1. Page 1 Recording of this session via any media type is strictly prohibited. Page 1 Loss Forecasting for Beginners – Know Thy Enemy Stephen L Upshaw, Vice President of Risk Management, Equity Residential Ann M Conway FCAS MAAA CERA, Director, Towers Watson Steven W Sachs, ARM, Executive Vice President, Director Real Estate and Hotel Practice, Willis Group

2. Page 2 Recording of this session via any media type is strictly prohibited. Session Objectives To view Loss Forecasting in the context of the Risk Management Process Gain ability to understand how insurers (underwriters) and actuaries set pricing To effectively be able to communicate the “Big Picture” to management as well as actions required to effect change Provide use friendly and practical information that session attendees can use

3. Page 3 Recording of this session via any media type is strictly prohibited. “ It is an Opportunity to Communicate with Management Using Their Language 1.Why Forecast Loss? A. It enables Risk Managers to effectively communicate the big picture to management and then to focus on the interventions or actions that can change the outcome B. It is how insurers/actuaries set pricing C. Credible data is a Risk Manager’s friend and can (unfortunately) be trusted.

4. Page 4 Recording of this session via any media type is strictly prohibited. Loss Forecasting for Beginners 2. How Do We Forecast Losses A.Collect Quality Data B.Loss Development i. Historical ii. Industry C.Loss Projections i. Importance of Relevant Exposure Data ii. Loss Trending Factors

5. Page 5 Recording of this session via any media type is strictly prohibited. Loss Forecasting for Beginners Loss Development Purpose Predicts Future Loss Trends Improve Analysis of Historical Losses Loss Development Factors Traces Historical Growth Over Time

6. Page 6 Recording of this session via any media type is strictly prohibited. Case History Tom Doe Incident occurred at a Shopping Center Date of Loss June 15, 2004 Background Claimant was riding a motorcycle in parking lot at 5 AM, hit a light pole and was killed. It was suspected that claimant was under the influence of alcohol or drugs.

7. Page 7 Recording of this session via any media type is strictly prohibited. Case Study Tom Doe Physical Defect Improper Lighting was alleged Reserve History 06/24/2004$2,500 7/11/2005$175,000 Settlement 10/09/2008 – Property Owner’s portion of jury award was $290,000 An additional $38,650 was spent in legal fees

8. Page 8 Recording of this session via any media type is strictly prohibited. Loss Development Limitations Does Not Reflect Future Changes In: o Operations o Legal Environment o Societal Changes o Inflation o Case Reserve Adequacy

9. Page 9 Recording of this session via any media type is strictly prohibited. Loss Forecasting for Beginners Other Issues that it allows you to communicate A.Premium Allocation Process I. Methodology II. Loss Sensitivity

10. Page 10 Recording of this session via any media type is strictly prohibited. Loss Forecasting for Beginners How Does One Change the Results A.Communication B.Accountability C.Loss Prevention D.Loss Reduction E.Goals and Objectives

11. Page 11 Recording of this session via any media type is strictly prohibited. Standards, Accountability and Measurement

12. Page 12 Recording of this session via any media type is strictly prohibited. Case Study: Hook’em-Slice’em Industries Hook’em-Slice’em Industries, manufacturers of golf clubs, is a qualified self-insurer in the State of Minnefornia since January 1, 2004. Minnefornia requires that Hook’em-Slice’em Industries maintain a Letter of Credit (LOC) to secure the liabilities in its self-insured workers compensation program. The outstanding amount of the LOC is set at the lower of 175% of case reserves or 110% of the unpaid losses (case plus IBNR). Your CFO has asked you to evaluate which of these two methods produces the lowest indicated LOC for the company. The CFO has also asked you to provide an estimate of the expected ultimate losses for 2014 claims for budget analysis.

13. Page 13 Recording of this session via any media type is strictly prohibited. Case Study: Hook’em-Slice’em Industries In order to provide this information, you need to calculate the total program reserves as of December 31, 2013, and also to project ultimate losses for 2014 claims based on historical ultimate losses. Due to the short timeframe you have to work under, you have elected to perform these calculations internally, rather than use your outside actuary. Based on the information contained in the attached sheets and following the methodologies outlined on these sheets, calculate the indicated LOCs as of December 31, 2013 under the two methodologies and project ultimate losses for 2014.

