National Council of Self-Insurers Annual Conference Key Biscayne, FL June 4, 2012

2 Agenda Welcome and thank you Current WC Market Conditions What factors are driving these results? What is the impact on self-insured's? What can/should should be done How can we help

3 State of the WC Market- Conflicted (NCCI –State of Line report May 10, 2012) Lost time frequency improved in 2011 – down another 1% after a 3% decline in 2010 Average indemnity costs per claim increased by 2.0% in 2011 after 2.8% decrease in 2010 Average medical costs per lost time claim increased by 4.0% in 2011 after a 1.3% increase in 2010 Investment yields remain low but improving Reserve deficient position at $ 11 billion Residual market pools increased to 5% of market

4 WC Industry Combined Ratio Current WC Market Conditions

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6 Current level of underwriting losses are not sustainable Industry reserve deficiency exceeding $11 billion – up $1 billion in one year Major carriers reevaluating their WC exposure – Chartis, Liberty & ACE have reduced writings Primary and Reinsurance rates are increasing Current WC Market Conditions

7 What factors are driving these results? Economic Reasons Societal Forces Government Involvement

8 Economic Reasons Investment returns at historic lows – Investment income has historically offset underwriting losses – Carriers must carry more reserves because GAAP discount rate is lower WC cost of capital is higher than other lines of insurance. Carriers must set aside more surplus for longer tail lines. What factors are driving these results?

9 Societal Forces Frequency decreases bottomed out in 1991 and are beginning to rise (first increase in 13 years) Inexperienced workers in recovering sectors (manufacturing, construction, etc.) Frequency decreases have balanced medical cost increases for two decades Frequency of severity has decreased over time Severity continues to increase Aging workforce What factors are driving these results?

10 Aging Workforce

11 Societal Forces (continued) Obesity epidemic – Increases chance for injury – Increases the length of recovery and the chance of PTD Increased life expectancy Narcotic pain medications – Now account for 25% of WC prescription drugs – 2 Billion in waste (Express Scripts 2011 report) – Causing addiction and longer disability What factors are driving these results?

12 Impact of Rx on Medical Cost

13 Government Involvement Federal regulations increasing costs and complexity – OSHA, EEOC, ADA, Dodd-Frank/FIO What will the impact of the Affordable Care Act be on WC? – PCI study of MA shows positive results? Medicare set asides - SCHIP Extension Act – Present practices are adding to claims costs What factors are driving these results?

14 What is the impact on Self-Insured's? Cost of risk – Affected by all the same factors Cost of risk transfer – Increasing reinsurance costs & retentions Impact of frequency and severity – Greater impact in recovering industries Medical cost inflation Impact of Rx and Opioids

15 Medical Share of Total Benefits by Accident Year © Copyright 2009 National Council on Compensation Insurance, Inc. All rights reserved Indemnity 54% Medical 46% Indemnity 47% Medical 53% 1998 Indemnity 42% Medical 58% 2008 Indemnity 40% Medical 60% 2011

16 Impact on Self-Insured's Source: NCCI DCI Data

17 Percent of Ultimate Losses Reported by Years of Development

18 What can/should be done? Predictive modeling – Era of Big Data? Control of medical and Rx costs Return to the basics – Pre & Post Loss programs and controls Engage outside resources

19 Predictive Modeling Use to indentify problem claims early – Are all factors considered? Soft tissue injuries Early Rx for Opioids Personal characteristics of employee – Smoking, Obesity Work with TPA/Claim manager to develop your plan Impact on Rx

20 Control of Medical and Rx Costs Work with TPA/Claims Manager on – Medical Cost Containment Strategy Does your plan encompass all areas of cost Demand transparency and accountability What is your Rx strategy? – Do you have a PBM protocol in place – Generic vs. name brand – Control of dosage size (100 mg/day) – Urine testing to determine proper usage – Use of Peer Physician review

21 What can/should be done? Stay committed to your risk management mission – Use your unique culture to attack these problems? Continue safety & loss prevention activities – Incorporate wellness into our programs if possible Take advantage of broker/carrier services – Are they partners in your risk management efforts? Get/stay involved in industry and legislative initiatives – SMART Act for SHCIP – State efforts for WC reform & Rx controls. Ex: Prime Tanning Case – Maine Brown vs. Cassens Transportation - Michigan

22 What is Safety National doing ? Working with customers to – Identify key severity hot spots Development of specialized services for self-insured's – Best Doctors – MAP Client Services Work Comp Kit - specialized risk control services S:ERVE - specialized driver training program Taken a leadership role in industry activities – Medicare Advocacy Recovery Coalition (MARC) – Raise awareness of the impact of narcotics, aging and obesity on WC – Facilitate WC industry discussions through LinkedIn and the media

23 Who is Safety National? Founded in 1942 Now part of Tokio Marine Holdings – One of the ten largest insurance companies in the world Licensed and admitted in all 50 states, the District of Columbia, Puerto Rico, and Canada Longest continual provider of Excess Work Comp coverage in the US Market leader in Excess Work Comp – 30% domestic market share Named one of the Best Places to Work by Business Insurance magazine

24 Questions?