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2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

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Page 1: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

2002 NCCI Holdings, Inc.

Midwestern Actuarial ForumRon Retterath, FCAS, MAAA

September 26, 2002

Page 2: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

2 2002 NCCI Holdings, Inc.

1. Select a number between 1 and 10

2. Multiply this number by 9

3. Add the two digits

4. Subtract 5

5. Correlate this number to a letter of the alphabet (A=1, B=2, etc.)

6. What is the first country that comes to mind that starts with this letter?

7. What is the last letter of the name of this country?

8. What is the first animal that comes to mind that starts with this letter?

9. What is the last letter of the name of this animal?

10. What is the first color that comes to mind that starts with this letter?

Page 3: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

3 2002 NCCI Holdings, Inc.

1. Green2. Red3. Blue4. Orange5. Purple6. Black

Page 4: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

4 2002 NCCI Holdings, Inc.

Page 5: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

2002 NCCI Holdings, Inc.

State of the Market

Page 6: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

6 2002 NCCI Holdings, Inc.

State of the Market

• The Economics Underlying P&C Insurance Industry Performance

• The State of the Workers Compensation Industry

• Looking to the Future

Page 7: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

7 2002 NCCI Holdings, Inc.

Line of Business 2000 2001 ChangePersonal Auto 119.6 B$ 127.8 B$ 6.9%

Homeowners 32.4 B$ 35.1 B$ 8.4%

Workers Compensation 24.8 B$ 26.0 B$ 4.7%

Other Liability (Incl Product Liability) 19.9 B$ 21.9 B$ 9.9%

Commercial Auto 19.5 B$ 21.7 B$ 11.4%

Commercial Multiple Peril 19.8 B$ 22.2 B$ 12.2%

Fire & Allied Lines (Incl Earthquake) 9.1 B$ 9.5 B$ 3.6%

All Other Lines 54.4 B$ 59.2 B$ 8.8%

Total All Lines 299.6 B$ 323.4 B$ 8.0%

Workers Compensation Remains the Third Largest P&C Line

Net Written Premium Volume by Line—Private Carriers

Source: Best's Aggregates & Averages

•Updated

Page 8: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

8 2002 NCCI Holdings, Inc.

Results Deteriorated for Most LinesCombined Ratios by Line—Private Carriers

Line of Business 1999 2000 2001Personal Auto 103% 109% 108%

Homeowners 108% 111% 122%

Workers Compensation 115% 118% 122%

Other Liability (Incl Product Liability) 109% 112% 130%

Commercial Auto 118% 116% 116%

Commercial Multiple Peril 118% 115% 118%

Fire & Allied Lines (Incl Earthquake) 108% 110% 129%

All Other 103% 100% 118%

Reinsurance Companies (2001 prelim) 115% 116% 142%

Total All Lines 108% 110% 116%

Source: Best's Aggregates & Averages

•Updated for actual 2001 Bests

Page 9: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

9 2002 NCCI Holdings, Inc.

P&C Industry Calendar Year Combined Ratios

Private Carriers

110 109116

107 109 107 106102

106 108 110116

40

60

80

100

120

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Percent

3.1%Due toSept. 11

Source: Best's Aggregates & Averages

Page 10: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

10 2002 NCCI Holdings, Inc.

Impact of 9/11 on the P&C IndustryEstimated Ultimate Cost of September 11 Catastrophe

A.M. Best(Sept 2002 Best's Review) $35 B - $55 B

Fitch(Jan 2002 Review & Outlook) $45 B

Insurance Information Institute(April 2002 Presentation) $40 B

Actual Calendar Year 2001 Combined Ratio(2002 Ed. A.M. Best Aggregates & Averages) 116%

Estimated Cal Yr Combined Ratio Points Due to Sept. 11(Derived from ISO, April 2002 Report)

3.1%( $10B)

Page 11: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

11 2002 NCCI Holdings, Inc.

-2.4%-3%

0%

3%

6%

9%

12%

15%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Return on Surplus for P&C Industry Has Been Volatile—

First Ever Net Loss for 2001Annual After-Tax Return on Surplus

1986–2001 Average: 8.5%

Note: After-tax return on surplus includes realized capital gainsSource: Best’s Aggregates & Averages

Page 12: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

12 2002 NCCI Holdings, Inc.

