Marsh P. Ryan BWC Administrator

1. Transitioning to a New Claims Reserving SystemAccuracy Clarity TransparencyOhio Bureau of Workers’ CompensationSeptember 19, 2007

2. Marsh P. RyanBWC Administrator

3. John Pedrick, FCAS, MAAABWC Chief Actuarial Officer

4. estimated value of future financial liability for a claim at a specific point in time Claim Reserve:

5. A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value ofall future costs associated with an individual risk transfer. Statement of Principles Regarding Property and Casualty Insurance Rate Making: Casualty Actuarial Society Principles of Insurance Rate Making Principle #4:

6. More accurate estimation of future value More equitable distribution of cost to employers Critical to accurate premium rates Brings stability to premium rates Improves claim management by recognizing severity of claims early Accurate Claim Reserves

7. Improved Subrogation Collections Faster Claims Settlement Retrospective Rating Program-Close Out Reserves Identify Fraud Savings Accurate Claim Reserves also…

8. Tabular Reserves, until to 2002 Average cost of a claim in fitted category Based primarily on last compensation paid MIRA I, 2002 to 2007 Automated reserving system that uses advanced statistical analysis to predict future cost/liability of a claim BWC’s Reserving Systems

9. MIRA II Overview

10. You touch Fair Isaac technology when you… Submit a medical claim Use an ATM Use a credit/debit card Buy or use a cell phone File for workers’ comp Buy or refinance a home Make online purchases Take out auto insurance

11. Industry Focus: Workers’ Compensation

12. The Business Problems Addressed by MIRA I &2 Aggregate Bulk Reserve Investment Allocation Solvency Policyholder Satisfaction Policyholder Satisfaction Accurate Reserves on Individual Claims Accurate Reserves on Individual Claims Accurate Ex Mods and Premium Calculations Actuarial benchmarking internal vs. external actuary

13. Claimant A 25 yr old - knee injury Construction Litigated No Surgery Claimant B 55 yr old - knee injury Clerical Not Litigated Surgery Which Claim Will Cost More?

14. MIRA I versus MIRA II MIRA II • Next generation modeling techniques • Enhanced use of payment transactions over time • Multiple sub-models • Continued Aggregate Accuracy • Strong Individual Claim Accuracy • Longer shelf-life MIRA I • Models tied directly to static claim characteristics • Linear regression models used • Only summary paid data used as cost drivers • Aggregately Accurate Modeling Technology Accuracy

15. Claim-level Accuracy –MIRA II is better than MIRA I $1,000,000 $1,000,000 $100,000 $100,000 Final Total Paid Final Total Paid $10,000 $10,000 $1,000 $1,000 $100 $100 $100 $1,000 $10,000 $100,000 $1,000,000 $100 $1,000 $10,000 $100,000 $1,000,000 MIRA II Prediction MIRA I Prediction 25% Split Sample Prediction Scatter Plots Prediction vs. Final Total Paid at 180 Days

16. Per Claim Accuracy – MIRA I vs. MIRA II Ultimate Cost = $93,553

17. Per Claim Accuracy – MIRA I vs. MIRA II Ultimate Cost = $93,553

18. Per Claim Accuracy – MIRA I vs. MIRA II Ultimate Cost = $93,553

19. MIRA II Aggregate Accuracy

20. MIRA II Aggregate Accuracy

21. MIRA II Aggregate Accuracy

22. How MIRA II is Built Support Decision Making Variable 1 Variable 2 Variable n Predictive Model Data Extracted from BWC’s system Derive Powerful Variables Prediction Combine derived variables to provide an overall projection of ultimate final claim cost FIC cleans and screens raw data to derive predictive characteristics

23. Model Variables –MIRA II’s use of dynamic variables enhances claim-level accuracy Dynamic Variables • Medical Paid • TTD (TTD/TPD) Paid • PPD Paid • Hospital Paid • Chiropractor Paid Static Variables • Date of Injury • Average Weekly Wage • ICD-9 Code • Date of Birth • Claimant Zip Code Dynamic variables, based on financial transactions, become more important over time

24. Predictive Models take a holistic view when making forecasts Body Part Nature AWW $ Prediction Rx Paid Severity PPD Paid • Factors the combined interactions of claim characteristics • Model prediction reflects the historical cost of similar claims as handled by BWC in the past • When a Claim is Processed by MIRA II: • Injury Severity Determined • Appropriate benefit-level models provide predictions based upon Injury Severity • Model Controls stop predictions

25. How MIRA II Assess Perm Partial Claims MIRA II MIRA II Controls Sub Models ( ) Stop Logic Medical No Medical Paid for390 Days TD Indemnity No TD Paid for 390 Days Type 9 PPD MIRA II Severity Classification TTD Reserve Type 1 TPD / Wage Loss / Death CLAIM PPD Reserve Living Maintenance Medical PPD Category No PPD Paid for Medical 390 Days e

26. Models are the Best Approach to Reserving • Proven, sound, modeling methodology • Non-judgmental • Based on Millions of Ohio claims • Consistent • Accurate • Understandable predictions • Based on file facts that are displayed on reports • Reason-codes explain why a prediction has changed

