Workers Compensation Update Recent reforms and notable issues for reinsurers Gerald T. Yeung May 2007

2 Table of Contents  California – Impact of Reform3  California - Industry Results 4  California - Legislative / Regulatory Update8  California – Excess Loss Factors9  New York - Industry Results 10  New York – The Case for Reform 12  New York - Legislative Update13  Catastrophe Risk Management14

3 California Impact of Reform

4 California Industry Results

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7 Industry Reserve Deficiency (Redundancy) Based on WCIRB Estimated Ultimate Losses

8 California Legislative / Regulatory Update Legislative activity AB 1212 would direct DWC to increase PD benefits based on empirical studies AB 644 introduces stricter rules for medical utilization review AB 1073 eases caps on chiropractic, physical and occupational therapy SB 942 provides more causes of action against employers who discriminate against workers comp claimants Regulatory activity Pressure on Division of WC to raise “future earnings capacity” multiplier Stiffer medical utilization review penalties Governor’s initiative for 24-hour medical care Court Cases Appeals Board reverses earlier adverse decisions regarding applicability of the old Permanent Disability schedule Apportionment decision pending Ratings under the new schedule may be rebutted by expert testimony

9 California Excess Loss Factors Current loss elimination ratios are as of 7/1/03 Update using same methodology Stochastic loss development On-level for impact of legislative changes on severity only Fitted severities above $2M per accident limit Proposed loss elimination ratios effective 7/1/07 are higher than current above $75,000 per accident limit  Large claims do not appear to benefit as much from reform Hazard groups not updated with this change

10 New York Industry Results Rate Change History The New York Insurance Department disapproved a filed increase of +7.5% proposed to be effective October 1, Source: New York Insurance Department

11 New York Industry Results Loss & LAE Ratios Source: Industry Annual Statement YearDirect Premiums Written ($000)Loss & LAE Ratio 20012,012, % 20023,384, % 20033,394, % 20043,430, % 20053,752, %

12 New York The Case for Reform Second highest average workers compensation costs in the country Lower than average benefits  Last increase in weekly benefits was in 1992 High permanent partial costs Lifetime benefits 12% of cases but 73% of costs High incidence of fraud in the system

13 New York Legislative Update Increase maximum weekly disability benefit from $400 per week to $600 per week by 2009 and index it to two-thirds of the State Average Weekly Wage thereafter  Raise the minimum weekly benefit from $40 to $100 Increase maximum weekly death benefit from $600 per week to $900 per week by 2009 and index it to the State Average Weekly Wage thereafter Impose a cap on permanent partial disabilities from 225 weeks to 525 weeks depending on degree of loss of wage-earning capacity  Allow claimants to petition to raise the cap in cases where their disability is 80% or greater Eliminate the Special Disability (Second Injury) Fund Increase civil and criminal penalties to combat workers compensation fraud Mandate fee schedules to manage costs for pharmaceuticals and durable goods Modify and review the role of the New York Compensation Insurance Rating Board (NYCIRB)

14 Catastrophe Risk Management Considerations Multi-claimant occurrences associated with industrial classifications (e.g. explosions, auto accidents) Get different views on catastrophic risk  Models differ in casualty rates, frequency assumptions  Do severities need adjustment? (e.g. medical inflation) Evaluate your data Employee count, construction, number of stories Required data granularity depends on peril insured (e.g. terrorism vs. earthquake)