Reserving For Runoff Operations A Real Life Claims Specific Methodology for Reserving a Workers Compensation Runoff

1. Reserving For Runoff Operations � A Real Life Claims Specific Methodologyfor Reserving a Workers Compensation Runoff Entity James B. Kahn, FCAS, MAAA CARe Special Interest Limited Attendance Seminar on WC September 17, 2003 New York, New York WC Always a work in progress � like the spinning of plates on broomsticks � Medicare, Not at MMI, no judge�s approval. People in other states, with different limits could suggest otherwise.WC Always a work in progress � like the spinning of plates on broomsticks � Medicare, Not at MMI, no judge�s approval. People in other states, with different limits could suggest otherwise.

2. Why a claim specific WC model? Needs to be tailor-made to each company because of many different factors internal or external � big differences between actual and expected (reinsurance leveraging, SDTF, settlements) Medical benefits vs. Indemnity benefits Injury type classifications such as PT, PP, etc. States or Jurisdictions Handling of Claims/Settlements and Loss Adjustment Expense Reinsurance Agreements, Retention Limits, Outside Recoveries (2nd Injury Funds, etc.) Implicit or Explicit Discounting Procedures Actual vs. expected results a lot different because of SDTF recoveries, settlement activity, and reinsurance leveraging Florida SDTF recoveries a long lag. Hazy law says can implicitly adjust IBNR for approved paid recoveries. SAOs show future development. Hard to get a grasp on leveraging with traditional methods (ELF�s in industry, BF and XS LDFs)Actual vs. expected results a lot different because of SDTF recoveries, settlement activity, and reinsurance leveraging Florida SDTF recoveries a long lag. Hazy law says can implicitly adjust IBNR for approved paid recoveries. SAOs show future development. Hard to get a grasp on leveraging with traditional methods (ELF�s in industry, BF and XS LDFs)

3. Particulars of WC Line of Business Generally few IBNR claims if no latent disease Payments over many years allows time to make adjustments Benefits set by Statute - changes to statutes of limitation or tort law can have profound impact Re-openings possible, though restricted by settlement language Lifetime reserves can be estimated relatively easily with mortality table assumptions Class action or something unforeseen could lead to IBNR claims, Section B, etc. Payment over many years � changes in settlement philosophy, allows to �scenario test� for a range and re-evaluate at later points in time We�ll describe some of the 94 tort reform issuesClass action or something unforeseen could lead to IBNR claims, Section B, etc. Payment over many years � changes in settlement philosophy, allows to �scenario test� for a range and re-evaluate at later points in time We�ll describe some of the 94 tort reform issues

4. Particulars of WC Runoff Entity Will have dwindling number of claims � over time becomes more manageable to look at individually May be in timeline beyond initial costs of hospitalizations and surgeries Shift in open claimants may eventually go more towards those who have suffered PT injuries and/or will not agree to settlements Do claimants pursue runoff less aggressively? Our runoff entity shown is referred to as �ABC Insurance Company� � latest AY is 1997 First four years following injury will be shown to be highest cost. Surgeries and hospitalizations are big inflation drivers. Will need to adjust reserve base since settlement possibilities (below case in many instances) will diminish. Type of claimants as PT will most likely involve more extensive treatment. �Blowup� possibilities of others if non-settled. Conflicting viewpoints on �deep pocket� theory application here.First four years following injury will be shown to be highest cost. Surgeries and hospitalizations are big inflation drivers. Will need to adjust reserve base since settlement possibilities (below case in many instances) will diminish. Type of claimants as PT will most likely involve more extensive treatment. �Blowup� possibilities of others if non-settled. Conflicting viewpoints on �deep pocket� theory application here.

