Retailer Risk: The Tipping Point Wednesday, April 30, 2104 IND019

1. Retailer Risk: The Tipping PointWednesday, April 30, 2104IND019 Janine Kral, Nordstrom, Inc. – Moderator Carol Murphy, Aon Risk Solutions, Inc. K. Max Koonce, Wal-Mart, Inc. David T. Smith, Family Dollar

2. What to Expect/Learning Objectives • • Equip yourself with understanding of the key risk issues facing retailers this year • • Discover many of the latest tools, metrics and benchmarks for continuous improvement • • Calculate the potential of emerging risk analytics and tools to mitigate volatility and protect the balance sheet

3. Managing Director Aon Risk Solutions, Inc. Carol Murphy

4. The Tipping Point of Risk New risk management tools • Growth of risk • Global complexity • Scrutiny around risk

5. Retailer Risk Manager Brain How am I going to get from my VT captive meeting to the trial in CA that fast? Why is everyone talking about TRIA so much? Glad my property renewal got done early this year Why are my WC costs going up despite all the great things we’re doing Lifetime medical reserves Need to do broad briefing on cyber Positive outlook from S&P! Supply chain

6. Underwriter Brain My management is really concerned about employee concentration stuff and terrorism risk I wonder if those cyber losses will be paid by our GL policy? Our property premiums are going down we need a new RMS model I don’t want to lose this account but can’t get to their pricing target! I need to get to know that client better so they understand why my company is better! Their actuaries are too aggressive Those brokers! This is our best account; is our Competition going to do anything crazy?

7. 2014 Casualty Marketplace: The Great Tug of War

8. Market balance Depressed interest rates Slowing reserve releases Rising tort costs Depressed industry ROE TRIPPA uncertainty Record policyholder surplus Market competition Improving economy Exposure growth Rate Decreases Rate Increases

9. Market uncertainty: Terrorism backstop (TRIPRA) • Current version of federal terrorism backstop (TRIPRA) expires 12/31/2014 • Casualty lines impacted: • General and excess liability • Workers compensation • Market focus on workers compensation due to aggregation risk • Conventional wisdom suggests TRIPRA will be renewed with greater risk borne by private sector

10. Market uncertainty: Terrorism backstop (TRIPRA) • Uncertainty created by its expiration beginning to have implications for renewals • Ability to re-price terrorism exposures • Ability to exclude terrorism (GL/excess only) • Short term workers compensation policies • Market dislocation • Navigating the uncertainty: • Start early • Obtain best exposure data possible • For risks with pricing uncertainty, negotiate terms if TRIPRA is renewed

11. TRIPRA: Which direction will it go? The Right: Pulling for higher private sector share The Left: Pulling for continuation of public sector support

12. Casualty and Cyber Liability • ISO changes in 2001 and 2004 • Massive technological change over 10 to 15 years • Many new laws and regulations have been passed • Insurance industry has developed many new cyber products to address exposures • Huge focus of insurers following large recent breaches • Casualty language is catching up quickly this year

13. New Risk Management Tools

14. Era of Big Data: Aging Workforce

15. Research Indicates Negative Impacts on Health and Function Ageing Obesity • Body fat doubles • Poor visual acuity (decreased pupil size) • Poorer auditory acuity • Slower cognitive speed and function • Decreased strength • Muscle mass reduced • Reduced fitness level • Lower aerobic capacity • Obesity doubles work limitations • Elevated heart rate • Reduced lung function • Slower reaction time • Decreased joint range of motion

16. What does age look like for the Retail Industry? “In 2013 a Gallup poll revealed 37% of todays workers feel they will retire “after” age 65 vs 22% just 10 years ago”

17. What does the Data tell us: Retail Summary Results

18. The Impact of Aging on Workers’ Compensation Costs Key Cost Drivers on Claims “Laser results indicate the average cost of claims for the 45 to 55 age group is 52% higher than the 25 to 35 age group”

19. What Can Employers Do? • The Challenges of our changing workforce has spawned a new way of thinking about our workplaces among healthcare and safety professionals • “Ageonomics” and leveraging data to create “Prescriptive Wellness Solutions” are the latest trends in the application of Ergonomic principles in the workplace

