Assigned Risk Plans/State Funds A National Perspective Senate Bill 304 Study Committee Bruce R. Hockman Towers Perrin Philadelphia, Pennsylvania Bruce R. Hockman Towers Perrin Philadelphia, Pennsylvania

- 1 -  The evolution of “residual” or guaranteed markets  The impact of market movement  Where we have been, Where we are now, and Where we may be going  A few case histories Discussion Points S e n a t e B i l l S t u d y C o m m i t t e e

- 2 -  In the beginning of the last century, workers compensation laws were passed that for the most part made coverage under the law mandatory  One by one states needed to address the issue of how to “guarantee” insurance protection for all employers  Several basic solutions evolved –Monopolistic state run “funds” –Private carriers with “assigned risk” plans –Private carriers with a state created “fund” –Private carriers with a state created “fund” and assigned risk plans –Self insurance - individual and group Evolution S e n a t e B i l l S t u d y C o m m i t t e e

- 3 - Where We Are Today Monopolistic State Funds:Ohio, North Dakota, Washington, West Virginia, Wyoming State Funds:Arizona*, California, Colorado, Hawaii (1), Idaho*, Kentucky (1), Louisiana (1), Maine (1), Maryland, Minnesota*, Missouri*, Montana, New Mexico*, New York, Oklahoma, Oregon *, Pennsylvania,Rhode Island (1), South Carolina*, Texas (1), Utah Assigned Risk Plans:Alabama, Alaska, Arkansas, Connecticut, Delaware, (JUA)Washington D.C., Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Massachusetts, Michigan, Mississippi, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, South Dakota, Tennessee, Vermont, Virginia, Wisconsin Private Carriers:Everywhere except in Monopolistic State Funds *Also have assigned risk plans operating in the state (1)Successor to assigned risk plans S e n a t e B i l l S t u d y C o m m i t t e e

- 4 - Source: AM Best Aggregates and Averages Percentage Ratio of Loss, Loss Expense, General Expense, and Dividends to Premium Calendar Year Combined Ratios S e n a t e B i l l S t u d y C o m m i t t e e

- 5 -  The impact of market cycles is significant –As financial returns from doing the business deteriorate insurers can respond in several ways increase pricing reduce writings (nationally or specific jurisdictions) leave the market (voluntarily or involuntarily) –The result of the later trend often leads to an increase in business moving to the Guaranteed Market or Assigned Risk Plan Impact of Market Movement S e n a t e B i l l S t u d y C o m m i t t e e

- 6 - $ Billions Residual Market Premiums Policy Year NCCI Assigned Risk Plans Source: NCCI S e n a t e B i l l S t u d y C o m m i t t e e

- 7 - Workers Compensation Residual Market Shares Also on the Rise S e n a t e B i l l S t u d y C o m m i t t e e NCCI Workers Compensation Insurance Plan (WCIP) Premium as a Percentage of Direct Written Premium Source: NCCI Percent Calendar Year P Preliminary

- 8 - Market Comparisons  The impact on premium shifts through cycles is quite consistent with some notable demographic implications  The direct impact of such market shifts on employers and state economies cannot be overstated U.S. Total$34.9B$28.8B$37.5B$43.1B Texas Total$1.9B$1.8B$2.4B$2.6B Texas W.C.I.F.$540M$223M$422M$609M Pennsylvania Total$2.5B$1.4B$1.8B$2.0B Pennsylvania S.W.I.F.$456M$72M$114M$212M Montana Total$273M$153M$152M$182M Montana State Fund$181M$77M$81M$95.8M Market S e n a t e B i l l S t u d y C o m m i t t e e

- 9 - Market Dislocation -- A Ten Year Perspective Aetna Life & CasualtyTravelers ContinentalCNA Reliance GroupLiquidation Home Ins. GroupLiquidation USF&GSt. Paul Orion CapitalRoyal RoyalTravelers General AccidentCGU CGUOne Beacon FremontConservation California CompSuperior National Superior NationalLiquidation Golden EagleLiberty Mutual LegionLiquidation KemperSelling Off Employers WausauLiberty Mutual CIGNAACE MissionLiquidation  