0

100

200

300

400

500

0.0

0.5

1.0

1.5

2.0

2.5

NWP Surplus P:S Ratio

P&C Surplus Has Risen Significantly Relative to PremiumP&C Industry—Private Carriers

$ Billions P:S Ratio

Source: Best’s Aggregates & Averages

1985-2001 Average Growth in NWP: +5.1%1985-2001 Average Growth in Surplus: +8.8% High Surplus

$334.3 in 1999

Low P:S Ratio 0.845:1 in 1998

$144.9

$323.4

$75.5

$289.6

Updated

Page 13: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

13 2002 NCCI Holdings, Inc.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Return on Surplus

Underwriting Profit/Loss to Surplus

Net Investment Income (Incl Realized Capital Gains) to Surplus

Return on Surplus Reflects Volatilityof Underwriting Gains

Pre-tax Underwriting & Investment Contributionsto Total Return on Surplus

Source: Best’s Aggregates & Averages

Page 14: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

14 2002 NCCI Holdings, Inc.

The State of Workers Compensation:

Page 15: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

15 2002 NCCI Holdings, Inc.

Workers Compensation Calendar Year Combined Ratios

Continue Their Upward ClimbPrivate CarriersCombined Ratio

Source: Best’s Aggregates & Averages

1.9%Due toSept. 11

118 123 122109

101 97 100 101108

115 118 122

0

20

40

60

80

100

120

140

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Loss LAE Underw riting Expense Dividends

Page 16: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

16 2002 NCCI Holdings, Inc.

Projected Impact of September 11 Catastrophe on Workers Compensation

Initial Workers Compensation Sept. 11 Loss Estimates…Morgan Stanley: $3 billionTillinghast: $3 billion–$5 billion

… these estimates assumed 6,000+ deaths.

Current Workers Compensation Sept. 11 Loss Estimates… Approx. # deaths: 3,015 excl hijackers Approx. # injuries: 5,000

Approx. 15% of losses were self-insured (includes NY Firefighters/PD)Approx. 5% non-workers compensation lossesApprox. 20% of fatalities were single (lump sum $50,000 pmt per

person)NCCI currently estimates ultimate Sept. 11 losses at $1.3 B–$2.0 B

Majority of direct losses were ceded to reinsurers Losses Net of Reinsurance: $0.3 B–$1.2 B

Ultimate Accident Year Combined Ratio Impact of 1%–4%

Page 17: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

17 2002 NCCI Holdings, Inc.

2001 Drop in Investment Returns—Will This Level Continue?

Workers Compensation Ratio of Investment Gain and Other Income to Premium Private Carriers

13.715.2

17.6 17.014.3

16.9 17.620.0 19.3 20.2

12.0

19.2

0

5

10

15

20

25

1990* 1991* 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Calendar Year

Source for 1990–2000: NCCI; 2001 Best’s Aggregates & AveragesInvestment gain includes investment income and realized gains* Adjusted to include realized capital gains to be consistent with 1992 and after

Page 18: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

18 2002 NCCI Holdings, Inc.

-3.8

-7.9-4.4

8.4

19.8 18.4 19.1

4.20.7

-9.7

13.311.5

-15

-10

-5

0

5

10

15

20

25

1990* 1991* 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Calendar Year

Workers Compensation Pretax Operating Gain Ratio

Private Carriers

Source for 1990–2000: NCCI; 2001 Best’s Aggregates & AveragesInvestment gain includes investment income and realized gains* Adjusted to include realized capital gains to be consistent with 1992 and after

Page 19: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

19 2002 NCCI Holdings, Inc.

97 100 101108

115 118 122115

124 127

141 138 136

116

80

100

120

140

160

1995 1996 1997 1998 1999 2000 2001Calendar Year

Private Carriers State Funds

Percent

Source: Best’s Aggregates & Averages and Annual StatementsState Funds—AZ, CA, CO, HI, ID, KY, LA, ME, MN, MO, MT, NM, OK, OR, PA, RI, TX, UT

Workers Compensation Combined RatiosPrivate Carriers vs. State Funds

•Updated

Page 20: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

20 2002 NCCI Holdings, Inc.

