1. 2003 National Council on Compensation Insurance, Inc. 1 Workers Compensation Residual Market Overview Cliff Merritt NCCI Residual Markets Helena, Montana November 7, 2003

2. 2003 National Council on Compensation Insurance, Inc. 2 n In order to ensure that all employers have some means of complying with their statutory obligations, many states have created a market of last resortthe residual market. n The Residual Market within a particular state can be in the form of: NCCIs WCIP (Workers Compensation Insurance Plan) Assigned Risk Reinsurance Pool State Fund JUA (Joint Underwriting Association) Alternative Assigned Risk Plan Residual Markets

3. 2003 National Council on Compensation Insurance, Inc. 3 NCCIs WORKERS COMPENSATION INSURANCE PLAN (contd) n The PLAN is the set of rules that govern the administration of the residual market and are approved by the state regulatory authority the random and equitable assignment of employers to assigned carriers (i.e., direct assignment and servicing carriers) administration eligibility of employers participation of carriers policy issuance requirements duties and responsibilities of the Plan Administrator and assigned carriers

4. 2003 National Council on Compensation Insurance, Inc. 4 NCCIs WORKERS COMPENSATION INSURANCE PLAN (contd)) NCCI provides Plan Administration services in the following states as of 1/2003: AL, AK, AR, AZ, CT, DE, DC, GA, ID, IN, IA, IL, KS, MS, NH, NJ, NM, NV, NC, OR, SC SD, VA, VT NCCI also provides Pool Administration services in the following states: AL, AK, AR, AZ, CT, DE, DC, GA, ID, IN, IA, IL, KS, MA, MI, MO, NH, NJ, NM, NV, NC, OR, SC, SD, VA, VT

5. 2003 National Council on Compensation Insurance, Inc. 5 RESIDUAL MARKET WORKERS COMPENSATION REINSURANCE POOLS The POOL is a contractual agreement among participating insurers to share in the operating results arising out of Plan assignments. The largest reinsurance pooling arrangement is the National Workers Compensation Reinsurance Pool (NWCRP or National Pool or Pool) for which NCCI serves as Administrator.

6. 2003 National Council on Compensation Insurance, Inc. 6 RESIDUAL MARKET WORKERS COMPENSATION REINSURANCE POOLS (contd) Participating companies in the National Pool share in the operating results of the Pool for those states where they are participating, in proportion to their share of the total voluntary workers compensation insurance premium in that state.

7. 2003 National Council on Compensation Insurance, Inc. 7 STATE RESIDUAL MARKET MECHANISMS STATE STATE FUNDRESIDUAL MARKET Arizona Competitive NWCRP California Competitive State Fund Colorado Competitive State Fund Hawaii Competitive State Fund Idaho Competitive NWCRP Kentucky Competitive State Fund Louisiana Competitive State Fund Maine Competitive State Fund Maryland Competitive State Fund Minnesota CompetitiveMN AR Pool Missouri Competitive Alternative Montana Competitive State Fund New Mexico Competitive NM AR Pool

8. 2003 National Council on Compensation Insurance, Inc. 8 STATE RESIDUAL MARKET MECHANISMS STATE STATE FUNDRESIDUAL MARKET New York Competitive State Fund North Dakota Monopolistic State Fund Ohio Monopolistic State Fund Oklahoma Competitive State Fund Oregon Competitive NWCRP Pennsylvania Competitive State Fund Rhode Island Competitive State Fund South Carolina Competitive NWCRP Texas Competitive State Fund Utah Competitive State Fund Washington Monopolistic State Fund West Virginia Monopolistic State Fund Wyoming Monopolistic State Fund

9. 2003 National Council on Compensation Insurance, Inc. 9 STATE RESIDUAL MARKET MECHANISMS STATESTATE FUNDRESIDUAL MARKET Alabama None NWCRP Alaska None NWCRP Arkansas None NWCRP Connecticut None NWCRP Delaware None NWCRP D.C. None NWCRP Florida None JUA Georgia None NWCRP Illinois None NWCRP Indiana None NWCRP Iowa None NWCRP Kansas None NWCRP Massachusetts None MA Pool

10. 2003 National Council on Compensation Insurance, Inc. 10 STATE RESIDUAL MARKET MECHANISMS STATESTATE FUNDRESIDUAL MARKET Michigan None MI Facility/Pool Mississippi None MS AR Pool Nebraska None Alternative Nevada None NWCRP New Hampshire None NWCRP New Jersey None NWCRP North Carolina None NWCRP South Dakota None NWCRP Tennessee None Alternative Vermont None NWCRP Virginia None NWCRP Wisconsin None WI Pool

11. 2003 National Council on Compensation Insurance, Inc. 11 Premium Size ProfilePolicy Year 2002 Assigned Risk in NCCI-Administered Plan States Montana – Total Market

12. 2003 National Council on Compensation Insurance, Inc. 12 States With Highest Residual Market Share Calendar Year 2002 Residual Market Premium as Percentage of Total Direct Premiums Written

13. 2003 National Council on Compensation Insurance, Inc. 13 States With Lowest Residual Market Share Calendar Year 2002 Residual Market Premium as Percentage of Total Direct Premiums Written

14. 2003 National Council on Compensation Insurance, Inc. 14 RESIDUAL MARKET PROGRAMS # States (out of 22) Surcharge and Differential Programs22 Take-Out Credit Program16 Removal of Premium Discounts16 Loss-Sensitive Rating Plan15 Assigned Risk Adjustment Program15

15. 2003 National Council on Compensation Insurance, Inc. 15 MONTANA ISSUES Adequate Rates to Prevent Transfer of Liabilities to the Industry – Self Funded Residual Market Number, Profile, Historical Losses of Residual Market Accounts Needed for Rating Purposes Time – Need to Implement Rules, Rates and Select Servicing Carriers (1 year) Claimant and Policyholder Service is Important Need Approval for Reinsurance from NWCRP Board