Impact of Reserve Changes on Combined Ratio
Reserve adequacy is improving substantially
Source A.M. Best, Lehman Brothers for years
2005E-2007F
25
2004 Prior Year Reserve Development by Line (
Millions)
Longer-tail casualty coverages have been the
source of most reserve problems in recent years
Reserve Strengthening
Reserve Releases
Source A.M. Best, Lehman Brothers.
26
Underwriting Gain (Loss)1975-2005
Billions
Insurers sustained a 5.9 billion underwriting
loss in 2005. Before Katrina, p/c insurers were
on track for only the second underwriting profit
in 27 years U/W profit in 2006 is likely.
Source A.M. Best, Insurance Information
Institute
27
Combined Ratio Reinsurance vs. P/C Industry
Sept. 11
2004/5 Hurricanes
HurricaneAndrew
Source A.M. Best, ISO, Reinsurance Association
of America, Insurance Information Institute
28
A 100 Combined Ratio Isnt What it Used to Be 95
is Where Its At
Combined ratios today must be below 95 to
generate Fortune 500 ROEs
2005 figure is return on average statutory
surplus. Source Insurance Information Institute
from A.M. Best and ISO data.
29
Workers Comp Pure Loss Ratio 19932005E
WC losses ratios have improved substantially
since 2001
WC is a relative bright spot in most states
Source NAIC Insurance Information Institute
2005 estimate from NCCI.
30
Workers Comp Combined Ratios, 1994-2005P
Percent
1.9 due to 9/11
p Preliminary AY figure. Accident Year data is
evaluated as of 12/31/2005 and developed to
ultimate Source Calendar Years 1994-2004, A.M.
Best Aggregates Averages Calendar Year 2005p
and Accident Years 1994-2005pbased on NCCI Annual
Statement Analysis. Includes dividends to
policyholders
31
Workers Comp Calendar YearNet Combined
Ratios Private Carriers and State Funds
Percent
WC state fund underwriting performance is now on
par with private industry
Calendar Year
1.9 due to 9/11
p Preliminary Source 1996-2004 Private Carriers,
A.M. Best Aggregates Averages 2005p,
NCCI1996-2005p State Funds AZ, CA, CO, HI, ID,
KY, LA, ME, MO, MT, NM, OK, OR, RI, TX, UT Annual
Statements Source National Council on
Compensation Insurance
32
Workers Comp Calendar Year U/W Expense Ratio,
1990-2005p Private Carriers
Percent
Underwriting expense ratio benefited from run-up
in premiums, but likely to turn up again as
premium growth slows
Calendar Year
p PreliminarySource 1990-2004, A.M. Best
Aggregates Averages 2005p, NCCI
33
Cost of Risk vs. Commercial Lines Operating Ratio

• 2005 operating ratio is III estimate
• Per 1,000 Revenue.

Source RIMS, A.M. Best Insurance Information
Institute
34
UNDERWRITING AFFECTS FINANCIAL STRENGTHIs There
Causefor Concern?
35
P/C Company Insolvency Rates,1993 to 2004

• Insurer insolvencies are decreasing
• 12-yr industry failure rate 0.71
• Failure rating for B or better rating 0.49
• Failure rate for D through B rating 1.29

12-yr Failure Rate 0.71
38
30
30
21
10
Source A.M. Best Insurance Information
Institute 1993-2003
36
Reason for P/C Insolvencies(218 Insolvencies,
1993-2002)
Reserve deficiencies account for more than half
of all p/c insurers insolvencies
So far, Katrina appears to have claimed just 1
victimRosemont Reexpected to go into run-off
Source A.M. Best, Insurance Information
Institute
37
Reasons for US P/C Insurer Impairments, 1969-2005
2003-2005
1969-2005
Deficient reserves, CAT losses are more important
factors in recent years
Includes overstatement of assets. Source
A.M. Best P/C Impairments Hit Near-Term Lows
Despite Surging Hurricane Activity, Special
Report, Nov. 2005
38
Workers Comp Reserve Deficiency,1993-2005p
Billions
Loss and LAE Reserve DeficiencyPrivate Carriers
WC reserve deficiencies have been cut by 12
billion57 since 2001
Calendar Year
p Preliminary Considers all reserve discounts to
be deficient. Loss and LAE figures are based on
NAIC Annual Statement data for each valuation
date and NCCI latest selections. Source
1995-2005p, NCCI analysis
39
Historical Ratings Distribution,US P/C Insurers,
2000 vs. 2005
2000
2005
A/A shrinkage
Ratings agencies increasing emphasis on multiple
events?require more capital
Source A.M. Best Rating Downgrades Slowed but
Outpaced Upgrades for Fourth Consecutive Year,
Special Report, November 8, 2004 for 2000 2006
Review Preview for 2005 distribution.
Ratings B and lower.
40
Ratings Agencies Tightening Requirements for CATs

