2003 NCCI Holdings, Inc. 1

CAS Ratemaking Seminar

Barry Lipton

NCCI

March 28, 2003

New Catastrophe Exposure

For

Workers Compensation

2 2003 NCCI Holdings, Inc.

Impact of 9/11 on Workers CompensationInitial WC Loss Estimates (6,000 deaths)

Morgan Stanley: $3 billionTillinghast: $3 billion–$5 billion

Current NCCI WC Loss Estimates (3,047 deaths excl hijackers; 2,250 injuries)

Self-insured losses 15% (includes NY Firefighters/PD)

Losses not covered by WC 5%

Fatalities w/o dependents 20% (lump-sum $50k payment per person)

Ultimate Direct Losses $1.3 B–$2.0 B

Ultimate Net Losses $0.3 B–$1.2 B

Impact on Net Acc Yr Combined Ratio 1%–4%

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Unique Challenges of Workers Compensation and Terrorism Coverage

Coverage mandated by law, exclusions are not possible

Benefits are defined by law, limits aren’t possible

Risks that aren’t written voluntarily will be backed by the entire market through the involuntary pool

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Objectives of NCCI’s Terrorism Modeling Efforts

Support the industry in developing a course of action for terrorism response

Develop actuarial methods for technical analysis of extreme events other than natural disasters

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NCCI’s Partner in Terrorism Modeling

NCCI’s partner is EQECAT, an Oakland firm with a strong track record in catastrophe modeling

They do the modeling for the California earthquake authority

They are certified by the Florida DOI to do hurricane modeling in support of rate filings

EQECAT is a subsidiary of ABS consulting, one of the largest risk management firms who has been assessing terrorist threats for many years

EQECAT is the ABS consulting division serving the insurance/reinsurance/financial markets

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What NCCI/EQECAT Terrorism Modeling Demonstrates

Although predicting frequency is difficult, modeling is a strong analytic tool to help us understand these extreme events

The workers compensation losses alone from a single event could have a devastating impact on segments of the Property/Casualty Industry

This is a problem for all regions of the country—not just major metropolitan areas

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Overview of Modeling Method

Modeled at the local level, peril by peril

Provisional nationwide assessment of frequency done by ABS consulting with outside expert input

Provisional local assessment of frequency made by allocation of nationwide frequency to state

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Overview of Modeling Method (Continued)

Many scenarios run at local level to get distribution of expected losses for a given event

Scenarios aggregated to get statewide expected losses

Aggregation can be extrapolated to get regional results and then combined to get nationwide results

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Perils Modeled

Blasts

Chemical agents

Biological agents

Radiological agents

Dam breaks

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Size of Events

Only large events modeled (a priori expectation of $15 million to $20 million in WC losses)

Large is defined by the size of agent rather than dollar threshold

400 lbs. equivalent TNT rather than 1 stick

One ounce of anthrax (letters have significantly less)

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Blasts

Car bombs

Small truck bombs

Large truck bombs

1 kiloton nuclear bomb

10 kiloton nuclear bomb

Aircraft impact

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Frequency

Frequency is extremely difficult to assess

EQECAT estimates that the frequency of a large terrorist event is between 1 and 5 per year nationwide

The model was calibrated to one nationwide event per year and the result was scaled as necessary

EQECAT analyzed potential target locations, difficulty of using a given weapon, and various theories on how terrorists choose their targets to develop the stochastic event set.

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Frequency

National threat level allocated to state based on state characteristics (urban density, industrial targets, etc).

State threat level distributed to peril categories based on past terrorist events, degree of difficulty and potential impact

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From Peril Event to Injury

A footprint is established for each peril

The footprint defines the intensity of peril based on distance, size of source and wind conditions

Injury distributions (as a function of peril intensity) are combined with worker density to get the number of injuries

Calculations done at the census block level

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Terrorism Model Overview

•Blast or explosion outside buildings•Blast or explosion inside buildings•Chemical release outside buildings•Chemical release inside buildings•Biological release outside buildings•Biological release inside buildings•Radioactive material release

BlastBlast BiologicalBiological

RadioactiveRadioactiveChemicalChemical

severityseverity

Location specificLocal ConditionsLocation of hazards facilitiesLocation of high profile facilities

Frequency

Employment DatabaseBuilding Stock Database

#of Employees by zip code by SIC class by construction class

Hazard Severity %

Inju

ry/D

eath

Rat

e

Severity 1

Severity 2Severity 3Severity 4

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Event Footprints

EQE proprietary software is used to generate footprints

– BLAST

– Midas AT Software

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Blast Effects AnalysisComputer Graphic Software