Workers Compensation Calendar Year Direct Combined Ratios

Countrywide vs. NCCI StatesPrivate Carriers Only

Source: NCCI, NCCI States—Private CarriersIncludes dividends to policyholders

Combined Ratio

104 102

113

121124 127

98 96

111115

118115

80

90

100

110

120

130

1996 1997 1998 1999 2000 2001

Countrywide NCCI States

Page 21: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

21 2002 NCCI Holdings, Inc.

Workers Compensation Premium Volume:Have We Shifted to a Period of Growth?Workers Compensation Net Written Premium—Private Carriers

31.0 31.3 29.7 30.3 28.9 26.2 25.1 24.1 23.2 22.2 24.8 26.0

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Calendar Year

0.00.51.01.52.02.53.03.54.04.5

WC Net Written Premium Private Nonfarm Wages and Salaries

Source: Best’s Aggregates & Averages$ Billions $ Trillions

$ Billions $ Trillions

Page 22: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

22 2002 NCCI Holdings, Inc.

Workers Compensation Premium Volume:Have We Shifted to a Period of Growth?Workers Compensation Net Written Premium—Private Carriers

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Calendar Year

0.00.51.01.52.02.53.03.54.04.5

WC Net Written Premium Private Nonfarm Wages and Salaries

Source: Best’s Aggregates & Averages$ Billions $ Trillions

$ Billions $ Trillions

Page 23: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

23 2002 NCCI Holdings, Inc.

Adjusted Workers CompensationPremium Volume

Workers Compensation Direct Written Premium—Private Carriers1. Direct of Reinsurance$ Billions $ Trillions

$ Billions $ Trillions

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Calendar Year

0.00.51.01.52.02.53.03.54.04.5

WC DWP Private Nonfarm Wages and Salaries

Page 24: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

24 2002 NCCI Holdings, Inc.

1. Direct of Reinsurance

2. Grossed-Up for Large Deductible Credits

$ Billions $ Trillions

Adjusted Workers CompensationPremium Volume

Workers Compensation Direct Written Premium—Private Carriers

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Calendar Year

0.00.51.01.52.02.53.03.54.04.5

WC Adjusted DWP Private Nonfarm Wages and Salaries$ Billions $ Trillions

Page 25: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

25 2002 NCCI Holdings, Inc.

1. Direct of Reinsurance

2. Grossed-Up for Large Deductible Credits

3. Adjusted to 1990 Rate/Loss Cost Level

$ Billions $ Trillions

$ Billions $ Trillions

Adjusted Workers CompensationPremium Volume

Workers Compensation Direct Written Premium—Private Carriers

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Calendar Year

0.00.51.01.52.02.53.03.54.04.5

WC Adjusted DWP Private Nonfarm Wages and Salaries

Page 26: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

26 2002 NCCI Holdings, Inc.

1. Direct of Reinsurance

2. Grossed-Up for Large Deductible Credits

3. Adjusted to 1990 Rate/Loss Cost Level

4. Grossed-Up for Carrier Departure

$ Billions $ Trillions

$ Billions $ Trillions

Adjusted Workers CompensationPremium Volume

Workers Compensation Direct Written Premium—Private Carriers

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Calendar Year

0.00.51.01.52.02.53.03.54.04.5

WC Adjusted DWP Private Nonfarm Wages and Salaries

Page 27: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

27 2002 NCCI Holdings, Inc.

26.2 25.1 24.1 23.2 22.224.8 26.0

3.73.3

2.9 2.8 2.8

3.7

6.0

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001Calendar Year

0

1

2

3

4

5

6

7

Private Carriers State Funds

Workers CompensationNet Written Premium Private Carriers vs. State Funds

Private Carriers WC NWP ($B) State Funds NWP ($B)

Source: Best’s Aggregates & Averages and Annual StatementsState Funds—AZ, CA, CO, HI, ID, KY, LA, ME, MN, MO, MT, NM, OK, OR, PA, RI, TX, UT

•Updated

Page 28: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

28 2002 NCCI Holdings, Inc.

Joe

Page 29: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

29 2002 NCCI Holdings, Inc.

Joe

Page 30: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

30 2002 NCCI Holdings, Inc.