• 2006 SRQ CAT Model Reqs.
• All Property Exposure
• Auto Physical Damage
• Reinsurance Assumed
• Pools Assessments
• All Flood Exposure
• WC Losses from Quake
• Fire Following
• Storm Surge
• Demand Surge
• Secondary Uncertainty

• ALSO A.M. Best will perform additional
  stress-tested risk-adjusted capital analysis
  for a second event in order to determine the
  potential financial condition of an entity post a
  severe event.
• IMPLICATION Some insurers may be required to
  carry more capital to maintain the same rating.

Best currently estimates PML for 100-yr. wind
250-yr. quake to determine capital adequacy
SRQ Supplemental Rating Questionnaire Source
A.M. Best Review Preview, January 2006.
41
INVESTMENTSDoes Investment Performance Affect
Discipline?
42
Net Investment Income
Growth History 2002 -1.3 2003 3.9 2004
3.4 2005 23.7
Billions
Source A.M. Best, ISO, Insurance Information
Institute Includes special dividend of 3.2B.
Increase is 15.7 excluding dividend.
43
US P/C Net Realized Capital Gains,1990-2005 (
Millions)
Realized capital gains rebounded strongly in
2004/5 but are 46 below their 1998 peak
Sources A.M. Best, ISO, Insurance Information
Institute.
44
Total Returns for Large Company Stocks 1970-2006
SP 500 is up 0.3 so far in 2006
Markets are moving sideways in 2006 as interest
rates rise
Source Ibbotson Associates, Insurance
Information Institute. Through
June 16, 2006.
45
The Treasury Yield CurveIs Still Fairly Flat
June 2004
May 2006
December 2005
December 2004
June 2005
Source Board of Governors, Federal Reserve
System Insurance Information Institute. Week
ending 5/26.
46
Property/Casualty Insurance Industry Investment
Gain
Investment gains are rising but are only now
comparable to gains seen in the late 1990s
Investment gains consist primarily of interest,
stock dividends and realized capital gains and
losses. 2005 figure includes special one-time
dividend of 3.2B. Source Insurance Services
Office Insurance Information Institute.
47
WC Low Investment Returns Persist Low Interest
Rates
Investment Gain on Insurance Transactions to
Premium Ratio Private Carriers
Rising interest rates should help WC investment
returns over time
Adjusted to include realized capital gains to be
consistent with 1992 and after. Investment Gain
on Insurance Transaction includes Other Income.
Source 1990-2004 A.M. Best Aggregates
Averages 2005p NCCI.
48
Interest Rate Forecast,2006-2017
Fed thinking on future hikes is unclear depend
on economic data over the next few months
Source Blue Chip Economic Indicators, March
2006 Insurance Information Institute.
49
CAPITAL/CAPACITYCan the Industry Efficiently
Employ Its Increasing Capital?
50
U.S. Policyholder Surplus 1975-2005
Capacity TODAY is 427.1B, 9.2 above year-end
2004, 47 above its 2002 trough and 22 above its
mid-1999 peak. Sufficient capacity exists to pay
all hurricane claims.
Billions
Foreign reinsurance and residual market
mechanisms absorbed 27-32B (57-67) of 2005
CAT losses of 57.7B
Surplus is a measure of underwriting capacity.
It is analogous to Owners Equity or Net Worth
in non-insurance organizations
Source A.M. Best, ISO, Insurance Information
Institute As of 12/31/05.
51
Announced Insurer Capital Raising( Millions,
as of December 1, 2005)
As of Dec. 1, 19 insurers announced plans to
raise 10.35 billion in new capital. Twelve
start-ups plan to raise as much as 8.75 billion
more for a total of 19.1 billion. Actual total
higher as Lloyds syndicates have added capacity
for 2006.
Existing (re) insurers. Announced amounts may
differ from sums actually raised. Sources
Morgan Stanley, Lehman Brothers, Company Reports
Insurance Information Institute.
52
Announced Capital Raising by Insurance
Start-Ups( Millions, as of April 15, 2006)
As of April 15, 14 start-ups plan to raise as
much as 9.75 billion.
Chubb, Trident are funding Harbor Point.