20. Understanding Impact of Volatility Integrating Confidence Levels and Financial KPI’s Will Provide a Greater Understanding of Volatility in Go-Forward Program Design • Establishes appetite levels for enterprise risks and tolerance levels for insurable risks which are linked to corporate performance objectives and volatility thresholds • Risk Appetite • Analysis • Dynamic • RiskModeling • Generates a thorough understanding of current insurance exposures, individually and/or in portfolio • Design & • Program • Stress Testing(including funding) • Provides a cost/benefit comparison of various risk management strategies including captive and alternative risk strategies Aon Risk Solutions | Global Risk Consulting | Proprietary & Confidential

21. Risk Financing Decision PlatformIdentifying the Efficient Frontier Aon Risk Solutions | Global Risk Consulting | Proprietary & Confidential

22. Sr. Director Risk Management Walmart Stores, Inc. K. Max Koonce

23. Walmart U.S. (approx. 1,400,000 associates) • 4,005 Walmart Retail Stores • 602 Sam’s Clubs • 142 Distribution Centers • Walmart International (approx. 800,000 associates) • 6,148 Retail Units • 27 Countries Walmart Stores, Inc. is comprised of:

24. Walmart’s property and casualty program utilizes the following structure: • Self-insurance – all states • Administration through wholly owned subsidiary TPA – 49 states • Administration through outside TPA – 1 state • Self-insurance – 13 states • High deductible insurance coverage – 36 states • Administration through wholly owned subsidiary TPA – 35 states • Administration through outside TPA – 14 states General Liability Workers’ Compensation

25. The Walmart Property & Casualty Focus: Workers’ Compensation ensure associates that suffer work injuries: • Receive prompt and appropriate medical care that is focused on their recovery and return to gainful employment; • Receive prompt and appropriate disability benefits; • Compliance. General Liability Program ensure all customers claims are: • Addressed promptly and appropriately while recognizing the importance of our customers in the retail environment; • Compliance.

26. Opioids are continuing to present challenges in workers’ compensation injuries. • The use of opioid medications, particularly long-acting opioid medications, is an independent risk factor for the development of catastrophic claims. (Michigan WC Study published in J Occup Environ Med, 2012 Aug.) • Too often, opioid use results in extended disability and additional medical concerns for claimants.

27. Will the Affordable Care Act impact workers’ compensation? • The combination of guaranteed issue and individual mandates that • become effective in 2014 with expanded Medicare eligibility is • expected to facilitate coverage for an additional 30 million lives.NCCI • Annual Issues Symposium 2013. • Impact on access to Medical Providers • Cost Shifting • Charges / Utilization • Claims filed as WC because 100% coverage • Impact on co-morbidities • Impact from Employers moving employees to Part Time Status: • Safety / Training? • Injury increase?

28. How do we manage the total person, “Biopsychosocial”? • “Must meet the reasonable needs of the whole person in the context of their life predicaments in order to address healing from the injury and resolve the situation.” • Study at the University of Montreal published in Work 2013: 44(2): 117-32, stated the following, “The results show the importance of addressing chronic work disability in research and rehabilitation from a multidimensional perspective although psychosocial variables were the most significant predictors…” • Co-morbidities • Social Constraints • Economy

29. What does it take to ensure quality decision making? • Predictive Modeling • We are really helping people avoid poor outcomes, which materially affect the quality of their lives,” said George Neale, Boston-based executive vp and general claims manager for Liberty Mutual Group Inc. “And that's the real benefit of this modeling from a responsibility standpoint.” • Seattle-based SeaBright Insurance Co. uses a similar predictive model, called CATT, as part of its BrightCure PDQ program for complex workers comp claims. Richard Seelinger, senior vp of policyholder services for SeaBright, said the model, created in 2008, is used to identify difficult claims and assign peer-to-peer counseling for physicians who treat those injured workers. • Sources agree that predictive models can't replace experienced claims handlers who can interpret workers comp cases. Still, they believe it's an effective tool to lighten the workload of busy claims adjusters, as well as to provide additional assistance for less experienced staff. • Business Insurance, April 8, 2014 – Predictive Modeling flags potentially costly workers’ compensation claims. • How do you determine when a claim is off track? • How do you ensure appropriate and timely allocation of resources?

