Workers Comp Cat Covers CARe Meeting Cambridge, MA 19 May 2008 Paul Silberbush, FCAS, MAAA

1 Guy Carpenter Outline  Basics of Coverage  Clauses/Exclusions  Data Requirements for Reinsurers  Exposure Accumulation  Pricing Examples  State of the Market

2 Guy Carpenter Basics of Coverage  A Workers Comp Cat is an occurrence affecting 2 or more lives (claimants) – A construction crane collapses and kills 6 workers – An explosion at a chemical factory injures hundreds – A $10m lifetime medical claim for a single person is NOT a WC Cat  Perils – Earthquake – Terrorism – Industrial Accidents (Fire, Explosion etc) – Workplace violence (e.g. Shooting)

3 Guy Carpenter Typical Workers Comp Cat Cover  Excess of Loss  MAOL: “Maximum Any One Life” – Most any single risk can contribute to subject loss – Important pricing factor (higher MAOL, higher price)  One paid reinstatement  Terrorism – One limit of full coverage ex-NBCR is usually included  May depend on location (e.g. New York or Chicago) – NBCR available at extra cost (e.g. 3-6% additional ROL)

4 Guy Carpenter Typical Exclusions/Clauses  Occupational Disease/Cumulative Trauma – Limited to sudden and accidental over 72 hours  Industrial accident releases chemicals which cause illness over time – Cover not designed for latent exposures  Chemicals in work environment cause illness over time – Gives short reporting tail (but usual WC long-tail otherwise)  Usual reinsurance exclusions (Assumed Re, Pools, War, etc)  Jones Act  USL&H unless incidental  Employers Liability  Sunset clause – all losses reported within 7 years of expiry  Commutation (but many have no real substance)

5 Guy Carpenter Reinsurer Data Requirements  Premium  Exposure Detail – Both for qualitative assessment and to run cat models – Payroll/Premium by zip code (or street address) – Premium by industry class codes – Hazard group and state mix – 10 largest accounts by payroll, premium, employee count  Loss history (multiclaimant detail is needed to be of use)  Triangles, loss ratios, rate level history etc not usually needed

6 Guy Carpenter Exposure Accumulations (Reinsurers)  Within a single cedant – Single large insureds (factories, etc) – Several or many insureds nearby  Single large office building  Dense business part of major city (e.g. Wall Street or Midtown)  Over many cedants – Reinsurer XYZ writes cat covers on companies A,B,C – A,B,C collectively insure several large firms in same building – Or, A,B,C write layered policies on same large firm  More common in excess casualty or D&O  Reinsurers track aggregates of these types in varying degrees of detail

7 Guy Carpenter Exposure Accumulations (Reinsurers)  “Unknown Exposures” – Large groups of employees of one or several firms out of office – Company meetings – Air travel  Tradeshow Example – Sony, Nokia, Motorola send large contingents to consumer electronics show in Las Vegas – Insurer ABC writes WC on all 3 and is reinsured by XYZ – Las Vegas a terrorist target – How to track this? – Some accumulation models take largest tradeshows into account

8 Guy Carpenter Factors Impacting Workers Comp Cat Reinsurance Pricing  Portfolio Size (Subject Premium) – Size impacts ROLs due to capacity charges  Combination of MAOL and Attachment  Geographical Split – Natural hazard  California, New Madrid Subject Premium – Urban accumulation  Terrorism probabilistic somewhat used by some reinsurers  Terrorism - City targets vs. Employee Count accumulation densities  SIC / Hazard Group Profiles

9 Guy Carpenter Workers Comp Cat Pricing Examples  Example 1 – Regional (Midwest) mutual – $300m WC premium – NM EQ exposure; limited CA EQ exposure – Some Chicago exposure – $10m xs $5m, 2 paid reinstatements, $3m MAOL, Terror ex-NBCR – 6.75% ROL  Example 2 – Large national stock company – $1b+ WC premium – Exposure in most states, including major cities – $25m xs $25m, 1 paid reinstatement, $10m MAOL, Terror ex-NBCR – 9% ROL

10 Guy Carpenter Workers Comp Cat Pricing Earthquake EP Curve (Example 1) Layer attaches Layer exhausts

11 Guy Carpenter Workers Comp Cat Pricing Terrorism EP Curve (Example 1) Layer attaches Layer exhausts

12 Guy Carpenter Workers Comp Cat Pricing Loss Costs (Example 1)

13 Guy Carpenter Workers Comp Cat Reinsurance Market  Capacity is greater than pre-9/11 levels ($800m+) – Bermuda continues to lead terms and capacity  A&H capacity remains less than $50M – Security and rating issues prevent from being placed  Continued Price Softening – experienced 5-10% reductions – experienced % decreases in rates on line – 1/1/2008: 5-20% decreases in rate on line (limited sample)  Pricing and coverage driven by portfolio features  Detailed WC exposure data secures best terms

14 Guy Carpenter Workers Comp Cat Reinsurance Market  Improved Terrorism coverage – Including Domestic Terrorism coverage is standard – Ample coverage exists for TRIA exposures  Some programs have been structured as a stand-alone cover to coincide with TRIA legislation  Pricing for conventional attacks continues to improve  Increased capacity for NBCR perils; pricing remains expensive - Security remains the key issue

15 Guy Carpenter State of the Workers Comp Cat Reinsurance Market Near-Term Outlook  During the second quarter of 2007 the Property Cat market has demonstrated softening (and has continued through 1/1/08 and beyond) – Property decreases largely driven by lack of hurricanes  Rating agencies have increased scrutiny on carriers’ WC exposures from catastrophes (natural and man-made). – Will this translate into pressure to purchase additional catastrophe protection?  Will TRIA’s increasing carrier deductible and uncertainty regarding the program’s long-term viability lead to more reinsurance placements and additional NBCR capacity?  Recent events have caused some reinsurers to become concerned about a WC “mega-event” – frequency and severity of 2006 and 2005 hurricanes, 2004 tsunami, potential for flu pandemic, 1906 SF earthquake repeat). – To date, these concerns have not translated to increased pricing or coverage limitations

16 Guy Carpenter State of the Workers Comp Cat Reinsurance Market January 1, 2008 Renewals  Overall, cedants are increasing reinsurance retentions – Looking to save on overall spend in preparation for the inevitable loss in volume as primary pricing declines – Over many LOBs, not just Workers Comp  Catastrophe: – Capacity was readily available – ROL reductions up to 20%+ – Slight increase in available limits for terror cover  Some reinstatements were allowed for price considerations  Working Layers: – Price softening with decreases of 5% - 10% – Desire to increase retentions