14. Page 14 Recording of this session via any media type is strictly prohibited. Miscellaneous Information 1.Your claims administration firm (TPA) changed as of January 1, 2008. You are confident that reserves are stronger under the new TPA. 2.The State of Minnefornia passed workers compensation reform legislation in 2008 which was expected to lower costs by 10% in 2010. 3.Your self-insured retention (SIR) is $500,000. The SIR has not changed since 2004. 4.Losses are inflating at 4% per year and payroll is inflating at 3% per year

15. Page 15 Recording of this session via any media type is strictly prohibited. Important Definitions Paid Losses Case Reserves Reported Losses IBNR - Incurred But Not Reported Accident Year Ultimate Losses Unpaid Losses

16. Page 16 Recording of this session via any media type is strictly prohibited. Important Relationships Reported Loss = Paid Loss + Case Reserve Ultimate Loss = Reported Loss + IBNR Ultimate Loss = Paid Loss + Case Reserve + IBNR Unpaid Losses = Ultimate Losses - Paid Loss

17. Page 17 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Reported Losses ($000’s) As of (months) - Latest evaluation is December 31, 2013 1224364860728496108 Accident Year 2005502.5674.9751.3791.2809.7817.9821.3823.0 2006527.6684.6768.0804.6820.5828.6833.5835.1 2007553.9741.0823.5866.7885.7894.2898.2 2008581.7745.6845.2890.3909.7918.8 2009668.9801.5841.0864.5883.5 2010702.3842.1885.7907.8 2011737.5882.0926.1 2012774.3925.7 2013875.3

18. Page 18 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Reported Losses (000’s) As of (months) - Latest evaluation is December 31, 2013 1224364860728496108 Accident Year 2005502.5674.9751.3791.2809.7817.9821.3823.0 2006527.6684.6768.0804.6820.5828.6833.5835.1 2007 553.9741.0823.5866.7885.7894.2898.2 2008581.7745.6845.2890.3909.7918.8 2009668.9801.5841.0864.5883.5 2010702.3842.1885.7907.8 2011737.5882.0926.1 2012774.3925.7 2013875.3 Across a row - reported losses for a particular accident year evaluated every 12 months Down a column - reported losses for each accident year evaluated at a specific age (eg. 36 months) Along a diagonal - reported losses for each accident year evaluated at a specific date (eg. December 31, 2013)

19. Page 19 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Calculation of Loss Development Factors 12 to 2424 to 3636 to 4848 to 6060 to 7272 to 8484 to 9696 to 108 Accident Year 20051.3431.1131.0531.0231.0101.0041.0021.000 20061.2981.1221.0481.0201.0101.0061.002 20071.3381.1111.0521.0221.0101.004 20081.2821.1341.0531.0221.010 20091.1981.0491.0281.022 2010 20111.1961.050 20121.196 2013 2007 Evaluated at 48 months AY 2007 LDF 36 - 48 months=2007 Evaluated at 36 months 866.7 1.052=823.5

20. Page 20 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Calculation of Loss Development Factors 12 to 2424 to 3636 to 4848 to 6060 to 7272 to 8484 to 9696 to 108 Accident Year 20051.3431.1131.0531.0231.0101.0041.0021.000 20061.2981.1221.0481.0201.0101.0061.002 20071.3381.1111.0521.0221.0101.004 20081.2821.1341.0531.0221.010 20091.1981.0491.0281.022 20101.1991.0521.025 20111.1961.050 20121.196 2013 2007 Evaluated at 48 months AY 2007 LDF 36 - 48 months=2007 Evaluated at 36 months 866.7 1.052=823.5

