Shifts in the Marketplace Workers Compensation Residual Markets CARe Presentation Jon Hale, FCAS...

Shifts in the Marketplace

Workers Compensation Residual Markets

CARe Presentation

Jon Hale, FCASTravelers P&C

September 17, 2003New York City, NY

2

Line of Business 2001 2002p ChangePersonal Auto 127.8 B$ 141.1 B$ 10.4%

Homeowners 35.1 B$ 40.0 B$ 13.9%

Other Liability (Incl Prod Liab) 21.9 B$ 31.2 B$ 42.4%

Workers Compensation 26.0 B$ 29.2 B$ 12.6%

Commercial Multiple Peril 22.2 B$ 25.4 B$ 14.3%

Commercial Auto 21.7 B$ 24.3 B$ 11.8%

Fire & Allied Lines (Incl EQ) 10.7 B$ 15.1 B$ 40.7%

Reinsurance Lines 12.7 B$ 15.8 B$ 24.0%

All Other Lines 45.3 B$ 47.0 B$ 3.8%

Total All Lines 323.5 B$ 369.1 B$ 14.1%

2002 P&C Industry Premium Growth Highest in Sixteen Years

Net Written Premium by Line—Private Carriers

p PreliminarySources: 2001, Best’s Aggregates & Averages; 2002p WC, NCCI; Other lines, Annual Statement data; 2002p Total, ISO

Used with permission of National Council on Compensation Insurance, Inc.

3

P&C Combined Ratios Improved Significantly in 2002

Net Combined Ratios—Private Carriers

Line of Business 2000 2001 2002pPersonal Auto 109% 108% 103%

Homeowners 111% 122% 113%

Other Liability (Incl Prod Liab) 112% 130% 119%

Workers Compensation 118% 122% 110%

Commercial Multiple Peril 115% 119% 112%

Commercial Auto 116% 116% 106%

Fire & Allied Lines (Incl EQ) 110% 126% 95%

Reinsurance Lines 107% 163% 126%

All Other 95% 116% 89%

Total All Lines 110% 116% 107%

p PreliminarySources: 2001, Best’s Aggregates & Averages; 2002p WC, NCCI; Other lines, Annual Statement data; 2002p Total, ISO


4

P&C Industry Calendar YearCombined Ratios

Private Carriers

116

105 105

109 110 109

116

102

110

116

109 108108 107107107

106 106

90

95

100

105

110

115

120

Calendar Year

Percent

2.9%Due toSept. 11

1985–2001 Average: 108.6%

p PreliminarySources: 1985–2001, Best’s Aggregates & Averages; 2002p, ISO


5

31.0 31.3 29.7 30.3 28.926.2 25.1 24.1 23.2 22.2

24.8 26.029.2

0

10

20

30

40

50

60

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

Calendar Year

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

WC Net Written Premium Private Nonfarm Wages and Salaries

$ Billions $ Trillions

Workers Compensation Premium:Third Consecutive Year of Growth

Net Written Premium vs. Wages and Salaries—Private Carriers


Source: 1990–2001, Best’s Aggregates & Averages; 2002, NCCI; Private Non-Farm Wages & Salaries, Economy.com.


6

0

10

20

30

40

50

60

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

Calendar Year

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Adjusted WC DWP Private Non-Farm Wages and Salaries


Adjusted Workers CompensationPremium Volume

Workers Compensation Direct Written Premium—Private Carriers


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


7

Workers Compensation Calendar Year Combined Ratio Declined in 2002

Private Carriers

117123 122

109101 97 100 101

108115 118 122

110

0

20

40

60

80

100

120

140

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

Loss LAE Underwriting Expense Dividends

1.9% Due to September 11th

Sources: 1990–2001, Best’s Aggregates & Averages; 2002, NCCI

Percent


8

Workers Compensation Results in 2002 Improved Over 2001

Pretax Operating Gain Ratio—Private Carriers

-4.4

-8.7

-3.4

7.6

19.817.9

19.7

5.2

1.53.0

-7.7

13.1 13.7

-15

-10

-5

0

5

10

15

20

25

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

Calendar Year

Percent

Sources: 1990–2001, Best’s Aggregates & Averages; 2002, NCCICombined Ratio less Investment Gain on Insurance Transaction and Other Income* Adjusted to include realized capital gains to be consistent with 1992 and after


9

The Impact of Discounting on Workers Compensation Premium

NCCI States—Private Carriers

Based on data through 12/31/2002 for the states where NCCI provides ratemaking services.Dividend ratios are based on calendar year statistics.