5. WC Claims Handling Particulars Definitions of Closed Claims Discounting Reserving to Ultimate or otherwise Accounting issues Differences up to or beyond retentions (subrogation, etc.) Communicate with claims department to find out how these are being handled!! Definition of Closed - Not everyone handles reopens and closed claims (CNP) the same way. ABC separates between open with and without exposure Discount - explicit or implicit, some only catastrophic. Many do even if not in AS. Unwinding of discount fallacy? Reserving to ultimate or other � some project all claimants to live to a common age (Rule of X) with or without medical escalation. Others to a �settlement� value. Mortality table could be impaired or non-impaired (longer or shorter?) Accounting Issues � implicit or explicit sal/sub. SDTF. Common account netting. Reserving up to or beyond retentions � at higher levels, may piggyback off reinsurer�s audit. May not pursue subrogation for layers beyond reinsurance retention. Should always reserve ground up in case of insolvency of reinsurer or commutation.Communicate with claims department to find out how these are being handled!! Definition of Closed - Not everyone handles reopens and closed claims (CNP) the same way. ABC separates between open with and without exposure Discount - explicit or implicit, some only catastrophic. Many do even if not in AS. Unwinding of discount fallacy? Reserving to ultimate or other � some project all claimants to live to a common age (Rule of X) with or without medical escalation. Others to a �settlement� value. Mortality table could be impaired or non-impaired (longer or shorter?) Accounting Issues � implicit or explicit sal/sub. SDTF. Common account netting. Reserving up to or beyond retentions � at higher levels, may piggyback off reinsurer�s audit. May not pursue subrogation for layers beyond reinsurance retention. Should always reserve ground up in case of insolvency of reinsurer or commutation.

6. �Settlement Value� Case Reserves A unique ABC practice? Has there been a distinction between those who will accept settlement vs. those that will not? Will there be changes in philosophy going forward? Unique to ABC? � most probably employ some form of it. ABC has started to put some at ultimate. Eventually will look to put all or most at ultimate since in runoff. Case reserves generally NOT discoverable. As a result, should be reflected in Industry patterns. We�ll define ultimate reserve to be case+IBNR whether or not case is at settlement value. Accept vs. Not accept - ABC historically had success at 70% of settlement, though started to creep up. Settling more a function of claimant than anything else ie. utility theory. Dependants, state of economy, etc. all contributing factors. Future Changes - Want to slowly raise percentages for a final push. With runoff, more settlements lead to less open claims because not growing or steady state. No longer need judge or MMI to settle effective 10/1/2001 Unique to ABC? � most probably employ some form of it. ABC has started to put some at ultimate. Eventually will look to put all or most at ultimate since in runoff. Case reserves generally NOT discoverable. As a result, should be reflected in Industry patterns. We�ll define ultimate reserve to be case+IBNR whether or not case is at settlement value. Accept vs. Not accept - ABC historically had success at 70% of settlement, though started to creep up. Settling more a function of claimant than anything else ie. utility theory. Dependants, state of economy, etc. all contributing factors. Future Changes - Want to slowly raise percentages for a final push. With runoff, more settlements lead to less open claims because not growing or steady state. No longer need judge or MMI to settle effective 10/1/2001

7. Our Example � �ABC Insurance Company� Mostly Florida WC Funds; construction and auto dealers risks Indemnity needs adjustment for PTS SDTF Recoveries need consideration Establishes Case Reserves for ALAE Initially a �settlement� value reserve for many claimants who will ultimately not accept a settlement Relatively low retention limits (~$0.5-1.0M) Settlement Value � ABC has begun to put some unlikely to settle difficult claims at ultimate value recently. Can be adjusted with medical reserve overrides. Retention limits - Differing scenarios with minimal impact for ABC could be significant for some companies which don�t have as much leveragingSettlement Value � ABC has begun to put some unlikely to settle difficult claims at ultimate value recently. Can be adjusted with medical reserve overrides. Retention limits - Differing scenarios with minimal impact for ABC could be significant for some companies which don�t have as much leveraging

