1.  2002 NCCI Holdings, Inc. Workers Compensation: Emerging Issues WC Industry Reserve Adequacy Karen Ayres, FCAS, MAAA karen_ayres@ncci.com Casualty Loss Reserve Seminar September 23, 2002

2.  2002 NCCI Holdings, Inc. 2 Overview of NCCI Analysis Computations based on Schedule P data Industry-wide reported losses and LAE Analyze and select paid and incurred loss and LAE development factors Analyze ultimate loss projections and select final estimate of ultimate incurred losses and LAE Redundancy/Inadequacy = Reported - Selected Ultimate

3.  2002 NCCI Holdings, Inc. 3 WC Industry Underwriting Ratios The NCCI estimate and the latest report are based on data from the 2001 Annual Statement. The Initial Report is based on the respective annual statement for each accident year.

4.  2002 NCCI Holdings, Inc. 4 The Discount Has Remained Constant While the Deficiency Has Increased Numbers are based on the respective annual statement for each accident date.

5.  2002 NCCI Holdings, Inc. 5 WC Loss and LAE Reserve Adequacy Based on data from the 2001 Annual Statement

6.  2002 NCCI Holdings, Inc. 6 Estimated WC Reserve Deficiency Continues to Increase

7.  2002 NCCI Holdings, Inc. 7 NCCI Uses a Variety of Methods to Estimate Ultimate Losses Methods 1-4: reflect computed development factors using paid loss and LAE data Methods 5-7: reflect computed development factors using paid losses/LAE and company reserve estimates Methods 8-9: incorporate selected loss and LAE development factors Ultimate losses and LAE selected based on results of all methods

8.  2002 NCCI Holdings, Inc. 8 Comparison of Methods Accident Year 2000 Evaluated @2000 vs @ 2001

9.  2002 NCCI Holdings, Inc. 9 Comparison of Methods - An Alternate View- AY 2000 Evaluated @2000 vs @2001

10.  2002 NCCI Holdings, Inc. 10 Comparison of Methods Over Time Accident Year 1998

11.  2002 NCCI Holdings, Inc. 11 Comparison of Methods Over Time Accident Year 1999

12.  2002 NCCI Holdings, Inc. 12 Tail Methodology Based on NCCI countrywide financial call data Similar to method used in ratemaking

13.  2002 NCCI Holdings, Inc. 13 “And Prior” Row Development in years prior to ten years displayed Compare latest paid to prior reserve (p) Compare latest reserve to prior reserve (q) Geometric Series of reserve decay, where sum = p/(1-q) When p + q = 1, reserves assumed adequate.

14.  2002 NCCI Holdings, Inc. 14 Challenges in Estimating Industry Reserves Tail Factor “And Prior” Row Reinsurance Changes in market composition Mergers, insolvencies, etc.

15.  2002 NCCI Holdings, Inc. 15 Reserve Estimation vs. Ratemaking Data sources: Reserve Estimation = Schedule P (10 years) Ratemaking = Financial Call (20 Years) Reinsurance Issues Loss Development

16.  2002 NCCI Holdings, Inc. Questions and Answers?