-7.5 -7.0-8.5

-10.4

-14.6

-17.7-19.2

-14.2

-6.0

-22.6 -23.2

-30

-25

-20

-15

-10

-5

0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Policy Year

Pe

rce

nt

Rate/Loss Cost Departure Schedule Rating Dividends


10

Workers Compensation Residual Market MechanismsState Funds as of 1990

(Quasi-Pool)

14 State Funds acting as markets of last resort

2 Quasi-Pools (MN, ME)

36 Pool states (Direct Assignments did not exist)

Note: Arizona & Idaho had state funds but were not markets of last resort

Source: Jon Hale, Travelers

11

Note: Arizona, Idaho, & New Mexico have state funds but NCCI manages the markets of last resort

19 State Funds acting as markets of last resort

2 Quasi-Pools (FL & MN)

13 Pool states w/ Direct Assignment

15 Pool states w/o Direct Assignment

2 Private Carrier states (no Direct Assignments – MO & NE)(FWCJUA)

Workers Compensation Residual Market MechanismsState Funds as of 2003

(Quasi-Pool)

Source: Jon Hale, Travelers

12

Workers Compensation Residual Market Pool Premium Volume Is on the RiseNCCI Managed Workers Compensation Residual Market Pools

As of March 31, 2003

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

$634M

$352M

$1.1B

* Excludes Maine Residual Market Pool** Incomplete Policy Year Projected to UltimateIncludes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)

$ Billions


13

Workers Compensation Residual Market Plan New Applications Bound

Representative Subset of NCCI Plan Administered Residual Markets*

31%

42%41% 32%84%

82%69%

58%

60%

68%

18%16%0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

YTD 6-1998 YTD 6-1999 YTD 6-2000 YTD 6-2001 YTD 6-2002 YTD 6-2003

Assignments without Prior Coverage

Assignments with Prior Voluntary Coverage

Assignments without Prior Coverage–Total # of applications assigned with prior voluntary coverage during last six months prior to assignmentAssignments without Prior Coverage–Total # of applications assigned with no prior coverage during last six months prior to assignment* If servicing carriers stay through the contract years, they can renew policies themselves without having the employers to go through the application process. Also, changes of servicing carriers from one year to next may distort results


14

Workers Compensation Residual Market Plan New Premium Bound

Representative Subset of NCCI Plan Administered Residual Markets*

69%

77%

75%67%23%

26% 33%

41% 49%

31%

51%59%0

50

100

150

200

250

YTD 6-1998 YTD 6-1999 YTD 6-2000 YTD 6-2001 YTD 6-2002 YTD 6-2003

Assignments without Prior Coverage

Assignments with Prior Voluntary Coverage

Assignments without Prior Coverage–Total premium for applications assigned with prior voluntary coverage during last six months prior to assignmentAssignments without Prior Coverage–Total premium for applications assigned with no prior coverage during last six months prior to assignment* If servicing carriers stay through the contract years, they can renew policies themselves without having the employers to go through the application process. Also, changes of servicing carriers from one year to next may distort results

$ Millions


15

Workers Compensation Residual Market Plan Shares Have Increased in Recent

Years

11%

18%

3%

11%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1998 1999 2000 2001 2002 1st Qtr 2003

Policy Year

Policies Premium

Includes data for AL, AZ, AK, AR, CT, DC, GA, ID, IA, IL, IN, KS, NV, NH, NM, OR, SD, VA, VT


16

Workers Compensation Residual Market Pool Combined Ratios Are Holding Steady

NCCI Managed Workers Compensation Residual Market PoolsAs of March 31, 2003

116116118117113

10298

9397103

50

60

70

80

90

100

110

120

130

140

150

Policy Year

Percent

* Incomplete Policy Year Projected to UltimateIncludes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)


17

Workers Compensation Combined RatiosNCCI Managed Residual Market Pools as of March 2003

vs.Private Carriers Ultimate Accident Year Combined Ratios

95 97101

106

119129

137 133125

107116116118117113

102989397

103

5060

7080

90100110

120130

140150

Residual Market (Pol Yr) Private Carriers (Acc Yr)

Percent

* Incomplete Policy Year for Residual Market Projected to Ultimate. Includes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)

Source for private carriers accident years 1993–2002: NCCI. Accident year data is evaluated as of 12/31/2002, developedto ultimate and includes dividends to policyholders


18

Workers Compensation Residual Market Pool Combined Ratios Mainly Driven by Loss Ratios


3534 34

3333

36 37 35 35 35

10397 93

98102

113117 118 116 116

6862 60

6469

76 80 82 82 81

50

60

70

80

90

100

110

120

130

140

150

Policy Year

Percent

* Incomplete Policy Year Projected to UltimateIncludes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)


19

Workers Compensation Private Carrier Combined Ratios Driven by Both Loss & U/W

Expense Ratios

25 28 2930

31

3234 31

30

2795 97

101106

119

129137 133

125

107

70 69 7276

8897

103 10295

80

50

60

70

80

90

100

110

120

130

140

150

Policy Year

Percent

Source for private carriers accident years 1993–2002: NCCI. Accident year data is evaluated as of 12/31/2002, developed to ultimate and includes dividends to policyholders