1% - 4% Due to Sept. 11

123 122

109

10197

100 101

108

115118

112

10095 97

102107

121

129

137133

127

122

90

100

110

120

130

140

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Calendar Year Accident Year

Workers Compensation Calendar Year 2001 Results Deteriorated, While Accident Year Results Improved

Calendar Year vs. Ultimate Accident YearCountrywide—Private Carriers

Best’s Aggregates & Averages (Calendar Year)Includes dividends to policyholdersAccident year data is evaluated as of 12/31/01 and developed to ultimate

Combined Ratio

Page 31: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

31 2002 NCCI Holdings, Inc.

0.52.0

4.6

10.0

14.5

20.0 21.018.3

0

5

10

15

20

25

1994 1995 1996 1997 1998 1999 2000 2001Loss & LAE Reserve Deficiency Through Year End

Workers Compensation Reserve Deficiencies Have Grown Larger in

Recent Years

Difference between NCCI estimated ultimate losses and LAE as of 12/31/01 and reported Schedule P incurred losses and LAE

$ Billions Assuming losses are paid out in 30 years, implied discount rate is 4%

Approximately ¼ of reserve deficiencyis due to tabular reserves

Page 32: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

2002 NCCI Holdings, Inc.

Page 33: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

33 2002 NCCI Holdings, Inc.

Approved Rates/Loss Costs Are Basically Stable

History of Average Bureau Rate/Loss Cost Level Changes

12.1

7.4

10.0

2.9

-6.4

-3.2

-6.0-8.0

-5.4

-2.6

3.51.2

3.7

-10

-5

0

5

10

15

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002pCalendar Year

p PreliminaryCountrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization

Cumulative 1990-1993+36.3%

Cumulative 1994-1999-27.8%

Updated

Page 34: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

34 2002 NCCI Holdings, Inc.

The Impact of Discounting on PremiumNCCI States—Private Carriers

Based on data through 12/31/01 for the states where NCCI provides ratemaking servicesDividend ratios are based on calendar year statistics

-7.1 -7.5 -7.0 -8.5-10.4

-14.6-17.7

-22.6 -23.2

-19.2

-14.9

-30

-25

-20

-15

-10

-5

0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Policy Year

Per

cent

Rate/Loss Cost Departure Schedule Rating Dividends

Page 35: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

35 2002 NCCI Holdings, Inc.

+1.0% +1.7%+5.4%

+4.3%+5.4%

+5.1%+8.2%

+9.2%

-3.1% -2.8%+6.6%

5

7

9

11

13

15

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001pAccident Year

The Rate of Change in Workers Compensation Indemnity Claim

Costs Has Accelerated Since 1995Indemnity Claim Cost (000s)

p PreliminaryBased on data through 12/31/01, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies

Annual Change 1991–1995: +0.6%

Annual Change 1996–2001: +6.3%

Page 36: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

36 2002 NCCI Holdings, Inc.

+6.8% +1.3%

+4.6%+6.2%

+5.8%+4.6%

+5.1%+8.1%

+11.5%

-2.1%+10.9%

5

7

9

11

13

15

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001pAccident Year

Workers Compensation Medical Claim Costs Have Also Continued Their

Consistent Upward TrendMedical Claim Cost (000s)

Annual Change 1991–1995: +4.2%

Annual Change 1996–2001: +6.8%

p PreliminaryBased on data through 12/31/01, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies

Page 37: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

37 2002 NCCI Holdings, Inc.

-4.3%

-6.8%

-4.5%

-3.1%

-5.5%

-1.3%-0.7%

-2.2% -2.5%

-5.8%

-8%

-6%

-4%

-2%

0%

2%

4%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001pAccident Year

Cha

nge

in F

requ

ency

per 1

00 W

orke

rsThe Frequency of Lost-Time Claims Has

Continued to Fall Through 2001Two-Year Rolling Average

Cumulative Change of–35.7% Since 1990

p PreliminaryBased on data through 12/31/01, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies

Page 38: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

38 2002 NCCI Holdings, Inc.