Announced amounts may differ from sums actually
raised. Stated amount is 750 million to 1
billion. XL Capital/Hedge Fund venture. Arrow
Capital formed by Goldman Sachs. Sources Morgan
Stanley, Company Reports Insurance Information
Institute.
53
Surplus Under TRIA/TRIEA Covered Lines
(Billions of Dollars)
Shrinkage in 2006 (-11) surplus is due to
elimination of several lines covered under TRIA
though 2005 but dropped under the Acts extension
effective 1/1/06
2006 figure uses 2005 estimated year-end surplus
and premiums by line as basis for
calculations. Source Insurance Information
Institute.
54
PRICING TRENDS DOWNWARD PRESSURE?
55
How the Risk Dollar is Spent (2004)
Workers Comp costs account for 20 - 30 of the
risk dollar
Firms w/Revenues gt 1 Billion
Firms w/Revenues lt 1 Billion
Source RIMS (2004) Insurance Information
Institute
56
Cost of Risk 1990-2005
1992-2000 -41.8
2000-04 188
Cost of risk includes insurance premiums,
retained losses and administrative
expenses Source 2005 RIMS Benchmark Survey
Insurance Information Institute
57
Components of Cost of Risk Per 1,000 of Revenue
Change 2001 -04
38.6
62.0
78.2
-36
7.5
65
Cost of risk includes insurance premiums,
retained losses and administrative
expenses Source 2004 RIMS Benchmark Survey
Insurance Information Institute
58
PRICINGCan Discipline be Maintained?
59
Average Commercial Rate Change,All Lines,
(1Q2004 1Q2006)
Magnitude of rate decreases has diminished
greatly since mid-2005
Source Council of Insurance Agents Brokers
Insurance Information Institute
60
Average Commercial Rate Change by Account Size
Commercial accounts trended downward from early
2004 to mid-2005 but are now that trend is
shrinking post-Katrina
Source Council of Insurance Agents Brokers
61
Average Commercial Rate Change by Line
Commercial accounts trended downward from early
2004 to mid-2005 but now trend is shrinking
post-Katrina Property is up.
Source Council of Insurance Agents Brokers
62
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 1st Qtr. 2006
Largest increases for Commercial Property
Business Interruption are in the Southeast,
smallest in Midwest
Source Council of Insurance Agents and Brokers
63
P/C Soft Spots Accounts With Negative Price
Change(1ST Qtr. 2006)
Casualty/Liability/Terrorism
Property
Commercial lines pricing is weakening
Source Council of Insurance Agents Brokers
Insurance Information Institute
64
Workers Comp Rate Changes1999Q4 2006 Q1
Most WC renewals are negative
Source Council of Insurance Agents and Brokers
Lehman Brothers.
65
Percent of WC Accounts Renewing Downward, by
Region, 1st Qtr. 2006
About 80 of WC accounts in the West and SW
renewed negative during Q12006
Softness in WC pricing is most evident in the
West and Southwest
Source Council of Insurance Agents and Brokers
66
WORKERS COMPENSATION OPERATING ENVIRONMENT
67
Workers Comp Premium Volume Private Carriers and
State Funds 1990-2005P
Billions Trillions
State Fund Market was 11 in 1996, peaked at
25.6 in 2003, fell to 20 by 2005
Calendar Year
p Preliminary Source 1990-2004 Private Carriers,
A.M. Best Aggregates Averages 2005p, NCCI
Bureau of Economic Analysis. 1996-2005p State
Funds AZ, CA, CO, HI, ID, KY, LA, MO, MT, NM,
OK, OR, RI, TX, UT Annual Statements
68
Workers Compensation Pre-Tax Operating Gain
Ratios Private Carriers and State Funds
Percent
1996-2003p Averages Private Carriers 6.2 State
Funds 0.5
Calendar Year
p Preliminary Source 1996-2004 Private Carriers,
A.M. Best Aggregates Averages 2005p,
NCCI1996-2005p State Funds AZ, CA, CO, HI, ID,
KY, LA, MN, MO, MT, NM, OK, OR, RI, TX, UT Annual
Statements Operating Gain equals 1.00 minus
(Combined Ratio less Investment Gain on Insurance
Transactions and Other Income) Source NCCI
69
Workers Comp Premium Drivers
70
Number of Employed Workers(Millions)
Employment peaked at 132. 56 million in February
2001before slide and didnt fully recover until
February 2005.

