Privatization of Worker’s Compensation State Funds CAS Annual Meeting November 16, 1999

Privatization of Worker’s Compensation State Funds Why do it at all? Can it be done? Why now? Structural Issues 2

Why do it at all? Political / Philosophic Economic Eliminate government bureaucracies wherever possible Create Economic Incentives to: Cut claims costs Cut administrative costs Eliminate favors/cronyism Economic More efficient use of capital/free up trapped capital Reduce risk of insolvency/assessment 3

Discounted Value of Reserves -Expected- Margin Reinsurance Premium Reinsurers’ Limit Mean 4

Can it be done? Political will Economically feasible Pass enabling legislation Overcome entrenched interests Economically feasible Adequate funding plus margin Regulatory Cooperation Accounting Issues Posting Security RBC, etc. 5

Why now? Political will may exist Improved economic condition of funds Workers’ comp reforms in place and effective Stock market returns may have improved asset values Old reserves have been running off favorably Large reserves versus much smaller or different ongoing operations Reinsurance availability Workers’ comp reform/restructuring increases confidence in loss prediction It’s just plain competitive out there 6

Structural Issues Who is the reinsured? Who owns the company? Who handles the claims? Who shares the profits? Are coincident interests maintained? What happens if the reinsurance is inadequate? 7