Business Make-Up Who are the employer policyholders found in state funds and assigned risk plans?  Over the last 10 years nearly 85% of the policyholders pay annual premium of less than $5,000 per year  Less than 2% of the policyholders pay more than $50,000 per year  Based on the number of policies in A.R. plans, the top business classifications covered are: –Carpentry - Detached Dwellings –Clerical Office –Trucking - Local –Salespersons –Painting –Domestic Workers –Buildings - Operations by Owner –Carpentry - Interior –Physicians  The common denominator is that these accounts are small employers S e n a t e B i l l S t u d y C o m m i t t e e

Workers Compensation Residual Market Combined Ratios are Holding Steady S e n a t e B i l l S t u d y C o m m i t t e e NCCI Managed Workers Compensation Residual Market Pools as of December 31, 2002 Source: NCCI Percent Policy Year *Excludes Maine Residual Market Pool **Incomplete PY Projected to Ultimate

Workers Compensation Residual Market Underwriting Results Remain Negative S e n a t e B i l l S t u d y C o m m i t t e e NCCI Managed Workers Compensation Residual Market Pools as of December 31, 2002 Source: NCCI Policy Year *Excludes Marine Residual Market Pool **Incomplete PY Projected to Ultimate ,350 -1,797 -1,878 -2,072 -1,663 -1, ,500 -2,000 -1,500 -1, $ Millions *1989*1990*1991*1992* **

Where are we Going? Can the results of the early nineties be seen again in the future? Yes, but not to the same degree. S e n a t e B i l l S t u d y C o m m i t t e e Q  Rate suppression as a result of regulatory intervention  No incentives or disincentives within plan structure to control claims costs, premium collections, fraud  Assigned Risk Rates were often lower than private market rates  Several “troubled” states dominated the disastrous financial results  “De-population” plans in place with rate levels set for pools to be “self- supporting”  Improved levels of servicing carrier responsibility  Several “troubled” states abandoned assigned risk approach in favor of “Employer Mutual Model” A Then Now

Employer Mutuals S e n a t e B i l l S t u d y C o m m i t t e e Louisiana Texas New Mexico Maine Rhode Island Missouri Minnesota Kentucky Hawaii Louisiana Workers Compensation Corp. Texas Mutual Insurance Company New Mexico Mutual Casualty Maine Employers Mutual Insurance Beacon Mutual Insurance Co. Missouri Employers Mutual Insurance Minnesota State Fund Market Kentucky Employers Mutual Insurance Hawaii Employers Mutual Insurance Guaranteed Market Leading Writer33% Guaranteed Market Leading Writer23% Assigned Risk Plan Leading Writer32% Guaranteed Market Leading Writer54% Guaranteed Market Leading Writer74% Assigned Risk Plan Leading Writer25% Assigned Risk Plan Leading Writer10.5% Guaranteed Market Leading Writer26% Guaranteed Market Leading Writer20% YearStateEntityStatus

Customer Expectations What are employers looking for? Stability, Consistency  Price-Unexpected increases in premium cannot be effectively passed on in the cost of goods and services -The unexpected move from a private carrier to an assigned risk plan could have an immediate and devastating impact on a buyer, often with no notice to the buyer  Service-Employers expect and deserve more than just a policy -Changes in carriers results in disruption in service delivery and quality -Frustrated workers, frustrated providers  frustrated employers  Financial-The cost of insolvencies is a heavy one, passed on to all employers Strength A strong balance sheet is fundamental for an insurer to meet employer/policyholder expectations - whether private or public S e n a t e B i l l S t u d y C o m m i t t e e

Case Study #1 Louisiana Workers Compensation Corporation  Status: Private non-profit mutual: Rated A (A.M. Best)  Total Louisiana Market 1991:$413M  Total Assigned Risk Market 1991:$300M (72.6%)  LWCC Writings:1994$246, $166, $210,214  Current Marketshare:33%  Rate Review: Exempt from state approval, rates reviewed by Department for Actuarial Soundness  Rate Change History % (includes 25% surcharge) % %  Since 1993, NCCI has secured cumulative loss cost changes of -7.8%  During that same period LWCC has filed cumulative rate changes of -32.3% S e n a t e B i l l S t u d y C o m m i t t e e