• Employment rose by 75,000 in May 2006 to 135.106
  million
• 5.3 million jobs created since 8/03
• 2.5 million since 2/01

2.68 Million Jobs Lost from Feb. 2001 Aug. 2003
By August 2003, employment stood at 129.80
million, its lowest level since October 1999.
Source U.S. Bureau of Labor Statistics
Insurance Information Institute
71
Calendar Year Average Approved Bureau Rate/Loss
Cost Changes
Percent
Cumulative 2000-2003 17.1
Cumulative 1994-1999 -27.8
Cumulative 2004-2005 -11.6
Cumulative 1990-1993 36.3
Calendar Year
States approved through 04/13/2006 Countrywide
approved changes in advisory rates, loss costs
and assigned risk rates as filed by the
applicable rating organization. Source NCCI
72
Average Approved BureauRate/ Loss Cost Changes
All States vs. All States Excluding California
Cumulative 2000-2004 All States 10.1 All
States Excl. CA 1.4
Countrywide approved changes in advisory rates,
loss costs and assigned risk rates as filed by
the applicable rating organization. Source NCCI
States approved through 04/13/2006
73
Current NCCI Voluntary Market Filed Rate/Loss
Cost Changes
Percent Change
Notes Effective 1/1/06 or prior except
subsequent to 1/1/06 in MS, VT, TN, MT, KY, NE,
AL, NC and VA. SC filed and pending as of
4/20/06. Source NCCI as of 4/20/06
74
Workers Comp Frequency Severity Trends
75
Workers Comp Combined Ratios, 1994-2005P
Percent
p Preliminary AY figure. Accident Year data is
evaluated as of 12/31/2005 and developed to
ultimate Source Calendar Years 1994-2004, A.M.
Best Aggregates Averages Calendar Year 2005p
and Accident Years 1994-2005pbased on NCCI Annual
Statement Analysis. Includes dividends to
policyholders
76
Workers Comp Lost-Time Claim Frequency ( Change)
Cumulative Change of 45.8 (1991-2004)
Percent Change
Accident Year
2003p Preliminary based on data valued as of
12/31/2005 1991-2003 Based on data through
12/31/2004, developed to ultimate Based on the
states where NCCI provides ratemaking
services Excludes the effects of deductible
policies Source NCCI
77
Workers Comp Indemnity Claims Costs Have
Accelerated, 1993-2005p
Indemnity Claim Cost (000s)
Annual Change 19921996 1.3 Annual Change
19972004 7.4
Cumulative Change 103.2 (1993-2005p)
Accident Year
2005p Preliminary based on data valued as of
12/31/2005 1991-2004 Based on data through
12/31/2004, developed to ultimate Based on the
states where NCCI provides ratemaking
services Excludes the effects of deductible
policies Source NCCI
78
WC Indemnity Severity vs. Wage Inflation
WC indemnity severity is no longer outpacing wage
inflation
4.3 pts
2005p Preliminary based on data valued as of
12/31/2005 1991-2004 Based on data through
12/31/2004, developed to ultimate. Based on the
states where NCCI provides ratemaking services.
Excludes the effects of deductible policies. CPS
Current Population Survey. Source NCCI
79
Workers Comp Medical Claims Continue to Climb
Medical Claim Cost (000s)
Annual Change 19921996 4.1 Annual Change
19972005 9.5
Cumulative Change 176.8 (1993-2005p)
Accident Year
2005p Preliminary based on data valued as of
12/31/2005 1991-2004 Based on data through
12/31/2004, developed to ultimate Based on the
states where NCCI provides ratemaking services
Excludes the effects of deductible policies
80
WC Medical Severity Rising Far Faster than
Medical CPI
WC medical severity is rising twice as fast as
the medical CPI
4.3 pts
Sources Med CPI from US Bureau of Labor
Statistics, WC med severity from NCCI based on
NCCI states.
81
Med Costs Share of Total Costs is Increasing
Steadily
2005p
1995
1985
Source NCCI (based on states where NCCI
provides ratemaking services).
82
WC Costs Higher Than GeneralHealth Due to Price
Utilization
Workers Comp vs. Group Health First Three Months
Following Injury, GH 100
Source NCCI
83
Price Utilization Impacts Varyby Service in
Workers Comp
Workers Comp vs. Group Health First Three Months
Following Injury, GH 100
Physical Therapy and Radiology very problematic.
Ineffective price/utilization controls
Source NCCI
84
WC Drug Costs as of Total WC Medical Costs
WC drug costs account for an increasingly large
share of WC medical costs. They are a major
driver behind the accelerating cost of providing
medical care to injured workers.
Analysis is on an accident year (AY) basis,
developed through 8th report. Source National
Council on Compensation Prescription Drugs
Comparison of Drug Costs and Patterns of Use in
Workers Compensation and Group Health Plans.
85
Workers Comp Residual Market Trends
86
Workers Comp Residual Market Premium
VolumeNCCI-Serviced Workers Compensation
Residual Market Poolsas of December 31, 2005
Billions
Residual market premium volume declined in 2005
for the first time since 1997
Policy Year
Incomplete Policy Year Projected to
Ultimate Source NCCI
87
Workers Compensation Residual Market Shares
Stabilize Workers Compensation Insurance Plan
States Premium as a Percent of Direct Written
Premium
Percent
Residual market shares are stable at about 12
Calendar Year