Fifteen Large Classes

Countrywide Latest Four Years Prior

Class Payroll ($M)

Lost-Time Only

Claims Freq

Lost-Time Only

Claims FreqFreq

ChangeClerical 397,020$ 29,358 0.07 32,267 0.10 -26%Salesperson—Outside 95,602$ 11,051 0.12 11,662 0.14 -19%College Professional 54,507$ 7,298 0.13 7,636 0.16 -16%Retail Store 25,884$ 15,786 0.61 19,257 0.89 -31%Hospital Professional 18,904$ 7,180 0.38 9,960 0.51 -25%Auto Service/Repair 12,884$ 12,118 0.94 14,206 1.24 -24%Store—Meat/Grocery 10,086$ 11,714 1.16 14,542 1.64 -29%Drivers/Chauffers 9,581$ 13,813 1.44 15,016 1.72 -16%Electrical Wiring 9,164$ 9,110 0.99 8,584 1.28 -22%Convalescent/Nursing Home 8,929$ 14,190 1.59 17,610 2.47 -36%Machine Shop 8,212$ 9,291 1.13 9,904 1.47 -23%Plumbing 7,768$ 8,726 1.12 9,190 1.43 -22%Store—Wholesale 7,716$ 11,642 1.51 12,163 2.01 -25%Hotel 6,827$ 8,471 1.24 10,975 1.79 -31%Carpenters 6,570$ 16,248 2.47 18,761 3.22 -23%Total 679,654$ 185,996 0.27 211,733 0.37 -27%All Class Total 1,209,061$ 633,342 0.52 750,801 0.72 -27%

Note: Frequency = Lost-Time Claims/Payroll; prior payroll adjusted for inflationSource: NCCI

Page 39: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

BAM!

Let’s Kick It Up A Notch

Page 40: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

40 2002 NCCI Holdings, Inc.

The Rate of Work-Related InjuriesHas Decreased Over Time Due to

Improved Working Conditions Trends in Workplace Injuries and Illnesses

0

5

10

15

20

25

1926

1929

1932

1935

1938

1941

1944

1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

Year

Rat

e of

Inju

ry p

er 1

00 F

TE W

orke

rs

Injuries per 100 full-time workers in manufacturing Injuries and Illness per 100 full-time workers in all industries Long-Term Trend Line

Trend Line

Page 41: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

41 2002 NCCI Holdings, Inc.

Recent Decline in Frequency

This is a long-term trend driven by technology, economic incentives, and employee preferences for a safe workplace,such as…

• Continued Emphasis on Workplace Safety• Robotics• Modular Design and Construction• Power-Assisted Processes• Ergonomic Design• Cordless Tools• Stronger, lighter-weight materials (e.g., fiberglass rather

than wooden ladders)• More and Better Training• Clerical Support Aids• Fraud Initiatives

Page 42: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

42 2002 NCCI Holdings, Inc.

Workplace Injury Incidence Rates— Decreases During Recessions and

Increases in Recovery

Countrywide—Six Recessions Since 1960

0

5

10

15

20

25

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Inci

denc

e R

ates

Per

100

FTE

Wor

kers

RecessionsInjuries and illnesses per 100 full-time workers in manufacturingInjuries and illnesses per 100 full-time workers in private industry

Page 43: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

43 2002 NCCI Holdings, Inc.

Impacts of Recessions and Expansions on Frequency

In a recession, frequency generally drops:• Inexperienced workers are laid off, leaving a more

experienced workforce• Minimal new hires• Average workweek is reduced, minimizing fatigue• Laid off workers may be more likely to file claims

In an expansion, frequency generally increases (at least initially):

• New employees are hired• Workweek expands• Inexperienced workers make up higher proportion

of workforce

Page 44: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

44 2002 NCCI Holdings, Inc.

1.2

2.12.6 2.8

3.54.0

4.44.8

4.1

3.1

2.0

1.00.6 0.3 0.3

0

1

2

3

4

5

6

Policy Year

$ B

illio

ns

* Excludes Maine Residual Market Pool** Projected to ultimate

Residual Market Premium Volumeas of March 31, 2002

$623m$356m

Page 45: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

45 2002 NCCI Holdings, Inc.

Residual Market Policies by Size of Risk

Premium by Size of Risk Total

2000 Risk Count

2001 Risk Count

Percent Change

0$ - 999$ 59,328 66,041 11%

1,000$ - 4,999$ 25,003 33,096 32%

5,000$ - 24,999$ 7,084 12,725 80%

25,000$ - 99,999$ 1,360 3,132 130%

100,000$ AND OVER 249 636 155%

TOTAL 93,024 115,630 24%

Page 46: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

46 2002 NCCI Holdings, Inc.