Case Study #2 Kentucky Employers Mutual Insurance Company  Status: Non-profit, independent DeJure Municipal Corporation and political subdivision of Commonwealth of Kentucky: Rated A- (A.M. Best)  Total Kentucky Market 1994:$278M  Total Assigned Risk Market 1994:$84M (30%)  KEMI Writings:1996$72.9M 1998$41.6M 2002$108M  Current Marketshare:26%  Rate Review: KEMI Board approves rates, subject to approval by insurance department  Rate Change History % % % S e n a t e B i l l S t u d y C o m m i t t e e

Case Study #3 Employers Insurance Company of Nevada  Private domestic insurance company: Rated A- (A.M. Best) Successor company of Nevada Workers Compensation Fund and State Industrial Insurance System, operating in a competitive environment after monopolistic plan ended.  Total Nevada Market 2000:$444M  Total Assigned Risk Market 2000:$6M  Total Assigned Risk Market 2002:$19M  Current Marketshare:30.8%  Rate Review: Subscribe to NCCI, licensed rating authority  Rate Change History S e n a t e B i l l S t u d y C o m m i t t e e *Includes 25% assigned risk differential AR Y EIGN Writings %*-8.0%$ %+4.5%$ %-6.0%$ %+1.5%$114

S e n a t e B i l l S t u d y C o m m i t t e e Direct Written Premium ($000’s)Market Share GROUP NAME. US 1994US (% of US)US Total 1994 TOP TWENTY by DWP Liberty Mut Ins Cos Travelers PC Group CNA Ins Companies Amer Intern Group State Comp Fund Cal Hartford Ins Group Kemper Ins Cos Fremont General Grp CIGNA Group Allianz of America St Paul Companies Zurich US Group Amer Financial Group Superior Nat Ins Grp Reliance Ins Group State Worker Fd (PA) CGU Group Home Ins Companies Golden Eagle Ins Co Old Republic Gen Grp Subtotal Industry Total 3,805,161 2,211,457 2,087,227 1,855,581 1,449,033 1,366,032 1,342,898 1,217, , , , , , , , , , , , ,850 22,241,738 34,889, % 3,805,161 2,211,457 2,087,227 1,855,581 1,449,033 1,366,032 1,342,898 1,217, , , , , , , , , , , , ,850 22,241,738 34,889, % 6.34% 5.98% 5.32% 4.15% 3.92% 3.85% 3.49% 2.40% 2.20% 1.95% 1.82% 1.79% 1.73% 1.57% 1.36% 1.35% 1.29% 1.23% 1.11% 63.75% 34,889,072 Source: © A.M. Best Company - Used by Permission. Exhibit 1 Line: Workers CompensationUnited States

Source: © A.M. Best Company - Used by Permission. Direct Written Premium ($000’s) GROUP NAME. US 1998US (% of US)US Total TOP TWENTY by DWP Liberty Mut Ins Cos CNA Ins Companies Amer Intern Group Travelers PC Group Kemper Ins Cos State Comp Fund Cal Hartford Ins Group Fremont General Grp Reliance Ins Group Allianz of America Superior Nat Ins Grp Zurich US Group CIGNA Group Orion Capital Cos CGU Group St Paul Companies Amer Financial Group Chubb Grp of Ins Cos Legion Ins Group SAFECO Ins Cos Subtotal Industry Total 2,866,858 1,774,676 1,407,530 1,342,583 1,294,125 1,215,753 1,093, , , , , , , , , , , , , ,441 18,117,371 28,872, % 2,866,858 1,774,676 1,407,530 1,342,583 1,294,125 1,215,753 1,093, , , , , , , , , , , , , ,441 18,117,371 28,872,889 Market Share % 6.15% 4.87% 4.65% 4.48% 4.21% 3.79% 2.85% 2.65% 2.64% 2.47% 2.29% 1.82% 1.74% 1.60% 1.49% 1.48% 1.31% 1.21% 1.11% 62.75% 28,872, % 5.68% 5.88% 4.93% 4.36% 3.65% 3.92% 3.18% 2.16% 2.32% 2.84% 2.48% 1.43% 1.38% 1.86% 1.63% 1.53% 1.21% 1.06% 1.12% 61.99% 28,407, % 5.12% 6.04% 5.03% 4.05% 3.29% 3.95% 2.92% 1.73% 2.37% 2.70% 2.95% 1.50% 1.29% 1.82% 1.91% 1.37% 1.12% 0.69% 1.09% 60.27% 29,717, % 5.58% 5.76% 3.68% 3.35% 4.02% 3.07% 1.46% 2.29% 1.82% 3.02% 1.98% 1.14% 1.58% 2.10% 1.46% 1.05% 0.54% 1.09% 61.10% 31,352,471 Annualized 1994 DWP Growth 10.91% 5.98% 5.32% 6.34% 3.85% 4.15% 3.92% 3.49% 1.57% 2.20% 1.73% 1.82% 2.40% 0.87% 1.35% 1.95% 1.79% 0.84% 0.56% 0.99% 62.01% 34,889, % -3.97% -6.68% % -0.92% -4.29% -5.42% -9.33% 8.81% -0.10% 4.31% 0.96% % 13.31% -0.53% % -9.02% 6.62% 16.00% -1.85% -4.34% -4.62% Line: Workers CompensationUnited States S e n a t e B i l l S t u d y C o m m i t t e e Exhibit 2

