National Council of Self-Insurers2014 Meeting

Presented by Tom HebsonVice PresidentJune 2, 2014

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

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

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

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

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.

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

The impact of development

• Medical Development– Co-Morbidity– Opioids– Medical Advances– Complicated regulation and system structure– Overcrowded courts and or system– Presumption

The Impact of Medical Inflation

2005 2006 2007 2008 2009 2010 est 2011 est 2012 est 2013 est 2014 est 2015$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

250,000 263,500 280,101 298,587 310,829 315,181 326,527 336,323 348,094 360,278 372,887

500,000 527,000 560,201 597,174 621,658 630,362 653,055 672,646 696,189 720,556 745,775 750,000 790,500 840,302 895,761 932,488 945,542 979,582 1,008,969 1,044,283 1,080,833 1,118,662

2005 - 2015 Estimated Medical Cost InflationNCCI Avg Claim Cost

$250,000 $500,000 $750,000

Recent Bankruptcies

• Delphi Automotive Group• Prime Tanning• Hostess• City of Detroit

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?

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

The impact of Security

It is all about losses, payroll and financial standingSecurity 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 activitiesCreation 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

The impact of Security

Other pertinent issues from a regulatory perspectiveUse of inside agreements including deductible

buybacks, undisclosed indemnity agreements and other mechanisms

Multiple line, multiple state liabilities associated with self insuring

Claims suppressionThe long tail nature of the business – is it adequately

contemplated?

• Questions?

Thank You