8. ABC�s Categories of Claimants Closed Claims Resolved Claims Coverage B/Coverage Issues Special Disability Accepted Claims Maximum Reinsurer Reserve Claims PT Not at MMI Medical Maintenance PT Pending Other All but Closed, Resolved, and Coverage B further segmented into �Likely to Settle� or �Unlikely to Settle� Closed Claims � Almost none a year later. Closed but expecting a recovery from either SDTF, reinsurers, or other (Subrogation). Resolved Claims � Awaiting joint (judge�s) approval, open for recovery only (usually SDTF), final legal bill only, agreed to settle, now awaiting Medicare Approval Coverage B/Coverage Issues � Will have very few Coverage B as time progresses as statute runs out, though a longer tail than Coverage A in terms of reporting. Coverage Issues could involve other items needed to separate. Special Disability � claims accepted by SDTF. Dollar for dollar recovery Pre-94 with some exceptions; 50 cents on the dollar 94-97. Pay as you go so difference between SDF-Reqstd and SDF-on res Maximum Reinsurer � A different procedure, though mostly overrides. At time of article, one had exceeded maximum (Rule of 95 procedure). Another put at ultimate since then. PT � claims which have been accepted as PT under Florida Statute. On occasion could take another form of employment. Not at MMI � Claims which have yet to be determined as Maximum Medical Improvement, and therefore unable to settle - (Effective 10/1/2001 no Longer need to be at MMI to settle � we�ve changed category name) Medical Maintenance � Claims which had indemnity only settled pre-1994 Reforms. Although not ABC company practice to settle Indemnity only, still allowed under statute. PT Pending � Claims which have filed for a reclassification to PT. Most make it through, though have been getting fewer and fewer. No Statute of Limitation for filing. These days, get some PT qualities early for reclass fight. May be contributing to higher frequency and lower severity of Florida PT category. 20% offset if TT, 200%*20% offset for PP. Other � Mostly claimants who have returned to work. May or may not still be receiving benefits. Files still need to be setup for denials and Statute of Limitations. Likely to Settle look at 12 and 24 months prior to closing since ABC sometimes raises reserve amount just prior to settlement. 100% higher than historical, though Salzmann principle may say should happen that way.Closed Claims � Almost none a year later. Closed but expecting a recovery from either SDTF, reinsurers, or other (Subrogation). Resolved Claims � Awaiting joint (judge�s) approval, open for recovery only (usually SDTF), final legal bill only, agreed to settle, now awaiting Medicare Approval Coverage B/Coverage Issues � Will have very few Coverage B as time progresses as statute runs out, though a longer tail than Coverage A in terms of reporting. Coverage Issues could involve other items needed to separate. Special Disability � claims accepted by SDTF. Dollar for dollar recovery Pre-94 with some exceptions; 50 cents on the dollar 94-97. Pay as you go so difference between SDF-Reqstd and SDF-on res Maximum Reinsurer � A different procedure, though mostly overrides. At time of article, one had exceeded maximum (Rule of 95 procedure). Another put at ultimate since then. PT � claims which have been accepted as PT under Florida Statute. On occasion could take another form of employment. Not at MMI � Claims which have yet to be determined as Maximum Medical Improvement, and therefore unable to settle - (Effective 10/1/2001 no Longer need to be at MMI to settle � we�ve changed category name) Medical Maintenance � Claims which had indemnity only settled pre-1994 Reforms. Although not ABC company practice to settle Indemnity only, still allowed under statute. PT Pending � Claims which have filed for a reclassification to PT. Most make it through, though have been getting fewer and fewer. No Statute of Limitation for filing. These days, get some PT qualities early for reclass fight. May be contributing to higher frequency and lower severity of Florida PT category. 20% offset if TT, 200%*20% offset for PP. Other � Mostly claimants who have returned to work. May or may not still be receiving benefits. Files still need to be setup for denials and Statute of Limitations. Likely to Settle look at 12 and 24 months prior to closing since ABC sometimes raises reserve amount just prior to settlement. 100% higher than historical, though Salzmann principle may say should happen that way.

9. External Influences to Consider Florida Tort Reforms of 1994 Recent Medicare activity Social Security Offsets Big reforms taking place in 1994 were the allowance of entire settlement, difference in benefits among classes. PP from 66 2/3 to 33 1/3. TT claims benefits ran out 1/1/96 resulting in legal push for reclass. ALAE costs high Calendar Years 1996-1999 Medicare went after those who accepted settlements who looked for payment after age 65. ABC now gets Medicare approval prior to settlement. SS Offsets in Indemnity if qualifies (Not at MMI, PT Pending adjustments)Big reforms taking place in 1994 were the allowance of entire settlement, difference in benefits among classes. PP from 66 2/3 to 33 1/3. TT claims benefits ran out 1/1/96 resulting in legal push for reclass. ALAE costs high Calendar Years 1996-1999 Medicare went after those who accepted settlements who looked for payment after age 65. ABC now gets Medicare approval prior to settlement. SS Offsets in Indemnity if qualifies (Not at MMI, PT Pending adjustments)

10. Claims Specific Model Development of IBNR Indemnity ALAE Medical Miscellaneous adjustments/outside model adjustments Likely to settle claims � ultimate reserve estimated to be a percentage of current case reserves (at settlement value). Unlikely to settle (maximum exposure) - essentially applies a selected monthly amount by the number of remaining months from a mortality table (plus �adjustments�); no pdf(x) distribution around life expectancy. Reinsurance and Other Recoveries - easier to track all recoveries including SDTF by looking at individual claims. ALAE cession for each claimant � pro rata, same as loss, or not at all. Commuted or insolvent carriers? Reinsurance could have commutation implications. Need to adjust for commuted or insolvent carriers.Reinsurance could have commutation implications. Need to adjust for commuted or insolvent carriers.