Source: © A.M. Best Company - Used by Permission. Direct Written Premium ($000’s) GROUP NAME. US 2001US (% of US)US Total TOP TWENTY by DWP State Comp Fund Cal Liberty Mut Ins Cos Amer Intern Grp Inc Zurich/Farmers Group CNA Ins Companies Royal & SunAlliance Travelers/Citigroup Kemper Ins Cos Hartford Ins Group St Paul Companies Legion Ins Group Fairfax Fin (US) Gr ACE INA Group Allianz of America HDI U S Group Chubb Grp of Ins Cos Zenith Nat Ins Group Texas Mut Ins Co Pinnacol Assur Co FCCI Ins Group Subtotal Industry Total 3,638,077 2,985,751 1,921,250 1,851,730 1,679,884 1,330,850 1,328,591 1,319,218 1,188, , , , , , , , , , , ,047 23,051,190 37,514,851 3,638,077 2,985,751 1,921,250 1,851,730 1,679,884 1,330,850 1,328,591 1,319,218 1,188, , , , , , , , , , , ,047 23,051,190 37,514, % Market Share % 7.96% 5.12% 4.94% 4.48% 3.55% 3.54% 3.52% 3.17% 2.24% 2.01% 1.60% 1.51% 1.31% 1.22% 1.18% 1.16% 1.12% 1.09% 1.03% 61.45% 37,514, % 8.97% 4.91% 4.31% 4.74% 3.27% 3.87% 4.02% 3.18% 1.92% 2.19% 1.82% 0.91% 1.84% 0.95% 1.21% 0.97% 0.92% 0.96% 1.06% 57.43% 33,161, % 10.12% 4.77% 3.03% 6.01% 2.69% 4.55% 4.38% 3.70% 1.45% 1.19% 1.57% 1.78% 2.59% 0.88% 1.28% 0.92% 0.77% 0.83% 0.99% 57.62% 29,522, % 9.42% 3.75% 3.44% 5.69% 3.17% 4.19% 3.60% 3.52% 1.40% 1.76% 1.74% 1.23% 2.50% 1.06% 1.17% 0.93% 0.77% 0.89% 55.21% 30,394,442 Annualized 1997 DWP Growth 3.54% 9.51% 5.72% 3.10% 5.52% 2.15% 4.79% 4.24% 3.81% 1.56% 1.03% 1.23% 1.39% 2.25% 0.88% 1.18% 0.81% 0.80% 0.81% 1.06% 55.39% 29,229, % 1.80% 3.55% 19.53% 1.00% 20.64% -1.29% 1.57% 1.64% 16.50% 25.78% 13.68% 8.80% -7.11% 15.70% 6.51% 16.29% 15.91% 14.52% 5.73% 9.24% 6.44% Line: Workers CompensationUnited States S e n a t e B i l l S t u d y C o m m i t t e e Exhibit 3