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

88
Workers Compensation Residual Market Combined
Ratios NCCI-Serviced Workers Compensation
Residual Market Pools As of December 31, 2005
Percent
Residual market combined ratios are stable and
remain well below the highs of the late 1980s
Policy Year
Incomplete Policy Year Projected to
Ultimate Source NCCI
89
WC Residual Market Underwriting Results Are
Stable NCCI-Serviced Workers Compensation
Residual Market PoolsAs of December 31, 2005
Millions
Residual market underwriting losses are manageable
Policy Year
Incomplete Policy Year Projected to
Ultimate Source NCCI
90
EMERGING ISSUES
91
OBESITY WORKERS COMPENSATIONA Heavy
BurdenFor Workers Comp?
92
Avg. Annual Hours Lost Per CA Worker Due to
Obesity Physical Inactivity
Obesity costs employers nearly 2 weeks per year
per employee in terms of lost output/ productivity
Physical inactivity costs employers nearly 1.5
weeks per year per employee in terms of lost
output/ productivity
Presenteeism is defined as productivity loss
that occurs when workers are on the job but not
fully functioning. Source Topline Report, The
Economic Costs of Physical Inactivity, Obesity,
and Overweight in California Adults.
93
Lost Productivity Cost By Risk Factor Tied to
Obesity in California ( Millions)
Billions
In California, total lost productivity cost tied
to obesity is approximately 3.36 billion
Source Source The Economic Costs of Physical
Inactivity, Obesity and Overweight in California
Adults Health Care, Workers Compensation and
Lost Productivity, April 2005. Study conducted
by David Chenoweth, Ph.D., FAWHP, for the
California Department of Health Services.
94
Lost Productivity Cost By Risk Factor Tied to
Physical Inactivity in California
Millions
In California, total lost productivity cost tied
to physical inactivity is approximately 7.53
billion
Source Source The Economic Costs of Physical
Inactivity, Obesity and Overweight in California
Adults Health Care, Workers Compensation and
Lost Productivity, April 2005. Study conducted
by David Chenoweth, Ph.D., FAWHP, for the
California Department of Health Services.
95
Most Obesity-Related Costs to WC Systems are
Indirect
Most losses to associated with WC claim arising
from obesity are indirect in nature.
Source Source The Economic Costs of Physical
Inactivity, Obesity and Overweight in California
Adults Health Care, Workers Compensation and
Lost Productivity, April 2005. Study conducted
by David Chenoweth, Ph.D., FAWHP, for the
California Department of Health Services.
96
Direct and Indirect Workers Comp Costs for
Obesity in California Adults (2000 Dollars)
Source Source The Economic Costs of Physical
Inactivity, Obesity and Overweight in California
Adults Health Care, Workers Compensation and
Lost Productivity, April 2005. Study conducted
by David Chenoweth, Ph.D., FAWHP, for the
California Department of Health Services.
97
Estimated Cost of Obesity on US Workers
Compensation Systems
Estimates extrapolated by the Insurance
Information Institute based on CA estimates for
2000 assuming 4.72 annual inflation in WC costs
(same rate as was assumed in source study
below). Source The Economic Costs of Physical
Inactivity, Obesity and Overweight in California
Adults Health Care, Workers Compensation and
Lost Productivity, April 2005. Study conducted
by David Chenoweth, Ph.D., FAWHP, for the
California Department of Health Services.
98
Estimated Cost of Physical Inactivity on US
Workers Compensation Systems
Estimates extrapolated by the Insurance
Information Institute based on CA estimates for
2000 assuming 5.779 annual inflation in WC costs
(same rate as was assumed in source study
below). Source The Economic Costs of Physical
Inactivity, Obesity and Overweight in California
Adults Health Care, Workers Compensation and
Lost Productivity, April 2005. Study conducted
by David Chenoweth, Ph.D., FAWHP, for the
California Department of Health Services.
99
Estimated Obesity Costs as a Percentage of WC
Loss LAE
Obesity costs account for about 4 of workers
comp losses over the period from 2000-2005
Estimates extrapolated by the Insurance
Information Institute based on CA estimates for
2000 assuming 5 annual inflation in WC costs
(same rate as was assumed in source study
below). Source The Economic Costs of Physical
Inactivity, Obesity and Overweight in California
Adults Health Care, Workers Compensation and
Lost Productivity, April 2005. Study conducted
by David Chenoweth, Ph.D., FAWHP, for the
California Department of Health Services. Note
Adjusting for self-insured and entities with high
deductible programs would reduce this estimate by
an indeterminate sum.
100
Impact of Obesity on WC Systems Varies With Heath
Fitness of Population
WC systems in the Southeast and Midwest incur a
disproportionate burden because relatively high
proportion of workforce is obese