21. Page 21 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Calculation of Loss Development Factors 12 to 2424 to 3636 to 4848 to 6060 to 7272 to 8484 to 9696 to 108108 to Ult Accident Year 20051.3431.1131.0531.0231.0101.0041.0021.000 20061.2981.1221.0481.0201.0101.0061.002 20071.3381.1111.0521.0221.0101.004 20081.2821.1341.0531.0221.010 20091.1981.0491.0281.022 20101.1991.0521.025 20111.1961.050 20121.196 2013 Tail Factors Average Last 31.1971.0501.0351.0221.0101.0051.0021.000 All Years1.2561.0901.0431.0221.0101.0051.0021.000 Industry1.2201.0601.0391.0211.0101.0041.0021.0011.010 Selected1.2001.0501.0301.0221.0101.0051.0021.0011.010

22. Page 22 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Calculation of Loss Development Factors Period of Development 12 to 2424 to 3636 to 4848 to 6060 to 7272 to 8484 to 9696 to 108108 to Ult Selected1.2001.0501.0301.0221.0101.0051.0021.0011.010 Period of Development 12 to Ult24 to Ult36 to Ult48 to Ult60 to Ult72 to Ult84 to Ult96 to Ult108 to Ult Cumulative 1.1371.0821.0511.0281.0181.0131.0111.010 36 to Ult LDF=(36 to 48) x (48 to 60) x … (96 to 108) x (108 to Ult) =(36 to 48) x (48 to Ult); because (48 to Ult) = (48 to 60) x (60 to Ult) 1.082=1.03 x [1.022 x 1.01 x 1.005 x 1.002 x 1.001 x 1.01] =1.03 x [1.051]

23. Page 23 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Calculation of Loss Development Factors Period of Development 12 to 2424 to 3636 to 4848 to 6060 to 7272 to 8484 to 9696 to 108108 to Ult Selected1.2001.0501.0301.0221.0101.0051.0021.0011.010 Period of Development 12 to Ult24 to Ult36 to Ult48 to Ult60 to Ult72 to Ult84 to Ult96 to Ult108 to Ult Cumulative1.3641.1371.0821.0511.0281.0181.0131.0111.010 36 to Ult LDF=(36 to 48) x (48 to 60) x … (96 to 108) x (108 to Ult) =(36 to 48) x (48 to Ult); because (48 to Ult) = (48 to 60) x (60 to Ult) 1.082=1.03 x [1.022 x 1.01 x 1.005 x 1.002 x 1.001 x 1.01] =1.03 x [1.051]

24. Page 24 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program What Does a Cumulative Loss Development Factor Mean? Age-to-Age Factors Estimate losses by one period forward Cumulative Loss Development Factors age losses to Ultimate Hook ‘em – Slice ‘em Industries Workers Compensation Losses Loss at 36 monthsx36-to-48 factor=Estimated Loss at 48 months Loss at 48 monthsx48-to-60 factor=Estimated Loss at 60 months ::: Loss at 108 monthsx108-to-Ult factor=Estimated Ultimate Loss Loss at 36 monthsx(36-to-48) x (48-to-60) x … (108-to-Ult)=Estimated Ultimate Loss Loss at 36 monthsx36-to-Ult factor= Estimated Ultimate Loss for all losses which occurred 24- 36 months ago 36 to Ultimate Loss Calculation : 926.1x1.03 x 1.022 x … 1.01= 1,002.4 Estimated Ultimate Loss for all losses which occurred 24- 36 months ago 926.1x1.082= 1,002.4

25. Page 25 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program What Does a Cumulative Loss Development Factor Mean? Percent Reported = _________1_____________ Cumulative LDF Ultimate % Reported = 100% Loss at 108 months x 1.010 = Ultimate Losses Thus at 108 months losses are At 96 months losses are And at 36 months 1 =99.0% Reported 1.010 1 =98.9% Reported 1.011 1 = 92.4% of Ultimate Losses have been reported 1.082

