New Claim Reserving System Accuracy | Clarity | Transparency

1. New Claim Reserving SystemAccuracy | Clarity | Transparency Ohio Bureau of Workers’ CompensationJune 19, 2008

2. Marsha P. RyanBWC Administrator MIRA IIKick Off Meeting

3. John Pedrick, FCAS, MAAABWC Chief Actuarial Officer MIRA II Kick Off Meeting

4. Accurate Claim Reserves • 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

5. Clarity 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

6. Transparency 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 *New MIRA II Web Services Available by Sept 5, 2008

7. Legislative Update Moving Implementation Date to July 1, 2008 Impacts: • PEC Rates Use MIRA I • PA Retro Evaluation Use MIRA I • Current Web Screens Display MIRA I as of 6-30-2008 • Actuarial Analysis of MIRA II Predictions Prior to Release • New MIRA II Web Screens in Sept 2008

8. MIRA II Project Timeline

9. Why does BWC need to update the reserving system? • New system is state of the art technology • Use recent claim history and regularly updated claim history • Changes in: • Medical-Drug Utilization • BWC operations and claim management practices • Legislation • Implementation of Managed Care Organizations • Provider Fee Schedules • Safety Practices/BWC Programs • Provide clear information to customers

10. MIRA II Orientation

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

12. The Business Problems Addressed by MIRA II Aggregate Bulk Reserve Investment Allocation Solvency Policyholder Satisfaction Accurate Reserves on Individual Claims Accurate ExMods and Premium Calculations Actuarial benchmarking internal vs. external actuary • Utilizes FIC Superior Analytics and Data Screening Skills • Uses improved modeling techniques on BWC historical data • Provides per claim accuracy • Provides transparency to employers via reporting browser based reports

13. AGENDA • MIRA II Results • MIRA II Overview • How MIRA II is Built • MIRA II Accuracy Measurements • MIRA II Reporting • Fair Isaac MIRA II Transparency Plan • Appendix

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 • System hosted by FIC • One-time historical data collection only • Web-based Report Capability allows easy access to reports and reserve data by BWC staff and ICS reports can be emailed or viewed by policyholders • Ongoing data monitoring by FIC MIRA I • Models tied directly to static claim characteristics • Linear regression models used • Only summary paid data used as cost drivers (e.g. Hosp Paid = ‘Y’) • Aggregately Accurate • MIRA I system hosted by BWC • Report generation requires analyst to log onto MIRA I server Modeling Technology Accuracy Convenience & Functionality

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. Permanent Disability Prediction: Percentile Distribution (On Type 9 [perm condition] Injury Type Claims) The table below displays the percentile distribution for MIRA I and MIRA II PD predictions.  As you will note, there is a significant decrease in the MIRA II PD predictions at all percentiles.  To interpret the table, at the 25th percentile, 25% of the claims had a MIRA II PD prediction less than $1,965.00 and 75% of the claims had a PD prediction greater than $1,965.00.  The 50th percentile is the median.

17. Temporary Total Prediction: Percentile Distribution (Injury Type 5 Injury Type Claims) The table below displays the percentile distribution for MIRA I and MIRA II TD Medical predictions.  To interpret the table, at the 25th percentile, 25% of the claims had a MIRA II TD Medical prediction less than $4,191.00 and 75% of the claims had a TD Medical prediction greater than $4,191.00.  The 50th percentile is the median.

18. Medical Type 9 Prediction: Percentile Distribution The table below displays the percentile distribution for MIRA I and MIRA II PD Medical predictions.  To interpret the table, at the 25th percentile, 25% of the claims had a MIRA II PD Medical prediction less than $5,488 and 75% of the claims had a PD Medical prediction greater than $5,488.  The 50th percentile is the median. Claim Count: 7,189

19. Medical Type 6 Prediction: Percentile Distribution The table below displays the percentile distribution for MIRA I and MIRA II Medical Only Medical predictions.  To interpret the table, at the 25th percentile, 25% of the claims had a MIRA II Medical Only prediction less than $532.00 and 75% of the claims had a Medical Only prediction greater than $532.00.  The 50th percentile is the median.