Line: Workers CompensationUnited States S e n a t e B i l l S t u d y C o m m i t t e e Exhibit 4 Source: © A.M. Best Company - Used by Permission. Direct Written Premium ($000’s) GROUP NAME. US 2002US (% of US)US Total Market Share Annualized 1998 DWP Growth % TOP TWENTY by DWP State Comp Fund Cal Liberty Mut Ins Cos Amer Intern Grp Inc Zurich/Farmers Group Travelers P C Group Hartford Ins Group CNA Ins Companies Kemper Ins Cos Royal & SunAlliance St Paul Companies ACE INA Group Everest Re US Group Texas Mut Ins Co Zenith Nat Ins Group Chubb Grp of Ins Cos HDI U S Group W R Berkley Group Pinnacol Assur Co Aon Corp Group Fairfax Fin (US) Gr Subtotal Industry Total 5,492,547 3,807,507 3,135,134 2,107,534 1,533,078 1,495,662 1,438,229 1,350,448 1,179, , , , , , , , , , , ,767 27,919,493 43,124,735 n/a 5,492,547 3,807,507 3,135,134 2,107,534 1,533,078 1,495,662 1,438,229 1,350,448 1,179, , , , , , , , , , , ,767 27,919, % 8.83% 7.27% 4.89% 3.55% 3.47% 3.34% 3.13% 2.74% 2.22% 1.68% 1.47% 1.41% 1.35% 1.34% 1.21% 1.18% 1.10% 0.92% 0.91% 64.74% 43,124, % 7.91% 5.09% 4.91% 3.14% 3.15% 4.45% 3.49% 3.53% 2.23% 1.50% 0.90% 1.12% 1.15% 1.17% 1.22% 0.83% 1.08% 0.77% 1.59% 58.85% 37,749, % 8.91% 4.87% 4.28% 3.25% 3.16% 4.71% 4.00% 3.25% 1.90% 0.91% 0.42% 0.91% 0.96% 1.20% 0.94% 0.65% 0.95% 0.73% 1.81% 53.19% 33,392, % 9.97% 4.70% 2.99% 3.67% 3.65% 5.93% 4.32% 2.66% 1.43% 1.76% 0.20% 0.76% 0.91% 1.26% 0.87% 0.68% 0.81% 0.39% 1.55% 52.55% 29,955, % 9.31% 3.71% 3.41% 3.47% 3.48% 5.63% 3.56% 3.13% 1.38% 1.22% 0.16% 0.76% 0.91% 1.16% 1.05% 0.66% 0.88% 0.46% 1.72% 50.12% 30,735, % 6.26% 22.17% 23.87% 8.66% 8.15% -5.12% 1.07% 10.35% 22.21% 8.31% 80.12% 27.82% 20.93% 11.19% 19.00% 25.67% 18.15% 35.98% -3.97% 15.40% 9.54%

Line: Workers CompensationMontana S e n a t e B i l l S t u d y C o m m i t t e e Exhibit 5

Line: Workers CompensationMontana S e n a t e B i l l S t u d y C o m m i t t e e Exhibit 6

Source: © A.M. Best Company - Used by Permission. Direct Written Premium ($000’s) GROUP NAME. MT 2001MT (% of US)US Total TOP TWENTY by DWP Montana State Fund Liberty Mut Ins Cos DHC Group Amer Intern Grp Inc AmTrust Group CNA Ins Companies Zurich/Farmers Group Amerisafe Ins Group ICW Group Royal & SunAlliance SAFECO Ins Cos Everest Re US Group Chubb Grp of Ins Cos Hartford Ins Group St Paul Companies Legion Ins Group HDI U S Group Argonaut Ins Group Sentry Ins Group Travelers/Citigroup Subtotal Industry Total 81,320 29,041 11,896 3,303 2,960 2,605 2,380 1,932 1,769 1,602 1,558 1,438 1,261 1, , ,999 81,320 2,985,751 23,381 1,921,250 5,182 1,679,884 1,851, ,543 91,650 1,330, , , ,274 1,188, , , , , ,335 1,328,591 16,325,638 37,514, % 0.97% 50.88% 0.17% 57.12% 0.16% 0.13% 0.98% 1.93% 0.12% 0.57% 0.42% 0.29% 0.10% 0.11% 0.12% 0.19% 0.36% 0.17% 0.04% 0.91% 0.41% Market Share % 19.11% 7.83% 2.17% 1.95% 1.71% 1.57% 1.27% 1.16% 1.05% 1.02% 0.95% 0.83% 0.81% 0.63% 0.59% 0.57% 0.44% 0.37% 0.31% 97.86% 151, % 16.19% 4.11% 0.85% 2.19% 0.56% 2.03% 0.36% 0.43% 2.29% 0.40% 0.85% 2.46% 0.55% 0.61% -0.32% 0.16% 0.37% 1.67% 87.63% 135, % 14.42% 6.37% 1.67% 1.34% 1.93% 3.28% 0.99% 0.95% 1.85% 1.08% 0.60% 1.37% 0.63% 1.38% 0.16% 0.53% 0.27% 0.58% 86.83% 150, % 4.92% 3.63% 5.45% 1.67% 2.38% 0.33% 0.44% 5.00% 0.66% 0.57% 5.91% 0.54% 2.62% 0.60% 0.03% 0.46% 3.06% 70.48% 75,866 Annualized 1997 DWP Growth 28.06% 5.00% 9.52% 5.54% 8.51% 0.06% 10.70% 0.56% 3.34% 2.06% 3.78% 0.34% 2.43% 0.51% 2.22% 82.64% 70, % 10.06% 35.50% % N/A -9.65% % 2.35% 91.86% % % 42.27% 33.66% % -9.82% % 37.69% % 12.10% % 26.40% 21.17% Line: Workers CompensationMontana S e n a t e B i l l S t u d y C o m m i t t e e Exhibit 7