• lt10
• 15-19
• 20

Source Behavioral Risk Factor Surveillance
System Insurance Information Institute
101
Prevalence of Overweight and Obesity among US
Adults (aged 20-74 years)
31
23
15
Nearly 2/3 of US adults are overweight or obese,
up from 47 in the late 1970s Workforce out of
shape too.
Source Centers of Disease Control and Prevention
(CDC), National Center for Health Statistics
(NCHS), National Health and Nutrition Examination
Survey (NHANES) Insurance Information Institute
102
Prevalence of Overweight and Obesity Among
Children and Adolescents
Next generation of workers likely to be the most
overweight ever, so cost to workers comp systems
will rise steadily

In the past two decades the percentage of
overweight children has more than doubled and the
percentage of adolescents who are overweight has
tripled
Source Centers of Disease Control and Prevention
(CDC), National Center for Health Statistics
(NCHS), National Health and Nutrition Examination
Survey (NHANES) Insurance Information Institute
103
Issues in Reintegration of Military Veterans
104
Exposure Issues AssociatedWith War in Iraq

• By the time major operations are completed in
  Iraq and Afghanistan, likely that more than
  500,000 military personnel will have be deployed,
  some more than once
• About 40 of these are National Guard and
  Reserves
• Pentagon planning for presence of 100,000
  through 2009 with 25 Reserve/Guard component
• About 4.2 of troops in Iraq are physically
  injured
• 18,229 physically injured so far many 1000s more
  yet to come
• Most will return to civilian workforce some
  w/impairment
• Nearly 30 of soldiers deployed to Iraq exhibit
  some post-deployment symptoms of mental health
  problems, including depression, anxiety and PTSD
  Alcohol issue
• Estimated that 100,000 may need some mental
  health help
• Only a minority will actually ever receive it

105
Why Does this Matter forWorkers Compensation?

• Tens of thousands of soldiers will re-enter the
  civilian workforce having suffered some physical
  injury
• Some will require accommodation
• Possibility of reinjury/second injury
• Many injuries undiagnosed, incl. Traumatic Brain
  Injuries
• 100,000 will have suffered some mental health
  issues
• How will lack of treatment manifest itself in the
  workplace?
• When?
• Costs to VA are already staggering
• VA spent 4.3 billion on PTSD disability payments
  in 2004 (excl. med costs)
• Could be some cost shifting to WC for both
  physical and stress (ultimately mental health
  related) injuries
• Outcome of war, community/family can have effect
  on incidence of psychological disorders

106
Why Does this Matter forWorkers Compensation?

• Post Traumatic Stress Disorder, or PTSD, is a
  psychiatric disorder that can occur following the
  experience or witnessing of life-threatening
  events such as military combat, natural
  disasters, terrorist incidents, serious
  accidents, or violent personal assaults like
  rape.
• While Most Vets Function Normally, PTSD Related
  Issues that Can Affect Workers Comp Injury
  Frequency and/or Severity
• Depression Sleep Deprivation
• Substance Abuse Marital/Family Problems
• Occupational Instability Social Maladjustment
• Anxiety