20. Living Maintenance/Voc Rehab Type 5 & 9: Prediction Percentile Distribution The table below displays the percentile distribution for MIRA I and MIRA II LM predictions.  To interpret the table, at the 25th percentile, 25% of the claims had a MIRA II LM prediction less than $10,007 and 75% of the claims had a LM prediction greater than $ 10,007.  The 50th percentile is the median. Claim Count: 498

21. TDX(Temp Total/Temp Part/Wage Loss):Prediction Percentile Distribution The table below displays the percentile distribution for MIRA I and MIRA II TDX predictions.  To interpret the table, at the 25th percentile, 25% of the claims had a MIRA II TDX prediction less than $3,143.00 and 75% of the claims had a TDX prediction greater than $3,143.00.  The 50th percentile is the median. Claim Count: 8,823

22. AGENDA • MIRA II Results • MIRA II Overview • How MIRA II is Built • MIRA II Accuracy Measurements • MIRA II Reporting • Fair Isaac MIRA II Transparency Plan • Appendix

23. 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

24. MIRA II Cost Drivers • Gender • Class Code • Litigation/Injury Type • Marital Status • Injured Worker Zip code • SIC code • Catastrophic • Injury Type • Top 3 ICD9 codes • Avg Week Wage • Claim Report Delay • Age • Claim Report Delay -(Filing_Date – Injury_Date) • Tenure– (Hire_Date – Injury Date). • Total Medical Paid • Hospital • Clinic Nursing Home • Doctors • Chiro (Y/N) • Physical Therapy (Y/N) • Drugs • X-rays • Prosthesis • TTD Paid • Ambulance • Medical Devices • Attorney Fee • PP Paid • %PP Paid • Total Indemnity

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

26. 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 • Uses Static & Dynamic Variables • Model prediction reflects the historical cost of similar claims as handled by BWC in the past

27. Prediction history for an Individual Claim in MIRA II Consistency and Accuracy at the individual claims level leads to accurate aggregate reserving. Ultimate Cost = $93,553

28. How MIRA II Adapts to External Changes –A long shelf-life • Ultimate Costs for WC Claims Influenced by: • Inflation • Changes in medical utilization • Law changes • Business/Operational changes • MIRA II predicts the mean expected ultimate cost for claims with the same development patterns • All costs are normalized to “base $’s” • Deep claim-level profiling captures current norms; Future cost trends can also be explicitly applied • Uses statutory caps, limits, rate tables, and annuity tables • Aggregates based on accurate claim-level predictions

29. How MIRA II assess various claim types MIRA MIRA MIRA Controls Sub Severity Models ( ) Classification Stop Logic Medical Category DTH – No Medical Type 1 Death Benefit Reserve Paid for 390 Days Death Medical/Funeral PTD - No Medical Paid for 390 Days TD - No Medical Paid for 390 Days Type 2 PTD Benefit Reserve MO - No Medical PTD Medical Paid for 180 Days PPD - No Medical Paid for 390 Days TTD Reserve Type 5 CLAIM TPD / Wage Loss PTD Indemnity TD Living Maintenance No PTD Paid for Medical 390 Days TD Indemnity ( TTD , TPD , W / L , Type 6 Medical Living Maint .) MED Only No TD Paid for TTD Reserve 390 Days TPD / Wage Loss / e Type 9 PPD Reserve PPD Category PPD Living Maintenance No PPD Paid for Medical 390 Days

30. How MIRA II assesses various claim types –Understanding non-modeling Logic

31. Operational Usage Rates & Payments System BWC Claim Data Entry Browser Based Reports Processing MIRA II Server (ASP)

32. MIRA II Reporting • Individual Claim Summary (ICS) Reports • Summarize the relevant file facts to aide in data clean up • Includes MIRA II and Manual reserve breakdown • Gives reasons for changed predictions • Aggregate Claim Summary (ACS) Reports • Actuarial Staff can drill down and compare MIRA II and Manual on groups of claims • Full Ad Hoc reporting. Detailed claim data can be exported to Excel or Database. • Browser Based reports allow easy access by BWC Actuarial Staff BWC Actuarial Staff

33. AGENDA • MIRA II Results • MIRA II Overview • How MIRA II is Built • MIRA II Accuracy Measurements • MIRA II Reporting • Fair Isaac MIRA II Transparency Plan • Appendix

34. FIC Experience • FIC has considerable experience with transparency issues, across industries and applications • For example: • “Reg B” compliance when taking “adverse actions” in credit environment • Reason-codes • Proven, sound, modeling methodology • Non-judgmental • Consistent • Accurate • Understanding the prediction • Reason-codes

35. Thank You