1. National Council of Self-Insurers 2014 Meeting Presented by Tom Hebson Vice President June 2, 2014

2. What we will discuss today Overall market issues and how these potentially impact the state of self insurance The dreaded “Development” and the impact of Medical Inflation on “Larger Claims” and some of the issues driving the increases Bankruptcies and posted security – deficiencies and desires When Regulators retire, liabilities do not cease existing

3. The Industry Press PC Insurers 2013 Profits and Profitability Reflect First Net Gains on Underwriting Since 2007- PCI Could Third Party Capital Transform the Reinsurance Market? – McKinsey Several workers comp insurers have ‘dangerously thin’ reserves – BI Insurance Industry Continuing to Release Reserves through 2014 – Guy Carpenter Recruiting the Insurance Industry’s Next Generation – P&C Digital

4. Industry Results Net income after taxes grew $63.8 Billion 10.3% overall rate of return Combined Ratio of 96.1 vs 102.9 Total Net Premiums Written = $477.7 Billion Record Surplus Level of $653.3 Billion Net Gains on Underwriting in past 55 years – only 12 times Less catastrophe losses in 2013 ($9Bn less than average and $22Bn less than 2012) $16 Billion in favorable prior year development

5. Catastrophe Reinsurance Worldwide Catastrophe Reinsurance Capacity - $300 Billion 16% of Capacity is provided by third party structures (up from 2% in the 1990’s) Primarily (80%)focused on property related disasters/event (Hurricanes, Earthquakes) Low interest rate environment and good returns may keep this strong as well as expand use of mechanism

6. WC Reserve Issues In the news -Tower Group, QBE, Liberty Mutual, Everest Re, Meadowbrook 10 Workers’ Comp carriers needed to strengthen reserves by $20 million or more in 2013 Additional reserve strengthening eroding available surplus WC Costs development should be carefully reviewed and appropriate reserves set aside for longer future payouts Despite the news… – Long Tail lines released more reserves for accident year 2012 than for accident year 2011.

7. Talent No sector is immune from the aging workforce-Carriers, Brokers, Regulators, TPA’s and Risk Management By 2018, it is estimated that 25% of the industry will have retired Long Tail business more susceptible to the loss of institutional knowledge Regulatory community is and will be seeing large retirements possibly exceeding 25% of their workforce Recruiting and Training seen as a key to future results Working with regulatory associations, key educational and support efforts must be initiated to maintain a strong regulatory environment

8. The impact of development Medical Development – Co-Morbidity – Opioids – Medical Advances – Complicated regulation and system structure – Overcrowded courts and or system – Presumption

9. The Impact of Medical Inflation

10. Recent Bankruptcies Delphi Automotive Group Prime Tanning Hostess City of Detroit

11. A new era of Security Impact of Bankruptcies – Underfunded obligations – Unfunded obligations Piercing the posted security What to do with the impact of Public Entity bankruptcies? What is the most efficient way of securing long tail exposures?

12. The impact of Security For the Employer – Maintains confidence level that obligations will be met in the event of default – May leverage balance sheet if required security and any accompanying LOC’s is a large amount – Long tail may slow down release of security over time suppressing cash flow and/or credit borrowing capacity For the Regulator – Improve protection for injured workers – Protect the SI Community – Protect State assets – Maintain State Viability

13. The impact of Security  It is all about losses, payroll and financial standing  Security is a function of losses, past and present, payroll and exposure trends and your credit worthiness  Controlling losses is a long term objective for improving an employer’s security requirements  Recent activities  Creation of alternative security options including modifying how credit is analyzed and appropriate security calculated  Utilization of an approach that allows security to be reviewed on a comprehensive basis and not just severally for a single employer  Streamlining of regulatory steps that allows for departments to do more with less

14. The impact of Security  Other pertinent issues from a regulatory perspective  Use of inside agreements including deductible buybacks, undisclosed indemnity agreements and other mechanisms  Multiple line, multiple state liabilities associated with self insuring  Claims suppression  The long tail nature of the business – is it adequately contemplated?

15. Questions?

16. Thank You