Source National Center for PTSD
http//www.ncptsd.va.gov/facts/general/fs_what_is_
ptsd.html accessed August 20, 2005.
107
Death Rates for Combat Troops vs. High-Risk
Civilian Occupations
Death Rates per 100,000 Employees
A soldier in Iraq is nearly 10 times more likely
to be killed than civilians in the most dangerous
occupations
Military data are for the period March 2003
through May 2005. Civilian data are for
2004. Source Brookings Institution, Iraq Index
Archive, updated June 5, 2006 US Bureau of Labor
Statistics.
108
Military PersonnelKilled in Iraq
More than 2,500 US troops have been killed in
Operation Iraqi Freedom
Deaths can fluctuate dramatically from month to
month
Source Brookings Institution, Iraq Index
Archive, updated June 5, 2006. Through 6/16/06.
109
Non-Fatal Injuries to Military Personnel Deployed
in Iraq
Injury counts can fluctuate dramatically from
month to month
18,229 military personnel were reported wounded
through May 2006 in Operation Iraqi Freedom.
Their issues have received relatively little
attention.
Source Brookings Institution, Iraq Index
Archive, updated June 5, 2006.
110
Non-Fatal Physical Injury RatesAmong 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 4.1 chance of being wounded
Source Insurance Information Institute
calculations based in data from the Brookings
Institution, Iraq Index Archive, updated June 5,
2005.
111
Troop Strength Levels in Iraq Guarantee
Significant Flow of Injured
To date, 54 of troops have been National Guard
or Reservists, meaning 100,000 people eventually
looking to be returned to the workforce soon
Source Brookings Institution, Iraq Index
Archive, updated June 5, 2006.
112
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.
113
Reported Mental Health Problems Among Army
Marine PersonnelAfter Iraq Deployment
Nearly 30 of returning army and marine personnel
exhibit at least one symptom of mental illness.
Source Hoge, et al, Combat Duty in Iraq and
Afghanistan, Mental Health Problems, and
Barriers to Care, New England Journal of
Medicine, v. 351, no.1, July 1, 2004, pp. 13-22.
114
War Takes a Toll on Mental Health of Military
Incidence of PTSD more than tripled and other
mental health problems doubled in 2004
Source Han Kang and Kenneth Hyams, Department
of Veterans Affairs.
115
Reported Alcohol Misuse Among Army Marine
Personnel After Iraq Deployment
Sharp increase in alcohol misuse reported
following deployment
N/A
Source Hoge, et al, Combat Duty in Iraq and
Afghanistan, Mental Health Problems, and
Barriers to Care, New England Journal of
Medicine, v. 351, no.1, July 1, 2004, pp. 13-22.
116
Combat Experience of US ArmySoldiers Deployed to
Iraq
Soldiers have experienced large numbers of
potentially life-altering events-both physical
and psychological
Source Hoge, et al, Combat Duty in Iraq and
Afghanistan, Mental Health Problems, and
Barriers to Care, New England Journal of
Medicine, v. 351, no.1, July 1, 2004, pp. 13-22.
117
Few Troops Who Need Mental Health Help Actually
Receive It
Among troops with signs of major depression,
generalized anxiety or PTSD, only about 1-in-4
(27) will receive treatment from a mental health
professional
Among troops whose survey response met screening
criteria for major depression, anxiety or
PTSD. Source Hoge, et al, Combat Duty in Iraq
and Afghanistan, Mental Health Problems, and
Barriers to Care, New England Journal of
Medicine, v. 351, no.1, July 1, 2004, pp. 13-22.
118
Reasons Why Troops Dont Seek Treatment for
Mental Health Issues
Stigma of mental health problems remains
Source Hoge, et al, Combat Duty in Iraq and
Afghanistan, Mental Health Problems, and
Barriers to Care, New England Journal of
Medicine, v. 351, no.1, July 1, 2004, pp. 13-22.
119
What Can/Should Employers,WC Insurers (esp.
Claims Staff) Do?

• Be aware of physical injuries sustained in
  theater by returning/new employees who served in
  military combat roles or as contractors in war
  zones
• Be aware of possible mental health issues
• Monitoring is probably wise, esp. in stressful
  jobs or jobs involving operation of heavy
  equipment and driving
• Most former military will have no major problem
  readjusting
• Some will, so know how to get them help
• Most employers, claims people may mistake root
  cause of workplace. Not trained to recognize
  warning signs.
• Veterans who were wounded or suffer from
  service-related mental health problems entitled
  to lifetime medical benefits from the Veterans
  Administration
• NOTE Many may be undiagnosed (barely ¼ see MH
  prof.)
• Be aware of local VA resources
  http//www.va.gov/rcs/
• VA Readjustment Counseling Service 800-905-4675