11. Indemnity Reserve In its simplest form, should be remaining months of lifetime times an amount determined by statute Permanent Total Supplemental (PTS) in Florida to reflect cost of living adjustments ~20 % Social Security Disability offsets in some cases � adjustments made to �Not at MMI�, �PT Pending� classifications We�ve selected all year monthly average times remaining months, which may be conservative given the possibility of other costs initially ie. vocational rehabilitation which would occur early on if not an ongoing ie. difference in wages. May have vocational rehab costs in the first couple of years as retraining in another vocation could take place. Indemnity shouldn�t decrease over time � generally won�t happen unless a death and caps. ABC doesn�t settle indemnity unless Pre-1994. Although not ABC philosophy, can settle Indemnity only piece. PTS Table - Take 2/3 times average weekly wage to a maximum of 100% SAWW. As result, like everyone is capped at 150% of SAWW in terms of their salary position. We�ve selected all year monthly average times remaining months, which may be conservative given the possibility of other costs initially ie. vocational rehabilitation which would occur early on if not an ongoing ie. difference in wages. May have vocational rehab costs in the first couple of years as retraining in another vocation could take place. Indemnity shouldn�t decrease over time � generally won�t happen unless a death and caps. ABC doesn�t settle indemnity unless Pre-1994. Although not ABC philosophy, can settle Indemnity only piece. PTS Table - Take 2/3 times average weekly wage to a maximum of 100% SAWW. As result, like everyone is capped at 150% of SAWW in terms of their salary position.

12. ALAE Reserve Will need to know how ALAE treated in cessions Unlike other LOBs, older WC claims may not have as high a % of ALAE to loss as less mature claims ABC has seen favorable incurred ALAE development the last several quarters, although Industry shows development including a 5% tail beyond 19 years of age 1. For ABC, almost all cases ALAE is Pro Rata. A couple where considered loss. Per claims, no ALAE reserves for Med Maintenance. Handle at claim level. Reverse Salzmann. Lawyers have incentive to settle or reclass. As population approaches PT unlikely, both of these will diminish. 3. Industry amount of five percent, may include a hybrid of paid and not case only. ABC may be slow to reflect some of the changes post 1994 as a conservative measure. 1. For ABC, almost all cases ALAE is Pro Rata. A couple where considered loss. Per claims, no ALAE reserves for Med Maintenance. Handle at claim level. Reverse Salzmann. Lawyers have incentive to settle or reclass. As population approaches PT unlikely, both of these will diminish. 3. Industry amount of five percent, may include a hybrid of paid and not case only. ABC may be slow to reflect some of the changes post 1994 as a conservative measure.

13. ALAE Reserve (Continued) ABC Model initially takes responsive approach of multiplying latest four year monthly paid average by the remaining number of months Possible ALAE payment data distortions 1994 Florida Tort Reforms allowed entire settlement of claims for first time � resulted in more ALAE fees Push for reclassification of Injury Type beginning in Calendar Year 1996 as TT benefits expired at 1/1/1996 � resulted in more ALAE fees A runoff company should have fewer claims willing to accept settlements over time� should result in less ALAE fees Effective 10/1/2001, no longer need a judge�s approval for settlement (if claimant�s legally represented) � should result in less ALAE fees Model uses the 4 year monthly average with a per claim reserve cap of two times incurred As loss begins to exceed retention, more ALAE ceded under Pro Rata policies 1.1994 Tort Reforms - allowed settlements for first time. Big ALAE push then. Over time, will have fewer who are willing to settle in a runoff situation. 2. 1996-1998 years - a lot fewer less eligible for reclass. TT expired 1/1/1996, ABC doesn�t fight as many at PT, no judge�s approval Therefore used a cap of 2 times incurred per claim(<2.0<3.0CDF). ABC seen favorable � may be slow to reflect tort reform. Could adjust average a lot more loss pierced threshold so more cession ABC1.1994 Tort Reforms - allowed settlements for first time. Big ALAE push then. Over time, will have fewer who are willing to settle in a runoff situation. 2. 1996-1998 years - a lot fewer less eligible for reclass. TT expired 1/1/1996, ABC doesn�t fight as many at PT, no judge�s approval Therefore used a cap of 2 times incurred per claim(<2.0<3.0CDF). ABC seen favorable � may be slow to reflect tort reform. Could adjust average a lot more loss pierced threshold so more cession ABC

