CALIFORNIA WORKERS COMPENSATION September 2001 A System Under Siege Presented by: Bill Miller, FCAS, MAAA Tillinghast–Towers Perrin (949)

CLRS0901.PPT/crf/Irvine 1 Pre-Open Rating Period 1993 to 1994 uHeavily Regulated Pricing vNo Pricing Deviations vOnly Pricing Competition through Dividends uProfitable Results uStrong Reserves uDeclining Frequency

CLRS0901.PPT/crf/Irvine 2 Pre-Open Rating Period 1993 to 1994 uInsurance Market vNon-Concentrated Market vStrong California Domestic Market vHeavy Capitalization (Premium/Surplus < 1.0) vHealthcare Companies Moving into Market

CLRS0901.PPT/crf/Irvine 3 First Years Of Open Rating 1995 to 1996 uGreat Pricing Flexibility uHeavy Price Competition

CLRS0901.PPT/crf/Irvine 4 Rate Level Index

CLRS0901.PPT/crf/Irvine 5 First Years Of Open Rating 1995 to 1996 uGreat Pricing Flexibility uHeavy Price Competition uPremium Decline

CLRS0901.PPT/crf/Irvine 6 $ $ Written Premium

CLRS0901.PPT/crf/Irvine 7 First Years Of Open Rating 1995 to 1996 uGreat Pricing Flexibility uHeavy Price Competition uPremium Decline uContinued Declining Frequency uCalendar Year and Accident Year Results Deteriorating uReserve Deficiencies

CLRS0901.PPT/crf/Irvine 8 First Years Of Open Rating 1995 to 1996 uInsurance Market vShifts through Withdrawals/Acquisitions/Expansions vHMO’s Move Out of Market vStill Heavy Capitalization (Premium/Net Worth =.6) vFavorable Investment Returns

CLRS0901.PPT/crf/Irvine 9 Open Rating 1997 to 2000 uContinued Heavy Price Competition

CLRS0901.PPT/crf/Irvine 10 1/1/891/1/901/1/911/1/921/1/931/1/9410/1/ Avg Avg Avg Avg Avg Avg. California Workers Compensation Rate Level Index (January 1989 Rate Level = 100%) as of 12/31/2000

CLRS0901.PPT/crf/Irvine 11 Open Rating 1997 to 2000 uContinued Heavy Price Competition uPremium Growth with Expanding Economy uContinued Declines in Frequency

CLRS0901.PPT/crf/Irvine 12 % Change As of 12/31/2000 Estimated Percentage Change In Indemnity Claim Frequency

CLRS0901.PPT/crf/Irvine 13 Open Rating 1997 to 2000 uContinued Heavy Price Competition uPremium Growth with Expanding Economy uContinued Declines in Frequency uSharp Severity Increases

CLRS0901.PPT/crf/Irvine 14 Loss Severity As of 12/31/2000 Estimated Ultimate Total Loss Per Indemnity Claim

CLRS0901.PPT/crf/Irvine 15 Open Rating 1997 to 2000 uContinued Heavy Price Competition uPremium Growth with Expanding Economy uContinued Declines in Frequency uSharp Severity Increases uInadequate Pure Premium Rates

CLRS0901.PPT/crf/Irvine 16 Estimated Inadequacy Of Approved Pure Premium Rates

CLRS0901.PPT/crf/Irvine 17 California Paid Medical Loss Development Factors Source: WCIRB of California. Age in Months 3/973/983/993/003/01 Trended — Selected Reported as of 27/15 39/29 51/

CLRS0901.PPT/crf/Irvine 18 Observations About Growth in Loss Development uOccurring across all types of indemnity claims, industries, and natures of injury uAverage permanent disability rating has increased markedly uFrequency of stipulated awards has been increasing uSettlements of “future medical” driving up severity uClaims with attorney involvement have higher development uSettlement “premium” increasing on permanent disability awards

CLRS0901.PPT/crf/Irvine 19 Open Rating 1997 to 2000 uContinued Heavy Price Competition uPremium Growth with Expanding Economy uContinued Declines in Frequency uSharp Severity Increases uInadequate Pure Premium Rates uRapidly Deteriorating Industry Results

CLRS0901.PPT/crf/Irvine 20 Percentage of Earned Premium 94% 106% 114% 96% 81% 93% 125% 137% 147% 161% 144% California Workers Compensation Accident Year Combined Loss And Expense Ratios as of 12/31/2000

CLRS0901.PPT/crf/Irvine 21 Open Rating 1997 to 2000 uContinued Heavy Price Competition uPremium Growth with Expanding Economy uContinued Declines in Frequency uSharp Severity Increases uInadequate Pure Premium Rates uRapidly Deteriorating Industry Results uGrowing Reserve Deficiencies

CLRS0901.PPT/crf/Irvine 22 Losses ( in billions) As of 12/31/2000 Difference Between Estimated Ultimate Losses And Reported Losses

CLRS0901.PPT/crf/Irvine 23 Open Rating 1997 to 2000 uInsurance Market vShifts through Withdrawals/Acquisitions/Insolvencies vHMOs Leaving Market vVery Low Reinsurance Rates vHigh Capitalization & Investment Returns

CLRS0901.PPT/crf/Irvine 24 Market Concentration Ratios

CLRS0901.PPT/crf/Irvine 25 Note: “California Specialty Insurers” are defined as private insurers who write at least 80% of their Workers Compensation business in California. Market Share By Type Of Insurer

CLRS0901.PPT/crf/Irvine 26 Future Outlook u1999 — Record Combined Ratio -7% Loss of Equity u2000 — Rates Up Almost 20%, Premium Up 30% uSharply Increasing Severity/Prior Year Loss Dev. uRelatively Little Improvement Expected in 2000 u2001 — Loss Cost Rates Up 10% uContinued Reserve Inadequacies uLikelihood of Large Benefit Increases

CLRS0901.PPT/crf/Irvine 27 Future Outlook uPotential Employer Backlash uInsurance Market vContinued Shift through Acquisitions/Regulatory Action vLittle Cheap Reinsurance/HMO’s out of WC vHigh Capitalization vPotentially Reduced Investment Returns