Blast Effects AnalysisComputer Graphic Software

Blast software enables rapid, accurate, effective analyses of overpressures and structural damage

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Terrorist Risk—MIDAS-ATTM SoftwareTerrorist Risk—MIDAS-ATTM Software

Agents that MIDAS-AT can model releases of:

– Chemical Agents

– Biological Agents

– Radiological

Used in nuclear power and chemical industry; and by US Marine Corps and US Embassies

Installed at over 70 sites worldwide and in use for over 20 years

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25,000 Ci dispersed 250 lb TNT, 3 mph from 210 degrees, D Stability

Different Footprints for Different Type/amount of agent

Chemical Agent Event Footprints

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Nuclear Scenarios1 K-ton Device (Suitcase Bomb)

50,000+ prompt deaths,

Nuclear Scenarios1 K-ton Device (Suitcase Bomb)

50,000+ prompt deaths,

Area of total destructionArea of total destructionArea of total destructionArea of total destruction

Area of Area of Extensive Extensive damagedamage

Area of Area of Extensive Extensive damagedamage

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From Injury to Losses

Injury rates are combined with distribution of losses by injury type to get overall loss

Distribution of losses are those underlying NCCI ELFs in Retrospective Rating Program

State specific average benefits are used

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From Event Losses to Annual Aggregate Losses

Census blocks are aggregated to get total loss for the event

The conditional severity of the event is multiplied by its frequency to get its annual cost

Events are aggregated to get statewide expected losses for representative states

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NCCI Response To Terrorism Risk Insurance Act

NCCI filed terrorism loss costs in the 36 jurisdictions where we provide ratemaking services

We shared the model results and analysis with the independent workers compensation bureaus

We priced the impact of the backstop on statewide expected workers compensation losses

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States Modeled

– New York – Pennsylvania

– New Jersey – Texas

– California – Ohio

– Washington D.C. – Georgia

– Illinois – Indiana

– Florida – Arizona

– Michigan – Iowa

– Massachusetts – North Carolina

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NCCI Terrorism Loss Cost Filing

The filing relied on EQECAT results in modeled states

Proxy states were used for the other non-modeled states

Voluntary loss costs were filed in most NCCI states

Rates were filed in Florida, Idaho, Arizona, Illinois, Rhode Island and Iowa

Assigned Risk rates were filed in all NCCI states

28 2003 NCCI Holdings, Inc.

NCCI Terrorism Loss Cost Filing

For the voluntary market, the effective date was December 20, 2002

For the residual market, most states have an effective date was January 1, 2003

The loss costs apply to new and renewal policies only

The rates/loss costs are for foreign terrorism only (net of anticipated federal recoveries)

29 2003 NCCI Holdings, Inc.

NCCI Terrorism Loss Cost FilingNCCI filed one voluntary in rate/loss cost for terrorism

exposure in each state and one for the involuntary market

Rates/loss costs were filed on the Miscellaneous Values Page of NCCI’s Basic Manual

It is a rate/loss cost per $100 of total payroll

It is not subject to premium discount, experience rating, schedule rating or retrospective rating or deductible credits

Because the non-terrorism rate/loss cost for clerical risks is lower than other risks, the terrorism charge has a larger percent impact on their premium

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Other NCCI Actions

NCCI has established a new statistical class code (9740) for these premium charges

The new code facilitates the tracking of premiums charged for terrorism exposure as defined in the federal Act

We filed a Terrorism Risk Insurance Act Endorsement for carriers to use to satisfy their policyholder disclosure obligations under the Act

The new endorsement also addresses an insurer’s limit of liability for certified terrorism losses when aggregate losses exceed $100 billion

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Cost per Worker prior to backstop

State

(1)

Loss Cost per Employee

(excluding LAE)Lower Range*

(2)

Loss Costper Employee

(excluding LAE)Upper Range*

(3)

Illinois 6.45 32.27

Iowa 1.71 8.54

New York 24.76 123.80

* EQECAT’s estimates assume universal Workers Compensation coverage. However, loss per worker is independent of whether the worker is covered or not.

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What’s Next

NCCI will continue to support industry initiatives to address the unique Workers Compensation problems presented by the terrorist threat

We will annually review the terrorism loss costs

We will address domestic terrorism

We will complete our work with EQECAT to address earthquake and tsunami’s potential impact on Workers Compensation

We will expand our modeling efforts with EQECAT to address accidental disasters such as fires, industrial explosions and chemical release