20

Workers Compensation Loss RatiosNCCI Managed Residual Market Pools as of March 2003

vs.Private Carriers Ultimate Accident Year Combined Ratios

Percent

* Incomplete Policy Year for Residual Market Projected to Ultimate. Includes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)

Source for private carriers accident years 1993–2002: NCCI. Accident year data is evaluated as of 12/31/2002, developedto ultimate

70 69 7276

8897

103 10295

80818282807669

646062

68

5060

7080

90100110

120130

140150

Residual Market (Pol Yr) Private Carriers (Acc Yr)


21

Workers Compensation Residual Market Pool Underwriting Results Remain Negative


-104

107 128

25

-13 -42 -45 -62-103

-178

-500

-400

-300

-200

-100

0

100

200

300

400

500

19931994

19951996

19971998

19992000

20012002**

Policy Year

$ Millions

* Excludes Maine Residual Market Pool** Incomplete Policy Year Projected to UltimateIncludes servicing carriers for all pools that NCCI manages (NWCRP, MA, MI, & NM)


22

Number of StatesNCCI Non-NCCI

Programs Programs

• Surcharge and Differential Programs 22 5

• Take-Out Credit Program 16 2

• Removal of Premium Discounts 16 2

• Loss-Sensitive Rating Plan 15 1

• Assigned Risk Adjustment Program 15 6

(out of 22) (out of 9)

Workers Compensation Residual Market Plan Programs

Sources: NCCI (NCCI-states); Jon Hale (Non-NCCI states)Applicable in all states where NCCI administers assigned risk programs

23

Workers Compensation Policy Size Distribution

Residual Market Plan* vs. VoluntaryYTD through June 2001

Total number of assigned risk policies in force, updated 8/02/2003* Includes residual market policies for all NCCI Plan Administered states, including IN. (Does not include all Pool states such as NJ, DE, & NC)

Assigned Risk - YTD 6/2001$50,000-$99,999

1%$10,000-$49,9996%

$100,000 and over0%

$0-$2,49977%

$5,000-$9,9996%

$2,500-$4,99910%

Voluntary - YTD 6/2001$50,000-$99,999

1%

$10,000-$49,99910%

$100,000 and over1%

$0-$2,49964%

$5,000-$9,99910%

$2,500-$4,99914%


24

Workers Compensation Policy GrowthChange in Number of Risks

Residual Market Plan* vs. VoluntaryYTD through June 2003 vs. YTD through June 2001


-8%

0%5%

10% 12%19%

53%59%

46%38%

28%

-6%-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

$0-$2,499 $2,500-$4,999 $5,000-$9,999 $10,000-$49,999

$50,000-$99,999

$100,000 andover

Assigned Risk Voluntary


25

Voluntary - YTD 6/2003

$50,000-$99,9992%

$10,000-$49,99911%

$100,000 and over2%

$0-$2,49960%

$5,000-$9,99911%

$2,500-$4,99914%

Assigned Risk - YTD 6/2003$50,000-$99,999

1%$10,000-$49,999

8%

$100,000 and over1%

$0-$2,49970%

$5,000-$9,9998%

$2,500-$4,99912%

Workers Compensation Policy Size Distribution

Residual Market Plan* vs. VoluntaryYTD through June 2003



26

Workers Compensation Residual Market Plan Top 15 Class Codes

Policy DistributionNumber of Policies In Force

Ranking at 6/2003

Ranking at 12/2002

Ranking at 12/2001

5645 CARPENTRY-DETACHED ONE OR TWO FAMILY DWELLINGS 1 1 18810 CLERICAL OFFICE EMPLOYEES NOC 2 2 27228 TRUCKING-LOCAL HAULING ONLY-& DRIVERS 3 3 45474 PAINTING OR PAPERHANGING NOC & SHOP OPERATIONS DRIVERS 4 9 128742 SALESPERSONS COLLECTORS OR MESSENGERS-OUTSIDE 5 4 55437 CARPENTRY-INSTALLATION OF CABINET WORK OR INTERIOR TRIM 6 12 139015 BUILDINGS-OPERATION BY OWNER OR LESSEE 7 7 69014 BUILDINGS-OPERATION BY CONTRACTORS 8 11 109082 RESTAURANT NOC/CATERER 9 15 16913 DOMESTIC WORKERS-INSIDE 10 5 38017 STORE: RETAIL NOC 11 13 118832 PHYSICIAN & CLERICAL 12 8 78380 AUTOMOBILE SERVICE OR REPAIR CENTER & DRIVERS 13 16 18908 DOMESTIC WORKERS-INSIDE- OCCASIONAL 14 6 87229 TRUCKING-LONG DISTANCE HAULING-& DRIVERS 15 14 15