Line: Workers CompensationMontana S e n a t e B i l l S t u d y C o m m i t t e e Exhibit 8 Source: © A.M. Best Company - Used by Permission. Direct Written Premium ($000’s) GROUP NAME. MT 2002MT (% of US)US Total Market Share Annualized 1998 DWP Growth TOP TWENTY by DWP Montana State Fund Liberty Mut Ins Cos DHC Group Zurich/Farmers Group Amer Intern Grp Inc CNA Ins Companies Amerisafe Ins Group Royal & SunAlliance ACE INA Group AmTrust Group Travelers P C Group Chubb Grp of Ins Cos Workers Comp Fd Grp SAFECO Ins Cos Hartford Ins Group Kemper Ins Cos Argonaut Ins Group Allianz of America HDI U S Group St Paul Companies Subtotal Industry Total 95,854 39,316 7,064 5,886 3,616 3,254 2,567 2,526 2,279 2,107 1,740 1,587 1,529 1,325 1,259 1, , ,461 95,854 3,807,507 8,136 2,107,534 3,135,134 1,438, ,893 1,179, ,660 21,110 1,533, , , ,821 1,495,662 1,350, , , , ,767 19,916,710 43,124, % 1.03% 86.82% 0.28% 0.12% 0.23% 1.44% 0.21% 0.31% 9.98% 0.11% 0.27% 0.78% 0.08% 0.40% 0.44% 0.15% 0.08% 0.88% 0.42% 52.53% 21.55% 3.87% 3.23% 1.98% 1.78% 1.41% 1.38% 1.25% 1.15% 0.95% 0.87% 0.84% 0.73% 0.69% 0.57% 0.50% 0.47% 0.42% 0.39% 96.56% 182, % 19.11% 7.83% 1.57% 2.17% 1.71% 1.27% 1.05% 0.23% 1.95% 0.29% 0.83% 0.21% 1.02% 0.81% -0.08% 0.44% -0.04% 0.57% 0.63% 95.07% 151, % 14.42% 6.37% 1.93% 1.67% 1.34% 3.28% 0.95% 1.73% 0.54% 0.60% 1.85% 1.37% 3.38% 0.53% 0.69% 0.16% 0.63% 88.86% 150, % 4.92% 1.67% 3.63% 5.45% 2.38% 0.44% 5.97% 2.92% 0.57% 5.00% 5.91% 3.08% 0.03% 1.46% 0.60% 0.54% 76.77% 75, % 16.19% 4.11% 0.56% 0.85% 2.19% 2.03% 0.43% 2.82% 1.55% 0.85% 2.29% 2.46% 1.01% 0.16% 0.57% -0.32% 0.55% 90.15% 135, % 12.63% 17.27% 46.75% 7.06% -5.83% 9.24% 65.91% % % -5.86% 38.61% % % % % % -6.31% 13.90% 14.99% 31.88% 24.53%