14. Medical Reserve Looked at historical CY payment by AY of remaining body of claims not already at maximum reinsurance retention After first 4 years following an accident, medical claims appear to follow a �U-Shaped� payment pattern over time as forces of inflation and utilization interact � similar patterns seen for virtually all Accident Years In model�s escalation scenarios, kept flat payment pattern for years 5-16 following the accident, and began to escalate at year 17 CY Payment by AY - Claims at Max (including those at Max w/o SDTF) had a different procedure, with many of them at overrides from claims department. Like looking at �non-cat� claims. Ideally, this should be revisited quarterly or whenever the next reserve evaluation is and refine model. Observed �U� Payment � Initial spike years 1-4. Became even more pronounced when all years put at 1997 cost level, and weighted (shown). Per claims, decrease in utilization until steady amount or second surgeries. Causes an increase after bottoming out around year 11. Other articles show total decrease until about year 7-8. Decrease in payment patterns for entire body, no real reason to decrease � indemnity should be steady and not tail off, medical with escalation shouldn�t decrease. Escalation years � to �flatten out the u�, assume even payments until year 16. A little light in later years, but a little heavy in middle years should even out.CY Payment by AY - Claims at Max (including those at Max w/o SDTF) had a different procedure, with many of them at overrides from claims department. Like looking at �non-cat� claims. Ideally, this should be revisited quarterly or whenever the next reserve evaluation is and refine model. Observed �U� Payment � Initial spike years 1-4. Became even more pronounced when all years put at 1997 cost level, and weighted (shown). Per claims, decrease in utilization until steady amount or second surgeries. Causes an increase after bottoming out around year 11. Other articles show total decrease until about year 7-8. Decrease in payment patterns for entire body, no real reason to decrease � indemnity should be steady and not tail off, medical with escalation shouldn�t decrease. Escalation years � to �flatten out the u�, assume even payments until year 16. A little light in later years, but a little heavy in middle years should even out.

15. Medical Reserve (Continued) Very little variation among average payments for Accident Years 1979-1991 � model uses a total weighted average of payments for this group of Accident Years Average payment for AY 1992 and AY 1993 calculated in model; immature years 1994-1997 calculated by using 1993 average payment adjusted for trend Escalation scenarios (beginning at year 17) at inflation rates of 0%, 6%, 10%, and �10% years 17-21, 6% years 22 onward� calculated 1. AYs 1979-1991 � should reflect that after time, no distinction by year�s maturity. 1992 (which WAS higher) now looks like 1991 and prior. Should be reflected in next scenario. 2. Inflation scenarios � whereas hospital inflation skyrockets over 10%, very little change in non-hospital inflation ie. Home health care. Can view 6% as 4% with general treatment and an extra 2% load for follow-up hospitalization and surgeries.1. AYs 1979-1991 � should reflect that after time, no distinction by year�s maturity. 1992 (which WAS higher) now looks like 1991 and prior. Should be reflected in next scenario. 2. Inflation scenarios � whereas hospital inflation skyrockets over 10%, very little change in non-hospital inflation ie. Home health care. Can view 6% as 4% with general treatment and an extra 2% load for follow-up hospitalization and surgeries.

16. Medical Reserve (Model Calculation) Years 1-8 - for each open claim, the average monthly payment through the first 8 years is calculated and applied to remaining months through year 8 Years 9-16 - takes lesser of 1-8 year monthly average and the all claim monthly average (for the appropriate Accident Year) and applies to remaining months through year 16 Year 17 onward - yearly escalation determined from the selected year 16 payment, and applied to all remaining months for the expected lifetime of the claim Model Calculation � Done for simplicity of setup 1-8, 9-16. Should probably be calculated average, especially in 2005 when no more claims less than 8 years. Differences at this point are inconsequential � too high years 5-8 and a little low afterwards (though SDTF and reinsurance have an impact). Model Calculation � Done for simplicity of setup 1-8, 9-16. Should probably be calculated average, especially in 2005 when no more claims less than 8 years. Differences at this point are inconsequential � too high years 5-8 and a little low afterwards (though SDTF and reinsurance have an impact).

17. Medical Payments-Claims Open With Exposure Excluding Maximum Retention This will lead to �u-shape� seen on next slide. We�ve trended the remaining open claimants to the 1997 medical cost level using 6% inflation and taken the weighted average. This pattern applies to the claimants remaining open, and will therefore be a dynamic subset. This will lead to �u-shape� seen on next slide. We�ve trended the remaining open claimants to the 1997 medical cost level using 6% inflation and taken the weighted average. This pattern applies to the claimants remaining open, and will therefore be a dynamic subset.