27

Workers Compensation Residual Market Plan Top 15 Class Codes

Premium DistributionPremium In Force

Ranking at 6/2003

Ranking at 12/2002

Ranking at 12/2001

5645 CARPENTRY-DETACHED ONE OR TWO FAMILY DWELLINGS 1 1 18861 CHARITABLE OR WELFARE - PROFESSIONAL EMPLOYEES AND CLERICAL 2 2 37229 TRUCKING-LONG DISTANCE HAULING-& DRIVERS 3 5 55551 ROOFING-ALL KINDS & YARD EMPLOYEES DRIVERS 4 3 27228 TRUCKING-LOCAL HAULING ONLY-& DRIVERS 5 4 48380 AUTOMOBILE SERVICE OR REPAIR CENTER & DRIVERS 6 6 69015 BUILDINGS-OPERATION BY OWNER OR LESSEE 7 15 108868 COLLEGE: PROFESSIONAL EMPLOYEES & CLERICAL 8 9 118835 NURSING-HOME HEALTH PUBLIC AND TRAVELING-ALL EMPLOYEES 9 17 195474 PAINTING OR PAPERHANGING NOC & SHOP OPERATIONS DRIVERS 10 16 139014 BUILDINGS-OPERATION BY CONTRACTORS 11 11 83724 MACHINERY OR EQUIPMENT ERECTION OR REPAIR NOC & DRIVERS 12 19 Not in Top 156217 EXCAVATION & DRIVERS 13 10 128829 CONVALESCENT OR NURSING HOME-ALL EMPLOYEES 14 7 179082 RESTAURANT NOC/CATERER 15 14 7


28

Distribution of Avg WC Residual Market Plan Mods Has Remained Stable in Recent Periods

Excludes Non-Experience Rated PoliciesPolicies Effective in 2001

Jan-Jun, 2001 Jul-Dec, 2001

Experience Mod Range# of

Mods %# of

Mods %

Less than 0.70 73 0.9% 72 0.8%

0.70 - 0.79 451 5.3% 451 4.8%

0.80 - 0.89 1,903 22.3% 1,993 21.3%

0.90 - 0.99 1,871 21.9% 1,938 20.7%

1.00 69 0.8% 79 0.8%

1.01 - 1.10 583 6.8% 737 7.9%

1.11 - 1.20 663 7.8% 800 8.5%

1.21 - 1.30 757 8.9% 786 8.4%

Greater than 1.30 2,168 25.4% 2,516 26.8%

Total 8,538 100.0% 9,372 100.0%

Includes data for AK, AL, AR, AZ, CT, DC, GA, IA, ID, IL, IN, KS, NH, NM, NV, OR, SC, SD, VA, & VT


29


Excludes Non-Experience Rated Policies Policies Effective in 2002

Jan-Jun, 2002 Jul-Dec, 2002


Mods %# of

Mods %

Less than 0.70 99 0.7% 76 0.6%

0.70 - 0.79 670 5.0% 625 4.7%

0.80 - 0.89 2,878 21.6% 2,749 20.6%

0.90 - 0.99 3,031 22.7% 3,061 22.9%

1.00 111 0.8% 129 1.0%

1.01 - 1.10 1,032 7.7% 1,093 8.2%

1.11 - 1.20 1,092 8.2% 1,116 8.4%

1.21 - 1.30 1,201 9.0% 1,185 8.9%

Greater than 1.30 3,240 24.3% 3,330 24.9%

Total 13,354 100.0% 13,364 100.0%



30


Excludes Non-Experience Rated Policies Policies Effective in 2003

Jan-Jun, 2003


Mods %

Less than 0.70 78 0.5%

0.70 - 0.79 661 4.1%

0.80 - 0.89 3,485 21.7%

0.90 - 0.99 4,043 25.2%

1.00 147 0.9%

1.01 - 1.10 1,282 8.0%

1.11 - 1.20 1,362 8.5%

1.21 - 1.30 1,402 8.7%

Greater than 1.30 3,599 22.4%

Total 16,059 100.0%



31


Excludes Non-Experience Rated PoliciesSix Month Policy Effective Intervals From January 2001 through June 2003

-5%

0%

5%

10%

15%

20%

25%

30%

< 0.69 0.70-0.79

0.80-0.89

0.90-0.99

1.00 1.01-1.10

1.11-1.20

1.21-1.30

> 1.31

Jan-Jun 2003

Jul-Dec 2001

Jul-Dec 2002

Jan-Jun 2001

Jan-Jun 2002



Shifts in the Marketplace Workers Compensation Residual Markets CARe Presentation Jon Hale, FCAS...

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