ACTUARIAL SERVICES ADVISORY SOP 97-3 & Other Balance Sheet Reserves: The Devil’s in the Details Las Vegas September 2004

2 SOP 97-3 & Other Balance Sheet Reserves: The Devil’s in the Details Moderator: Richard A. Hofmann, Senior Manager, KPMG LLP SOP 97-3, Focus on DOL Special Fund William G. Stanfield, Actuarial Manager, KPMG LLP Other Insurer Concerns: Claus S. Metzner, Actuary, Milliman USA SAO & Reinsurer Concerns – Sharon C. Carroll, Manager, KPMG LLP Questions & Answers

3 SOP 97-3: Why Is This An Issue? Advent of Large Deductible Policies Designed to Reduce Taxes & Assessments Self Insurers Still Taxed on Full Premiums Caused Increase in Assessment Rates, Especially in Premium Based States Many Employers Abandon Self-Insurance for Large Deductibles, Especially in Florida Statutory Caps on Assessment Rates Cause Failure of Funding Mechanisms

4 SOP 97-3: Why Is This An Issue? Rapid Expansion of Competitive Rating Rating Bureaus Publish Loss Costs, not Rates Self Insurers Taxed Using Fabricated Rates Insurers Taxed Based on Lower Net Premiums ADA & Second/Subsequent Injury Funds Many States Terminate Eligibility for Recoveries Some Employers Are Taxed But Are Ineligible to Receive Recoveries AICPA SOP 97-3 Reserve Requirements Legislative Activity to Alter Assessments Insurers Push for Premium Based Assessments

5 Growth of Large Deductibles

6 Summary of Assessments WC Administrative Funds Second/Subsequent Injury Funds Guaranty Funds Other Funds OSHA/Safety/Loss Prevention Programs Fraud Unit/Insurance Department Funding Major Medical/Vocational Rehab Programs Occupational Disease Funds (IN, MI, WA) Self-Insurance Units (NY, RI, TX) Statistical Advisory Organization (ME)

7 WC Administrative Funds General Revenue (9) AK, CA(80%), HI, IL, IN, IA, MI, MN, UT Split Funding Mechanisms (4) CA(20%), ME, MT, OK, VT Exposure Based Assessments (2) - MD, NM Premium Based Assessments (18) AR, AZ, CA(I), CO, FL, GA, ID, KY, ME(I), MA, MO, MT(I), NE, NC, OK(I), OR, RI, SC, TN, TX, VA, VT(I), WV Loss Based Assessments (14) AL, CA(SI), CT, DE, DC, KS, LA, ME(SI), MS, MT(SI), NV, NH, NY, OH, OK(SI), PA, RI(NDD), VT(SI), WA, WI Unclear (2) - NJ, SD No Self-Insurance (2) - ND, WY

8 Overview of Assessment Bases Conflicting Goals: Equity vs. Simplicity Split Funding Mechanisms Exposure Based Assessments Premium Based Assessments Estimated with True-Ups Estimated no True-Ups Actual with Deferrals Actual no Deferrals Loss Based Assessments

9 Premium Based Assessments: Several Types Payrolls by Class (Needs to Be Audited) xRates by Class (from Bureau/Company Rate Manual) =Manual Premium xExperience Modification (Needs to Be Verified) +Expense Constant =Bureau Standard Premium (Applies to Self Insurers) xRate Deviations and/or Schedule Credit/Debits =Insurer Standard Premium -Premium Discounts, Dividends or Retro Adjustments =Collected (Net) Premium

10 Loss Based Assessments Total Paid Losses (20): WCA Only: DE, ME, MS, VT SIF Only: GA, HI, IA, NE, SC, SD WCA & SIF: AL, CT, DC, KS, LA, MT, NV, NH, PA, WA Indemnity Paid Losses (11): WCA Only: CA, WI SIF Only: AK, ID, IL, IN, MI, MN, NJ WCA & SIF: NY, OH Percent of Awards: Death: MS, OK(WCA), WI($5000) PTD: OK(WCA,SIF) PPD: NC, OK(WCA,SIF), WI($7000) No Dependency Death Claims: CA(SIF), NM, RI, TX

11 SOP 97-3 Assessments: General Overview Assessment Bases Are Constantly Changing Several Types of Funds: Administrative Funds Second Injury Funds Guaranty Funds Several Types of Assessment Bases: Premium vs. Losses Estimated vs. Actual True-Ups or Deferrals Actuarial Input Needed to Avoid Overpayment

12 Presenter’s contact details Richard A. Hofmann, ACAS, MAAA Senior Manager, KPMG LLP (314) The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2004 KPMG LLP, a member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A G/SL