18. You can see the higher average payments in years 1-4 as claimants need hospitalization and more intensive treatments. The big inflation in Florida is hospital costs, and anecdotal evidence and some studies don�t show treatments outside the hospital increasing much more than inflation. Age is the great equalizer, and after utilization decrease until about year 11, starts to increase. We�ve assumed a level payment from years 5-16 and then applied medical escalation. We�re beyond year 4 in the ABC situation. You can see the higher average payments in years 1-4 as claimants need hospitalization and more intensive treatments. The big inflation in Florida is hospital costs, and anecdotal evidence and some studies don�t show treatments outside the hospital increasing much more than inflation. Age is the great equalizer, and after utilization decrease until about year 11, starts to increase. We�ve assumed a level payment from years 5-16 and then applied medical escalation. We�re beyond year 4 in the ABC situation.

19. Backup to Workers Compensation Claims Development Model

20. Settled/Closed Claim Percentages of Reserved Amounts by Calendar Year of Closing Took those that settled in a given Calendar Year, and saw where the reserves were at 24 months before. Then looked at 12 months and at closing, with payment adjustments when necessary. ABC puts reserves up just prior to settlement. As a result, we�ve looked at historical settlement as a percentage of case reserves one and two years prior to settlement. Was ~70%, now in the 85-90% range. In our �base� scenario, we�ve assumed 100% (Salzmann principle, conservatism, etc.) At some point, it may make sense to say that all those remaining will not settle and set at maximum exposure. Took those that settled in a given Calendar Year, and saw where the reserves were at 24 months before. Then looked at 12 months and at closing, with payment adjustments when necessary. ABC puts reserves up just prior to settlement. As a result, we�ve looked at historical settlement as a percentage of case reserves one and two years prior to settlement. Was ~70%, now in the 85-90% range. In our �base� scenario, we�ve assumed 100% (Salzmann principle, conservatism, etc.) At some point, it may make sense to say that all those remaining will not settle and set at maximum exposure.

21. Medical Payments-Claims Open With Exposure Excluding Maximum Retention - Medical Escalation at 10% Years 17-21, 6% thereafter Will use as base scenario in our examples. Above stair is actual data (untrended) Typo in blue book corrected on line. If you look at years 1979-1991, not much difference in average paid, therefore assumed the same. 1992 and 1993 own history. 1994-1997 trend 1993 since data is green. 1 year later, looks like 1992 behaves like prior years. Over time, should be not real difference among accident years (PT claims won�t show more development among more recent years).Will use as base scenario in our examples. Above stair is actual data (untrended) Typo in blue book corrected on line. If you look at years 1979-1991, not much difference in average paid, therefore assumed the same. 1992 and 1993 own history. 1994-1997 trend 1993 since data is green. 1 year later, looks like 1992 behaves like prior years. Over time, should be not real difference among accident years (PT claims won�t show more development among more recent years).

22. Medical Payments-Claims Open With Exposure Excluding Maximum Retention - Medical Escalation at 6% Beginning with Year 17 6% inflation6% inflation

23. Medical Payments-Claims Open With Exposure Excluding Maximum Retention - Medical Escalation at 10% Beginning with Year 17 10% escalation Typo in blue book corrected on line. 10% escalation Typo in blue book corrected on line.

24. Claim Examples

25. Loss Reserve Model at December 31, 2000 Ceded quota share of 75% used on claim 2. 50% on claim 5 not used. 1,3 had commuted with reinsurers. Go through the example. Medical reserve is based on what was there before (the �u�). On paper example the �Other� shown have returned to work and therefore, no ultimate indemnity reserve. Med Maintenance, claims has taken the position of no indemnity OR ALAE reserve.Ceded quota share of 75% used on claim 2. 50% on claim 5 not used. 1,3 had commuted with reinsurers. Go through the example. Medical reserve is based on what was there before (the �u�). On paper example the �Other� shown have returned to work and therefore, no ultimate indemnity reserve. Med Maintenance, claims has taken the position of no indemnity OR ALAE reserve.

26. Loss Reserve Model at December 31, 2000 1. No SDTF in these examples. 2. ALAE on Claims 2 and 3 capped at 2*incurred. 8 year medical average less doesn�t have much of an impact with ABC since years less than 8 years old weighted to higher average years 5-8, but could have an impact on others. Claim 5 has 20% offset for Social Security. No longer will be a �Not at MMI� category. No overrides shown.1. No SDTF in these examples. 2. ALAE on Claims 2 and 3 capped at 2*incurred. 8 year medical average less doesn�t have much of an impact with ABC since years less than 8 years old weighted to higher average years 5-8, but could have an impact on others. Claim 5 has 20% offset for Social Security. No longer will be a �Not at MMI� category. No overrides shown.

