Shifts in the Marketplace Workers Compensation Residual Markets CARe Presentation Jon Hale, FCAS Travelers P&C September 17, 2003 New York City, NY

P&C Industry Premium Growth Highest in Sixteen Years Net Written Premium by Line—Private Carriers p Preliminary Sources: 2001, Best’s Aggregates & Averages; 2002p WC, NCCI; Other lines, Annual Statement data; 2002p Total, ISO Used with permission of National Council on Compensation Insurance, Inc.

3 P&C Combined Ratios Improved Significantly in 2002 Net Combined Ratios—Private Carriers p Preliminary Sources: 2001, Best’s Aggregates & Averages; 2002p WC, NCCI; Other lines, Annual Statement data; 2002p Total, ISO Used with permission of National Council on Compensation Insurance, Inc.

4 P&C Industry Calendar Year Combined Ratios Private Carriers Percent  2.9% Due to Sept –2001 Average: 108.6% p Preliminary Sources: 1985–2001, Best’s Aggregates & Averages; 2002p, ISO Used with permission of National Council on Compensation Insurance, Inc.

5 $ Billions $ Trillions Workers Compensation Premium: Third Consecutive Year of Growth Net Written Premium vs. Wages and Salaries—Private Carriers $ Billions$ Trillions Source: 1990–2001, Best’s Aggregates & Averages; 2002, NCCI; Private Non-Farm Wages & Salaries, Economy.com. Used with permission of National Council on Compensation Insurance, Inc.

6 $ Billions $ Trillions Adjusted Workers Compensation Premium Volume Workers Compensation Direct Written Premium—Private Carriers $ Billions$ Trillions 1. Direct of Reinsurance 2. Grossed-Up for Large Deductible Credits 3. Adjusted to 1990 Rate/Loss Cost Level 4. Grossed-Up for Carrier Departure Used with permission of National Council on Compensation Insurance, Inc.

7 Workers Compensation Calendar Year Combined Ratio Declined in 2002 Private Carriers 1.9% Due to September 11th Sources: 1990–2001, Best’s Aggregates & Averages; 2002, NCCI Percent Used with permission of National Council on Compensation Insurance, Inc.

8 Workers Compensation Results in 2002 Improved Over 2001 Pretax Operating Gain Ratio—Private Carriers Percent Sources: 1990–2001, Best’s Aggregates & Averages; 2002, NCCI Combined Ratio less Investment Gain on Insurance Transaction and Other Income * Adjusted to include realized capital gains to be consistent with 1992 and after Used with permission of National Council on Compensation Insurance, Inc.

9 The Impact of Discounting on Workers Compensation Premium NCCI States—Private Carriers Based on data through 12/31/2002 for the states where NCCI provides ratemaking services. Dividend ratios are based on calendar year statistics. Used with permission of National Council on Compensation Insurance, Inc.

10 Workers Compensation Residual Market Mechanisms State Funds as of 1990 (Quasi-Pool) 14 State Funds acting as markets of last resort 2 Quasi-Pools (MN, ME) 36 Pool states (Direct Assignments did not exist) Note: Arizona & Idaho had state funds but were not markets of last resort Source: Jon Hale, Travelers

11 Note: Arizona, Idaho, & New Mexico have state funds but NCCI manages the markets of last resort 19 State Funds acting as markets of last resort 2 Quasi-Pools (FL & MN) 13 Pool states w/ Direct Assignment 15 Pool states w/o Direct Assignment 2 Private Carrier states (no Direct Assignments – MO & NE) (FWCJUA) Workers Compensation Residual Market Mechanisms State Funds as of 2003 (Quasi-Pool) Source: Jon Hale, Travelers

12 Workers Compensation Residual Market Pool Premium Volume Is on the Rise NCCI Managed Workers Compensation Residual Market Pools As of March 31, 2003 $634M $352M $1.1B *Excludes Maine Residual Market Pool **Incomplete Policy Year Projected to Ultimate Includes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM) $ Billions Used with permission of National Council on Compensation Insurance, Inc.

13 Workers Compensation Residual Market Plan New Applications Bound Representative Subset of NCCI Plan Administered Residual Markets* Assignments without Prior Coverage–Total # of applications assigned with prior voluntary coverage during last six months prior to assignment Assignments without Prior Coverage–Total # of applications assigned with no prior coverage during last six months prior to assignment * If servicing carriers stay through the contract years, they can renew policies themselves without having the employers to go through the application process. Also, changes of servicing carriers from one year to next may distort results Used with permission of National Council on Compensation Insurance, Inc.

14 Workers Compensation Residual Market Plan New Premium Bound Representative Subset of NCCI Plan Administered Residual Markets* Assignments without Prior Coverage–Total premium for applications assigned with prior voluntary coverage during last six months prior to assignment Assignments without Prior Coverage–Total premium for applications assigned with no prior coverage during last six months prior to assignment * If servicing carriers stay through the contract years, they can renew policies themselves without having the employers to go through the application process. Also, changes of servicing carriers from one year to next may distort results $ Millions Used with permission of National Council on Compensation Insurance, Inc.

15 Workers Compensation Residual Market Plan Shares Have Increased in Recent Years Includes data for AL, AZ, AK, AR, CT, DC, GA, ID, IA, IL, IN, KS, NV, NH, NM, OR, SD, VA, VT Used with permission of National Council on Compensation Insurance, Inc.

16 Workers Compensation Residual Market Pool Combined Ratios Are Holding Steady NCCI Managed Workers Compensation Residual Market Pools As of March 31, 2003 Percent *Incomplete Policy Year Projected to Ultimate Includes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM) Used with permission of National Council on Compensation Insurance, Inc.