30. Legacy claims will continue to be challenging to resolve and determine exposure. • Medical Uncertainty, Prescription Over Utilization, etc….? • What does the future look like in comparison to what you know today?

31. What solutions can be provided from a legislative perspective? • NCCI projects an immediate impact on overall benefits cost of 12.9% reduction due to 2013 OK Workers’ Compensation Reform (SB 1062) • WCRIB estimated impact of California SB 863 (2012) = 6.2% rate decrease. Current projections = ? • What drives the difference in impact: • Reactive - Is it simply focusing on fixing specific gaps and issues. • Proactive - Complete reform beginning at what is and should be covered by a Workers’ Compensation Act? • Alternatives to the Workers Compensation Act.

32. Divisional Vice President Family Dollar Risk Management David T. Smith

33. Roundtable Discussion • Implications of the ACA • WC Non-Subscription • Emerging Issues • Workplace Violence/Crisis Management • Captive Utilization • Collateral – Alternatives • Fraud

34. Family Dollar Stores, Inc. Corporate Overview Charlotte, NC based stores offering quality merchandise at everyday low prices, in easy-to-shop neighborhood locations • 55 year anniversary • Fortune 300 company • 8,100+ stores • “Small Box” • One new store every 17 hours • 1 to 3 team members staff the stores • 1 billion customers per year • 11 distribution centers • 46 states • 60,000 team members • Annual sales in excess of $10 billion

35. Casualty Claims Profile • Annually • 8,400 workers’ compensation incidents • 1,400 pending • 10,800 general liability incidents • 1,250 pending • Most expensive claims paid in the past 11 years • 2003 WC claim: $3.2 million • $2 million in pharmacy • 2007 GL Claim: $1.75 million • Slip & Fall • Eggshell Claimant • Spoliation of Evidence • Annual developed loss pick • ~$80 million

36. Implications of the ACA • Consumer Awareness • MSA’s • Medicare • Medical EBay/Priceline • Integration with Benefits • Subrogation

37. Alternatives to Workers’ Compensation • Emerging Issues • Non- Subscription • Texas, Oklahoma • Additional Jurisdictions • Employer Coalition • Excess Coverage • Carrier Concerns • Improved Work Injury Medical Care for Employees

38. Workplace Violence/Crisis Management • FBI National Statistics • One robbery every 54 seconds • Average cost = over $19,200 • National Retail Industry Statistics • One Commercial Robbery Every 4 Minutes • Every Day, An Estimated: • 16,400 threats are made • 723 workers are attacked • 43,800 workers are harassed • Workers’ Compensation claims related to workplace violence, have the second highest cost per claim, behind motor vehicle accidents • Retail Risk • Stores are accessible and inviting • Personnel • Customers • Brand • Response & the cost of inaction • Workplace Violence/Crisis Management Solutions • Crisis Intervention Program • Program ROI

39. Captive Utilization • Traditional • Casualty • Property • Executive Risk • EPLI • Cyber • Warranty • Benefits • STD/LTD • Health • Life • Collateral Alternatives • Creative Risk • Difficult Coverage Alternatives • Internal Business Alternatives • MSA’s

40. Questions, Final Comments and Contact Information

41. Janine Kral • As vice president of risk management for Nordstrom, Inc., Janine Kral is responsible for all aspects of risk; assessment, mitigation and management. She oversees all litigation and claims for the company, insurance procurement, risk control/safety and business continuity planning. The risk management department is comprised of 69 individuals who provide direct risk management support to all Nordstrom locations. Janine started at Nordstrom as a regional risk manager in 1987. Prior to joining Nordstrom she was a Claims Manager at Epic Insurance Services and Liberty Mutual Insurance. • Janine received a degree in Communications and Psychology from the University of Washington and has an Associate in Risk Management (ARM) designation. She is on the Board of Directors for the Workers Compensation Research Institute (WCRI) and is member of Risk Insurance Management Society (RIMS). She is a 25 year volunteer with the juvenile court system in Seattle, Washington.

