National Council of Self-Insurers 2014 Meeting

1. National Council of Self-Insurers2014 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