17 Workers Compensation Combined Ratios NCCI Managed Residual Market Pools as of March 2003 vs. Private Carriers Ultimate Accident Year Combined Ratios Percent * Incomplete Policy Year for Residual Market Projected to Ultimate. Includes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM) Source for private carriers accident years 1993–2002: NCCI. Accident year data is evaluated as of 12/31/2002, developed to ultimate and includes dividends to policyholders Used with permission of National Council on Compensation Insurance, Inc.

18 Workers Compensation Residual Market Pool Combined Ratios Mainly Driven by Loss Ratios NCCI Managed Workers Compensation Residual Market Pools As of March 31, 2003 Percent *Incomplete Policy Year Projected to Ultimate Includes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM) Used with permission of National Council on Compensation Insurance, Inc.

19 Workers Compensation Private Carrier Combined Ratios Driven by Both Loss & U/W Expense Ratios Percent Source for private carriers accident years 1993–2002: NCCI. Accident year data is evaluated as of 12/31/2002, developed to ultimate and includes dividends to policyholders Used with permission of National Council on Compensation Insurance, Inc.

20 Workers Compensation Loss Ratios NCCI Managed Residual Market Pools as of March 2003 vs. Private Carriers Ultimate Accident Year Combined Ratios Percent * Incomplete Policy Year for Residual Market Projected to Ultimate. Includes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM) Source for private carriers accident years 1993–2002: NCCI. Accident year data is evaluated as of 12/31/2002, developed to ultimate Used with permission of National Council on Compensation Insurance, Inc.

21 Workers Compensation Residual Market Pool Underwriting Results Remain Negative NCCI Managed Workers Compensation Residual Market Pools As of March 31, 2003 $ Millions *Excludes Maine Residual Market Pool **Incomplete Policy Year Projected to Ultimate Includes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM) Used with permission of National Council on Compensation Insurance, Inc.

22 Workers Compensation Residual Market Plan Programs Sources: NCCI (NCCI-states); Jon Hale (Non-NCCI states) Applicable in all states where NCCI administers assigned risk programs

23 Workers Compensation Policy Size Distribution Residual Market Plan* vs. Voluntary YTD through June 2001 Total number of assigned risk policies in force, updated 8/02/2003 * Includes residual market policies for all NCCI Plan Administered states, including IN. (Does not include all Pool states such as NJ, DE, & NC) Assigned Risk - YTD 6/2001 $50,000-$99,999 1%$10,000-$49,999 6% $100,000 and over 0% $0-$2,499 77% $5,000-$9,999 6% $2,500-$4,999 10% Voluntary - YTD 6/2001 $50,000-$99,999 1% $10,000-$49,999 10% $100,000 and over 1% $0-$2,499 64% $5,000-$9,999 10% $2,500-$4,999 14% Used with permission of National Council on Compensation Insurance, Inc.

24 Workers Compensation Policy Growth Change in Number of Risks Residual Market Plan* vs. Voluntary YTD through June 2003 vs. YTD through June 2001 Total number of assigned risk policies in force, updated 8/02/2003 * Includes residual market policies for all NCCI Plan Administered states, including IN. (Does not include all Pool states such as NJ, DE, & NC) Used with permission of National Council on Compensation Insurance, Inc.

25 Workers Compensation Policy Size Distribution Residual Market Plan* vs. Voluntary YTD through June 2003 Total number of assigned risk policies in force, updated 8/02/2003 * Includes residual market policies for all NCCI Plan Administered states, including IN. (Does not include all Pool states such as NJ, DE, & NC) Used with permission of National Council on Compensation Insurance, Inc.

26 Workers Compensation Residual Market Plan Top 15 Class Codes Policy Distribution Used with permission of National Council on Compensation Insurance, Inc.

27 Workers Compensation Residual Market Plan Top 15 Class Codes Premium Distribution Used with permission of National Council on Compensation Insurance, Inc.

28 Distribution of Avg WC Residual Market Plan Mods Has Remained Stable in Recent Periods Excludes Non-Experience Rated Policies Policies Effective in 2001 Includes data for AK, AL, AR, AZ, CT, DC, GA, IA, ID, IL, IN, KS, NH, NM, NV, OR, SC, SD, VA, & VT Used with permission of National Council on Compensation Insurance, Inc.

29 Distribution of Avg WC Residual Market Plan Mods Has Remained Stable in Recent Periods Excludes Non-Experience Rated Policies Policies Effective in 2002 Includes data for AK, AL, AR, AZ, CT, DC, GA, IA, ID, IL, IN, KS, NH, NM, NV, OR, SC, SD, VA, & VT Used with permission of National Council on Compensation Insurance, Inc.

30 Distribution of Avg WC Residual Market Plan Mods Has Remained Stable in Recent Periods Excludes Non-Experience Rated Policies Policies Effective in 2003 Includes data for AK, AL, AR, AZ, CT, DC, GA, IA, ID, IL, IN, KS, NH, NM, NV, OR, SC, SD, VA, & VT Used with permission of National Council on Compensation Insurance, Inc.

31 Distribution of Avg WC Residual Market Plan Mods Has Remained Stable in Recent Periods Excludes Non-Experience Rated Policies Six Month Policy Effective Intervals From January 2001 through June 2003 Jan-Jun 2003 Jul-Dec 2001 Jul-Dec 2002 Jan-Jun 2001 Jan-Jun 2002 Includes data for AK, AL, AR, AZ, CT, DC, GA, IA, ID, IL, IN, KS, NH, NM, NV, OR, SC, SD, VA, & VT Used with permission of National Council on Compensation Insurance, Inc.