27. Loss Reserve Model at December 31, 2000 This is unlikely to settle, so at 100%. Historically below 90%.This is unlikely to settle, so at 100%. Historically below 90%.

28. Scenario Summaries

29. Claim Specific Loss Reserve Model with Losses Evaluated as of December 31, 2000 Summary of all claims. 3 slides�1st is ultimate, 2nd is reported, 3rd is difference=IBNR.Summary of all claims. 3 slides�1st is ultimate, 2nd is reported, 3rd is difference=IBNR.

30. Claim Specific Loss Reserve Model with Losses Evaluated as of December 31, 2000 Reported losses in financial schedules, therefore IBNR equals ultimate values minus reported amounts.Reported losses in financial schedules, therefore IBNR equals ultimate values minus reported amounts.

31. Claim Specific Loss Reserve Model with Losses Evaluated as of December 31, 2000 Audit of the individual claims found some indemnity reserves still being held on medical only. That�s why we see the negative figure above. Some of this on maximum reinsurer claims as well. One year later, very few closed claims or coverage B claims (~3 each) and about half the resolved claims remaining.Audit of the individual claims found some indemnity reserves still being held on medical only. That�s why we see the negative figure above. Some of this on maximum reinsurer claims as well. One year later, very few closed claims or coverage B claims (~3 each) and about half the resolved claims remaining.

32. Other Adjustments (Outside the Claims Specific Model)

33. Calculation of IBNR for New and Reopened Claims Should decrease over time. No IBNR claims, better idea of what�s out there prior to closing. Can put outstanding medical procedure amounts in settlement language if necessary. Took the latest year�s average and applied a simple linear decay of amount we�re seeing the median decrease (~15%). One year later, percentage not decreasing as much as expected. Would probably use 10%, but we�ll alert claims department. Could be premature closing of files. To the extent this figure is the difference of assumed closing (between 85% and 100%), this is a conservative approach in that it would double-count implied reopened dollars.Should decrease over time. No IBNR claims, better idea of what�s out there prior to closing. Can put outstanding medical procedure amounts in settlement language if necessary. Took the latest year�s average and applied a simple linear decay of amount we�re seeing the median decrease (~15%). One year later, percentage not decreasing as much as expected. Would probably use 10%, but we�ll alert claims department. Could be premature closing of files. To the extent this figure is the difference of assumed closing (between 85% and 100%), this is a conservative approach in that it would double-count implied reopened dollars.

34. Calculation of IBNR Amounts Exceeding Reinsurance Limits Really an additional amount beyond override; some already handled in maximum reinsurance, which has a slightly different procedure, but also many overrides which could exceed maximum under held. Claims Department calculates these to age 95. Approximation, and may be better off with overrides. Could go sum of pdf(x) times amount of payment at each year up to 95 or through mortality table. Can have help with claims department�s input for which ones have possibility of exceeding retention.Really an additional amount beyond override; some already handled in maximum reinsurance, which has a slightly different procedure, but also many overrides which could exceed maximum under held. Claims Department calculates these to age 95. Approximation, and may be better off with overrides. Could go sum of pdf(x) times amount of payment at each year up to 95 or through mortality table. Can have help with claims department�s input for which ones have possibility of exceeding retention.

35. Calculation of Final IBNR Amount

36. Final ABC IBNR calculation including Adjustments not covered by Claims Specific Workers Compensation ModelScenario: (Likely to Settle at 100% of Current Reserves with 10% medical escalation years 17-21, 6% escalation thereafter) Subrogation - Traditional methods of paid/paid yields about 2% (1.9% historical recovery). Could put in model overrides if better knowledge. Likely to settle migration to Unlikely - to settle gave number example in paper ($125,000 difference in average amount Unlikely and Likely � also same as maximum exposure and 100% on Unlikely group). This 10% is a �net� figure of likely vs. unlikely. Can also be considered as migration among classes if data warrants. Data too thin to draw any meaningful conclusions about switching (also implicitly could cover classification changes which should be fewer over time). Eventually, management may make a decision as to putting all (or PT.PT Pending, Med Maintenance) at unlikelySubrogation - Traditional methods of paid/paid yields about 2% (1.9% historical recovery). Could put in model overrides if better knowledge. Likely to settle migration to Unlikely - to settle gave number example in paper ($125,000 difference in average amount Unlikely and Likely � also same as maximum exposure and 100% on Unlikely group). This 10% is a �net� figure of likely vs. unlikely. Can also be considered as migration among classes if data warrants. Data too thin to draw any meaningful conclusions about switching (also implicitly could cover classification changes which should be fewer over time). Eventually, management may make a decision as to putting all (or PT.PT Pending, Med Maintenance) at unlikely

