1. OHIO BUREAU OF WORKERS COMPENSATION LOSS RESERVES PROCESS

2. BACKGROUND For many years, an actuarial consultant has provided an annual loss reserve study with quarterly updates – Oliver Wyman provided this study through 12/31/09 – Deloitte began providing this study in 2010 – Study mandated by House Bill 100- required at least every two years – Study is primarily used in determining the financial position of the OBWC – BWC did not have an actuarial staff prior to 2007 – Today BWC has an actuarial staff but it is inadequate to do a full reserve study on its own – The reserve study is public information – Currently provided each quarter with an annual update for June 30

3. Operational Approaches Data is entered into data system when payments are authorized to be made. – Indemnity payments originate in a claims system when a claims service specialist authorizes a payment to be made. There are no traditional claims adjusters at BWC. – BWC has a medical payments system which records payments when a claims service specialist authorizes them. – Other payments are made on a separate system The Financial Reporting Unit validates payments and categorization. The Actuarial Division validates the new diagonal every year. This data compilation is provided to the consulting actuaries. The consulting actuaries perform quality checks The auditors perform quality checks.

4. Reserve Governance Process The study is presented to the BWC Actuarial Committee – The Committee approves the study and recommends the study to the Board The results of the study are used in the audited financial statements – The independent auditor also has a credentialed actuary review the reserves. The BWC does not file statutory statements but the financial statements are audited and provided to the state auditor The reserves are used in the funding ratio approach of the Board to solvency.

5. USE OF A DISCOUNT RATE The Bureau prepares loss reserves on a discounted and undiscounted basis A discount rate has been used for at least 30 years All reserves are discounted, not merely certain reserves as under statutory or GAAP accounting The same discount rate is applied to all reserves with the rate changed annually The most current discount rate is 4% starting on July 1, 2010 There is no split in discount rate by accident years as with some companies Complies with Ohio Revised Code that requires Administrator to maintain rates at the lowest possible level to ensure a solvent state fund.

6. AVAILABILITY OF RESERVE STUDIES All reserve studies are a matter of public record and are available to interested parties through the Bureau A large volume set of information supports the current reserve evaluation Each study is well documented in large binders and on a disk

7. Summary of reserve levels in millions(undiscounted/discounted at 4%) at 6/30/10 State insurance fund: $24,809/$15,718 Disabled workers relief fund: $3,514/$2,044 Coal Workers Fund: $182/$74 Self Insured Employers Guaranty Fund : $1,929/$889 Public Works Fund: $5/$3 Marine Industry: $4/$2 Admin Cost Fund:$1,794$/1,116 Total: $32,237/$19.847

8. Notes on Methodology Traditionally paid loss has been used exclusively – Loss reserves were not sufficiently reliable to set loss reserves for the incurred method – A new automated case loss reserving methodology was introduced in 2008 that promises availability of incurred losses that will be used as a secondary method when the reserves are sufficiently mature Medical ultimates determined separately from indemnity ultimates Loss adjustment expense developed separately from losses Initial estimate for fiscal year ending 6/30/xx derived from data as of March 31 (new in 2010)

9. SELECTION OF THE DISCOUNT RATE In the end, the selection is made by the administrator with the concurrence of the Board The selection is made in the 4 th fiscal quarter so it can be used in the ratemaking calculation as well as the reserve calculation in the upcoming year The investment officer must also concur as to his view on the ability to earn that level of investment income over a long period of time. BWC uses a rolling five year average risk free discount rate in setting the discount rate In recent years, the discount rate has been declining about.5% per year. 2003-2004: 5.50% 2005-2006: 5.25% 2007: 5% 2008: 4.5% 2009 and subsequent: 4% The rate was 7% from 1980 to 1996 In recent years there have only been declines in the discount rate which has served to increase the discounted reserves. GASB recommends that an entity’s settlement rate and investment yield rate be used in setting the discount rate. Average duration of the liabilities is about 10.32 years This closely matches the duration of Treasury bonds with a maturity of 17 years.

10. ORGANIZATION OF DATA BY ENTITY INSURED State Insurance Fund – Private employers – Public Employers- Taxing districts – Public employers- state agencies – Self insured – Health Partnership (loss adjustment expense) – Health partnerships with managed care organizations are unique to Ohio in that almost every employer is associated with a managed care partnership Disabled workers relief fund – Private employers – Public employers – Public employers-state agencies Coal workers Self insuring guaranty fund Public work relief Marine industry Administrative cost fund

11. ORGANIZATION OF DATA BY TYPE OF LOSS TYPE Medical only Hospital Physician Pharmacy Chiropractor Rehabilitation Medical only All other Indemnity Temporary total Permanent total Death Permanent partial Lump sum settlement Others Additional awards Data available over a long time period

12. Extensive analysis of expected versus actual Paid claim dollars Incurred claim dollars Ultimate loss Paid claim counts Reported claim counts

13. Types of methodologies used Paid loss development (primary) Incurred loss development (new and very secondary) Incurred B-F Paid B-F Paid cumulative frequency severity accident year development Paid incremental frequency severity accident year development Paid incremental frequency severity calendar year development Paid incremental trended frequency severity method Incremental index payment Not all methods are used on each segment

14. Data Used Historical state insurance fund payroll Historical incremental paid losses by accident year evaluated quarterly Claim reserves from 2 claim reserving systems Incremental paid losses for accident years 1977 through 2007 evaluated annually from 1992 to 2007 (change in system in 1992 limited ability to go back in time in detail) Historical incremental paid loss triangles for 1965 through 1995 with some data missing A series of prior actuarial reports from 2002 through 2009 A variety of adjustments were made to the data

15. MORTALITY STUDY Latest study conducted in March 2010- prior study in 2002 Mortality period March 15, 1916 to March 15, 2010 Used for those benefits such as permanent total disability that depend upon the mortality of the injured workers PTD has the largest amount of data Mortality is the number of deaths for a specified age over the exposures for that age Complicated mathematics used such as Whittaker-Henderson graduation formula for PTD ages 45 to 95 Six categories used – PTD-Public- Regular accidents – PTD-Private- Regular accidents – PTD-Occupational disease-Lung – PTD-Occupational disease-Non lung – Death- Public – Death- Private – Current discount rate used

16. Characteristics of benefits Indemnity payments – Fixed at 2/3 of worker’s weekly wage at time of injury – Adjustment made in disabled workers relief fund – Calculated as a percentage of weeks of benefits Medical – Paid at time of treatment with the expense at that time – Influenced by inflation and utilization – Changes in cost affect all accident years

17. Issues in the Methodology Role of Health Partnership Plan and Managed Care Organizations in Controlling Costs Proper measurement of benefit changes Proper measurement of the liberality changes in the Industrial Commission Administrative costs are on a pay as you go basis Increasing use of lump sum settlements in recent years which distorts patterns in the other categories of loss Others