27. MIRA II Provides Data Empowering BWC Reserve Transparency • Individual Claim Data • Summarize the relevant file facts • Making it easy for BWC to understand the connection between data and reserves • Aides in data clean up • Gives reasons for changed predictions • Aggregate Claim Data • BWC can drill down into MIRA II reserves on groups of claims • Data can be exported to Excel, Reporting Database

28. Claim Identification Section Unique information regarding the claim, the claimant, and the employer Claim Number : 13947690 Branch : 00 Claimant : MANT, CLAY Examiner : F13KLJ3P Jurisdiction : IL Claim Unit : Employer : THE SUN-TIMES COM Date of Injury : 01-17-2001 Policy Number : 4005233330008 MIRA Status : Open Policy Eff.Date : 01-01-2001 Prediction Status : First Time ========================================================================================= CLAIM IDENTIFICATION

29. Claim Characteristics Section Summarizes Data used by MIRA II CLAIM CHARACTERISTICS MIRA II Injury Type : 9 Permanent Partial Duration Start Date : 01-23-2001 ABC Injury Type : 9 Permanent Partial Claimant Birth Date : 07-23-1946 Accident Cause Code :05 Fall (From Elevation) Tenure Days : 1798 Body Part Code : 34 Wrist Report Delay Days : 6 Nature of Injury : 28 Fracture Claimant Gender Cd : M Job Class Schedule : 32 Cartage and Trucking Medical Rehab Code : Y Marital Status Code : M Married Average Weekly Wage: 917.15 Employment Status : F Full-time employee Claimant Zip Code : 60187 Death Hosp Claimant Life Inj On Ind Flag Attorney Pension Premises ======= ======= ======== ======= ======== N N N N N ===========================================================================================

30. Claim Summary Section Shows Paid amounts, MIRA II Predictions and Actual Claim Duration CLAIM SUMMARY ======================================================================================

31. Prediction Change Reasons Shows the Prediction Change Reason Codes and descriptions and the Prior Paid and MIRA II Incurred amounts for claims with updated predictions. CLAIM SUMMARY ======================================================================================

32. Inaccurate Claim Coding will impact Reserves CLAIM CHARACTERISTICS MIRA Injury Type : 9 Permanent Partial Duration Start Date : 11-02-2000 AMC Injury Type : 5 Temporary Disability Claimant Birth Dt : 03-24-1951 Accident Cause Code : 6 Struck Against Tenure Days : 1497 Body Part Code : 90 Multiple Injuries Report Delay Days : 4 Nature of Injury : 10 Contusion Claimant Gender Cd : F Job Class Schedule : 9 Services Medical Rehab Code : N Marital Status Code : S Single Average Weekly Wage : 491.00 Employment Status : F Full-time employee Claimant Zip Code : 40258 Death Hosp Claimant Life Inj On Ind Flag Attorney Pension Premises ====== ====== ======== ======== ======== N N N N N =========================================================================================

33. Reserves Before Data Clean Up ========================================================================================= Before =========================================================================================

34. Reserves Are More Accurate After Data Clean Up ========================================================================================= Before ========================================================================================= After – Data Changed to Wrist Sprain

35. BWC will be upgrading to a technologically superior version from Fair Isaac Meeting the Requirements of House Bill 100 “…shall completely transition from use of the Micro Insurance Reserve Analysis System to a different system or different version of that system to determine the reserves for use in establishing premium rates…”

36. Employers can view all data used in the reserves online, BWC to provide training Meeting the Requirements of House Bill 100 “The Administrator shall transition to a reserve analysis system that is characterized as transparent in nature…”

37. “The manner in which the system uses data can be understood in general terms by employers…” Meeting the Requirements of House Bill 100 New system uses standard data elements and payment patterns to set reserve Data that impacts reserve to be made available online

38. “The type of data the system uses in making reserve analysis can be explained to employers…” When a reserve changes the data element caused the reserve change (will be identified to the employer) Meeting the Requirements of House Bill 100

39. “The Administrator shall communicate information describing the manner in which the new reserve analysis system uses data and the type of data the system uses in making reserve analysis to employers…” All data elements will be viewable by employers on BWC website for each claim Training will be provided by BWC to employers to explain data used for reserves Meeting the Requirements of House Bill 100

40. New reserving system will: Use new historical claim data Use regularly updated claim data Reflect improved claim management environment Reflect improved statistical analysis Be responsive to Ohio specific requirements BWC’s New Claims Reserving SystemAccuracy

41. BWC will provide customers with: Information and instruction on reserve methodology Start/Stop Reserving Logic Payment Pattern Impact Statistical Data on Average Claim Reserve General Reserving Rules BWC Sponsored Training BWC’s New Claims Reserving SystemClarity

42. BWC’s New Claims Reserving SystemTransparency BWC will provide customers with: • Improved online web services • Listing of Claim Data used in reserve prediction • Reason for change in reserve • Average claim cost/reserve by injury type • Reserving methodology resource manual • More frequent reserve updates

43. Continue Development of Reserving Model Develop Applications to Improve Transparency Creating Online Services Policy Information Request System (PIRS) BWC’s New Claims Reserving SystemNext Steps