120
The Defense Base ActWhat is It Its
Relationship to WC?

• Congress passed DBA in 1941 to cover construction
  workers in lend/lease military bases outside
  continental US broadened several times since
• DBA extends USLH Act to civilian workers on
  bases overseas contractors employees outside US
• Administered by US Department of Labor
• Covers all US citizens employed on job site
  (e.g., Iraq), 3rd party and local nationals,
  subcontractors

121
Claims Under Defense Base Actin Iraq (As of June
2005)
Premiums are high for US contractors operating
abroad. Death rate among contractors is high,
reflecting hazardous work in a war zone
Source US Department of Labor
122
Degenerative Neurological Diseases Occupational
RiskThe Next Frontier for Workers Comp?
123
Occupational Groups Showing Elevated Incidence of
PSD or AD

• Presenile Dementia
• Clergy
• Dentists
• Graders/Sorters
• Hairdressers/ Cosmotologists
• Social Workers
• Teachers (prim/sec.)
• Farmers
• Under age 65 only

• Alzheimers Disease
• Aircraft Mechanics
• Bank Tellers
• Clergy
• Hairdressers/Cosmo.
• Painters/Sculptors
• Secretaries
• Teachers (prim/sec.)
• Farmers
• Under age 65 only

Source Park, Robert M., et al, Potential
Occupational Risks for Neurodegenerative
Diseases, American Journal of Industrial
Medicine, 48 63-77 (2005).
124
Occupational Groups Showing Elevated Incidence of
PD or MND

• Parkinsons Disease
• Biological Scientists
• Post-Secondary Teachers
• Clergy
• Other Religious Workers
• Welding
• For deaths under age 65 only

• Motor Neuron Disease
• Graders Sorters (non-agricultural)
• Hairdressers
• Teachers (prim/sec.)
• Veterinarians
• Farmers

Source Park, Robert M., et al, Potential
Occupational Risks for Neurodegenerative
Diseases, American Journal of Industrial
Medicine, 48 63-77 (2005).
125
Casual Theories About Occupations With Elevated
Odds of Neurodegenerative Diseases
126
TRIA EXTENSIONThe Burden Grows
127
Insurance Industry Retention Under TRIA (
Billions)
Extension

• Individual company retentions rise to 17.5 in
  2006, 20 in 2007
• Above the retention, federal govt. pays 90 in
  2006, 85 in 2007

Congress Administration want TRIA dead
Source Insurance Information Institute
128
Terrorism Coverage Take-Up Rate Rising
Terrorism take-up rate for non-WC risk rose
through 2003, 2004 and 2005
TAKE UP RATE FOR WC COMP TERROR COVERAGE IS 100!!
Source Marsh, Inc. Insurance Information
Institute
129
Surplus Under TRIA/TRIEA Covered Lines
(Billions of Dollars)
Shrinkage in 2006 (-11) surplus is due to
elimination of several lines covered under TRIA
though 2005 but dropped under the Acts extension
effective 1/1/06
2006 figure uses 2005 estimated year-end surplus
and premiums by line as basis for
calculations. Source Insurance Information
Institute.
130
Insured Loss Estimates Large CNBR Terrorist
Attack ( Bill)
Source American Academy of Actuaries, Response
to Presidents Working Group, Appendix II, April
26, 2006.
131
Insured Loss Estimates Medium CNBR Terrorist
Attack ( Bill)
Source American Academy of Actuaries, Response
to Presidents Working Group, Appendix II, April
26, 2006.
132
Insured Loss Estimates Truck Bomb Terrorist
Attack ( Bill)
Source American Academy of Actuaries, Response
to Presidents Working Group, Appendix II, April
26, 2006.
133
Potential Insured Losses from Terrorist Attack on
Major Corporate HQin Houston (Billions)
Potential losses in all major cities are large
Break down is based on 10 billion loss
estimate. Range of estimates is 10 - 12
billion. Source RMS.
134
Summary

• Personal Commercial lines picture is bright for
  2006, assuming normal CAT loss activity
• WC results continue to improve
• Frequency, investment trends favorable
• Indemnity trends more favorable than medical
• Rising investment returns insufficient to support
  deep soft market in terms of price, terms
  conditions
• Clear need to remain underwriting focused
• How/where to deploy/redeploy capital??
• Major Challenges
• Slow Growth Environment Ahead
• Maintaining price/underwriting discipline
• Managing variability/volatility of results

135
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