Premium by Size of Risk Total

Jan-Jun 2001 Risk

Count

Jan-Jun 2002 Risk

CountPercent Change

0$ - 999$ 33,505 38,483 15%

1,000$ - 4,999$ 16,210 22,269 37%

5,000$ - 24,999$ 6,142 9,406 53%

25,000$ - 99,999$ 1,419 2,365 67%

100,000$ AND OVER 244 494 102%

TOTAL 57,520 73,017 27%

Residual Market Policies by Size of Risk

Page 47: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

47 2002 NCCI Holdings, Inc.

* Excludes Maine Residual Market Pool** Projected to ultimate

Residual Market Combined RatiosContinue to Grow

as of March 31, 2002

116 118 119111

102979396102

110

126

142

159166169164

177

80

100

120

140

160

180

200

85 86 87 88* 89* 90* 91* 92* 93 94 95 96 97 98 99 00** 01**Policy Year

Per

cent

Page 48: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

48 2002 NCCI Holdings, Inc.

Residual Market Underwriting Results

as of March 31, 2002

-931

-1,357

-1,791-1,869-2,067

-1,644

-1,120

-500

-95

109 132 26

-65 -118-36-13 -44

-2,500

-2,000

-1,500

-1,000

-500

0

500

Policy Year

$ M

illio

ns

* Excludes Maine Residual Market Pool** Projected to ultimate

Page 49: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

49 2002 NCCI Holdings, Inc.

Comparisons of Conditions in the Industry

Late 1980’s• Benefit escalation• Wage inflation• Cost containment coming• Administered pricing• Large residual market share

and large burdens• Some use of deviations,

schedule ratings, dividends

At Present• Benefits relatively stable• Medical inflation• Cost containment in place• Loss cost filings; Loss costs

relatively adequate• Small residual market share

and low burdens• Use of tiers, schedule rating,

dividend• Use of large deductibles• Real exposure to catastrophe

Page 50: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

2002 NCCI Holdings, Inc.

Looking to the Future

Page 51: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

51 2002 NCCI Holdings, Inc.

The Underwriting of Risk Has Changed• Concentration of Employees• Concentration of Policyholders• Concentration of Lines• Catastrophe Exposures• Large Airports, Bridges, Tunnels, Nuclear Power Plants• Institutions in Major Cities• Water Treatment and Storage Systems• “Trophy” Buildings• High-Rise Buildings

Reinsurance Capacity Restricted (142% Combined Ratio)

• Affordability/Availability Issues

Workers Compensation OutlookFixed

Page 52: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

52 2002 NCCI Holdings, Inc.

Unique WC Issues Presented by Terrorism

• No policy limits

• No individual claim limits

• No exclusions or coverage modifications

• Mandatory for most employers

Page 53: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

53 2002 NCCI Holdings, Inc.

NCCI’s Response to Terrorism

• Support trades in working towards a federal backstop

• Partnered with EQECAT to develop models to estimate severity of major terrorist attacks

• Analyzed legal issues associated with a WC pool that would coordinate with the federal backstop

• Working with NAIC on terrorism related issues

Page 54: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

54 2002 NCCI Holdings, Inc.

71.6%71.7%

86.6%

107.1%

92.2%

77.7%73.4%

67.1%

60%

70%

80%

90%

100%

110%

'98Q1

'98Q2

'98Q3

'98Q4

'98YearEnd

'99Q1

'99Q2

'99Q3

'99Q4

'99YearEnd

'00Q1

'00Q2

'00Q3

'00Q4

'00YearEnd

'01Q1

'01Q2

'01Q3

'01Q4

'01YearEnd

'02Q1

'02Q2

Calendar Quarter

Source: NAIC Quarterly Statement, Annual Statement

Workers Compensation Outlook–Will the Combined Ratio Improve

in 2002-2003?Quarterly WC Direct Loss Ratios

Page 55: 2002 NCCI Holdings, Inc. Midwestern Actuarial Forum Ron Retterath, FCAS, MAAA September 26, 2002

55 2002 NCCI Holdings, Inc.

THEEND

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56 2002 NCCI Holdings, Inc.

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57 2002 NCCI Holdings, Inc.