42. Carol L. Murphy • Carol Murphy is the U.S. Casualty Sales Leader and Leader of Aon’s Loss Portfolio Transactions Practice. She is the Broking lead for our Laser risk diagnostic platform and the Casualty leader to our Retail and Food and Agricultural client industry practices as well as serving on our Casualty Broking Executive Committee. • She started her career with Travelers and Johnson & Higgins before joining Aon. Aon roles included Chicago Casualty Practice Leader (1996), Managing Director and Strategic Account Manager (1997) and Executive Vice President, ARS California (1999). Carol assumed leadership of Aon Broking’s Central Region casualty team in 2007 and grew the business to an industry-leading market share in the largest client segment. She has developed a national reputation as a leading innovator in the casualty risk discipline and for exceptional advocacy of Aon’s largest and most complex clients. She serves several customers as broker and was on the team that invented Aon’s patent-pending Laser diagnostic tool. • Carol earned her BA in Economics at Bates College and MBA at the University of Chicago. She has chaired Aon’s Women’s International Network globally and has been recognized as a top “Power Broker” by Risk & Insurance for six years and as a “Responsibility Leader” in 2012. Ms. Murphy has also been honored as a “Woman to Watch” by Business Insurance, a “Woman Worth Watching” by Diversity Journal and one of the “Top 50 Women in Insurance” by Reactions in December, 2013.

43. K. Max Koonce • K. Max Koonce is the Senior Director of Risk Management for Wal-Mart Stores, Inc. Mr. Koonce received a B.B.A. degree in Economics from Harding University and a J.D. degree from the University of Arkansas at Little Rock School of Law. • As an attorney, Mr. Koonce practiced primarily in the area of insurance defense and employment matters. He has served as an Administrative Law Judge with the Arkansas Workers’ Compensation Commission. Mr. Koonce has also served as a Justice on the Arkansas Court of Appeals. • Mr. Koonce is licensed to practice law in the State of Arkansas and is a member of the Arkansas and American Bar Associations. Mr. Koonce is also a Board Member of Circle of Life Hospice, Board Member of the Northwest Arkansas Medical Centers, Member of the National Association of Social Insurance, Executive Board Member of the National Council of Self-Insured Employers, and Board Member of UWC (National Workers’ Compensation and Unemployment Organization). Mr. Koonce is a former Board Member of the Arkansas Self Insurance Association, the West Virginia Self Insurance Association, Past President of the National Council of Self-Insured Employers, and former Board Member of A+ Charter School.

44. David Smith • Mr. Smith, with an MS from Syracuse University and more than 30 years of diverse experience in the insurance sector, is Divisional Vice President – Risk Management for Charlotte, NC based Family Dollar Stores, and President of Family Dollar Insurance, Inc. Family Dollar is a Fortune 300 company with more than 60,000 employees, more than 8,000 stores and annual revenues in excess of $10.5 billion. • Mr. Smith has served as Vice President and Board Member for the Carolina’s Risk and Insurance Management Society (RIMS), has served as Workplace Task Force Co-Chair & Executive Committee Member – National Action Alliance for Suicide Prevention, under Secretary of Health and Human Services, Kathleen Sebelius, and Secretary of the Army, John McHugh. • Smith is currently serving on the Board of Directors for the South Carolina Captive Insurance Association (SCCIA). • Mr. Smith has been featured in Risk & Insurance, published in Claims Management magazine and has spoken on various Risk Management, Disability Management, Crisis Response, Business Continuity, Disaster Response, Workplace Violence, Litigation Management, ERM, Fraud, Pharmaceutical Abuse before multiple professional organizations, including the American Bar Association and the Risk and Insurance Management Society (RIMS). For his work in the development of successful post traumatic response to workplace violence and acceleration of return to work, Mr. Smith received Risk & Insurance Management Magazine’s Risk Innovator of the Year award and Liberty Mutual’s Responsibility Leader Award.

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