37. Possible Enhancements Using Accident Year Aggregation as A Priori in BF test Restatement of Triangles to show history of open claims only Indemnity averages by accident year or further segmentation into lost wages only, etc. By all type splits for medical (see how �u� looks by category) Hospital vs. Home Health Care patterns and history Actual vs. Expected payment calculations 1st two are hybrid between traditional methods and our methods to possibly smooth in changes year to year. Virtually impossible to use any Industry enhancements regarding items like tail factors 3rd method would remove other indemnity figures such as vocational rehab which may have large expense in the first year or so By all type to see if migration or payment patterns vary significantly � credibility issue Hospital varies significantly for inflation. Again parameter risk into figuring out whether a claimant needs any hospitalization in the future A vs. E could be performed at every 12 months for variation since payments could be projected yearly.1st two are hybrid between traditional methods and our methods to possibly smooth in changes year to year. Virtually impossible to use any Industry enhancements regarding items like tail factors 3rd method would remove other indemnity figures such as vocational rehab which may have large expense in the first year or so By all type to see if migration or payment patterns vary significantly � credibility issue Hospital varies significantly for inflation. Again parameter risk into figuring out whether a claimant needs any hospitalization in the future A vs. E could be performed at every 12 months for variation since payments could be projected yearly.

38. Other Items ULAE Reserves Differing philosophies as to whether ULAE costs should increase or decrease following runoff (decreasing staff vs. providing stay bonuses or considering �all costs� as ULAE) Adjustments to accepted methodologies may be necessary to consider particulars of runoff or Company philosophy Different company philosophies of handling claims based on size may warrant different ULAE calculations based upon size of claim All ULAE methods using Industry statistics could have distortions based on inconsistencies of ULAE definitions among entities ULAE � Anecdotally, ULAE still not defined consistently among entities even after 1998 recodification. Some take viewpoint that all costs with a runoff entity should be considered ULAE whereas others think they will reduce costs through less employees (offset of stay bonuses). Adjustments To be considered: Paid ULAE/Paid Loss Method � few/no IBNR claims with runoff therefore 50% factor to apply to IBNR may need adjustment � settlement value distortion to the case piece? Industry ULAE Reserve as % of Loss Reserve � settlement value distortion to case? Projected future claims handling costs need to be considered as a reserve even if prepaid ULAE � Anecdotally, ULAE still not defined consistently among entities even after 1998 recodification. Some take viewpoint that all costs with a runoff entity should be considered ULAE whereas others think they will reduce costs through less employees (offset of stay bonuses). Adjustments To be considered: Paid ULAE/Paid Loss Method � few/no IBNR claims with runoff therefore 50% factor to apply to IBNR may need adjustment � settlement value distortion to the case piece? Industry ULAE Reserve as % of Loss Reserve � settlement value distortion to case? Projected future claims handling costs need to be considered as a reserve even if prepaid

39. Other Items (Continued) Duration for Economic Value of Company �Rule of thumb� that duration should decrease over time may not hold up in the short term for WC because of change in payment patterns after year 4 Claims specific calendar year payment projections can be applied to duration calculations for economic schedules (with adjustments for �unlikely to settle� claims, reopens, etc.) Duration - Duration increased as an example shown. Better projection of payments can be easily applied for duration calculation. Need to adjust for those that are not likely to settle (likely, switch buckets, reopens) One year later, what we�ve seen � less PT Pending in unlikely, 92 and 93 look like older years, few closed or Coverage B, maybe about 13% decrease in reopened, inconclusive as to % which switch, law changes to MMI and judges that don�t settle, about 900 open with exposure.Duration - Duration increased as an example shown. Better projection of payments can be easily applied for duration calculation. Need to adjust for those that are not likely to settle (likely, switch buckets, reopens) One year later, what we�ve seen � less PT Pending in unlikely, 92 and 93 look like older years, few closed or Coverage B, maybe about 13% decrease in reopened, inconclusive as to % which switch, law changes to MMI and judges that don�t settle, about 900 open with exposure.