26. Page 26 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Cumulative Percentage Reported

27. Page 27 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Projection of Ultimate Losses ReportedAge inLossEstimated AccidentLossesMonthsDevelopmentUltimate Yearat 12/31/13 FactorLosses (1)(2)(3)(4) = (1) x (3) 2005823.01081.010 831.2 2006835.1961.011 844.3 2007898.2841.013 909.9 2008918.8721.018 935.4 2009883.5601.028 908.5 2010907.8481.051 954.0 2011926.1361.082 1,002.4 2012 24 2013875.3121.364 1,193.8 Total Case Reserve at December 31, 2013 (5) 1,709.8 Paid Loss at December 31, 2013 (6) = [Total (1) - (5)] Unpaid Losses (7) = [Total (4) - (6)] IBNR (8) = [Total (4) - (5) - (6)]

28. Page 28 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Projection of Ultimate Losses ReportedAge inLossEstimated AccidentLossesMonthsDevelopmentUltimate Yearat 12/31/13 FactorLosses (1)(2)(3)(4) = (1) x (3) 2005823.01081.010 831.2 2006835.1961.011 844.3 2007898.2841.013 909.9 2008918.8721.018 935.4 2009883.5601.028 908.5 2010907.8481.051 954.0 2011926.1361.082 1,002.4 2012925.7241.137 1,052.1 2013875.3121.364 1,193.8 Total 7,993.508,631.7 Case Reserve at December 31, 2013 (5)1,709.8 Paid Loss at December 31, 2013 (6) = [Total (1) - (5)] 6,283.7 Unpaid Losses (7) = [Total (4) - (6)] 2,348.0 IBNR (8) = [Total (4) - (5) - (6)] 638.2

29. Page 29 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Ultimate Losses – Calculation of LOC Amount Letter of Credit (LOC) is the lesser of Methods A and B Method A 175% of Case Reserves= x175% Indicated LOC= Method B 110% of Unpaid Losses= x110% Indicated LOC= Selected LOC

30. Page 30 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em Industries Workers Compensation Program Ultimate Losses – Calculation of LOC Amount Letter of Credit (LOC) is the lesser of Methods A and B Method A 175% of Case Reserves= 1,709.8 x175% Indicated LOC= 2,992.2 Method B 110% of Unpaid Losses= 2,348.0 x110% Indicated LOC= 2,582.8 Selected LOC 2,582.8

31. Page 31 Recording of this session via any media type is strictly prohibited. Hook’em-Slice’em Industries Workers Compensation Program Questions to Answer 1.Explain why the loss development factors for 2009 and subsequent appear to be lower than prior years. What effect might this have on the projections using loss development? 2.Why are no development factors shown for the 2013 year? 3.Discuss how the stronger case reserves under the new administrator could affect the calculation of the LOC using case reserves. 4.What effect will a mis-estimation of the benefit level adjustment have on selected losses for 2010?

32. Page 32 Recording of this session via any media type is strictly prohibited. Homework – Estimate Losses for 2014

33. Page 33 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em An “Alternative” Look at 2014 (000’s)

34. Page 34 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em An “Alternative” Look at 2014 (000’s)

35. Page 35 Recording of this session via any media type is strictly prohibited. Hook ‘em - Slice ‘em An “Alternative” Look at 2014 (000’s) Indicated Loss Rate at 2014 AccidentPer $100 Payroll Year(8) = (4) / (7)Average All Years: 2.11Range of Loss Picks Average Last 3 x 2013: 2.09 Low Reasonable1,061.8 20052.187Minimum: 1.89 20062.095Maximum: 2.31 Central Estimate1,120.9 20072.130Average 2008-2009: 1.98 20082.066Estimated 2014 Payroll ($00s): 536.6 High Reasonable1,241.5 20091.892 20102.082 20112.064 20122.121 20132.314 2014

36. Page 36 Recording of this session via any media type is strictly prohibited. Questions, Final Comments and Contact Information Stephen L Upshaw supshaw@eqrworld.com ; (312) 928-1208supshaw@eqrworld.com Ann M Conway, FCAS MAAA CERA ann.conway@towerswatson.com ; (617) 638-3774 ann.conway@towerswatson.com Steven W Sachs, ARM steve.sachs@willis.com ; 410-584-8935steve.sachs@willis.com