Ohio Bureau of Workers’ Compensation Comprehensive Study

Financial Provisions: Loss Reserves

Report 2.1 Deloitte Consulting LLP Group 2 Report Finalized: March 26, 2009

Contents Executive Summary .................................................................................................................................... 2

The Situation ............................................................................................................................................... 4

Information & Data Gathered ..................................................................................................................... 6

Review & Analysis ..................................................................................................................................... 9

BWC Recorded Reserves ...................................................................................................................... 9

Oliver Wyman Actuarial Analysis ...................................................................................................... 10

Deloitte Consulting Actuarial Analysis .............................................................................................. 19

Conclusions ............................................................................................................................................... 35

Appendicies Appendix A – Summary Exhibits

Appendix B - Detail Exhibits

Section 1 - Private Employers ("PA") Section 2 - Public Employers - Taxing Districts ("PEC") Section 3 - Public Employers - State Agencies ("PES") Appendix C - Deliverable Matrix

Executive Summary Introduction The actuarial audit reserves (estimated losses and loss adjustment expenses for unpaid claims) and the expected future payments of losses and loss adjustment expenses are estimated by Oliver Wyman. Deloitte Consulting’s objective was to review these items and to assist the BWC in establishing objective quality management principles and methods by which to review the performance of the workers' compensation system. Deloitte Consulting did not review the reserves for purposes of recording an amount in the financial statement.

To complete the loss reserve tasks, Deloitte Consulting performed a review of the June 30, 2007 Oliver Wyman Annual Actuarial Audit Report and the December 31, 2007 Oliver Wyman Quarterly Actuarial Audit Report (collectively referred to as “Actuarial Audit Report”) to understand and assess Oliver Wyman’s actuarial process, methodologies and underlying assumptions used to determine Oliver Wyman’s discounted unpaid loss and loss adjustment expense estimate and expected future payments for each of the following Funds administered by the BWC: State Insurance Fund, Disabled Workers’ Relief Fund, Coal-Workers Pneumoconiosis Fund, Public Work-Relief Employees’ Compensation Fund, Marine Industry Fund, Self-Insuring Employers Guaranty Fund and Administrative Cost Fund.

For the State Insurance Fund, Deloitte Consulting also performed a comprehensive actuarial analysis to determine its own actuarial central estimate of losses for unpaid claims as of June 30, 2008 using claim data as of December 31, 2007. Deloitte Consulting’s estimates were determined separately for medical only claims, medical on lost time claims and each compensation type as well as for Private Employers, Public Employers – Taxing Districts and Public Employers – State Agencies. Multiple methodologies were applied based on both incremental and cumulative to date accident year data as well as both paid losses and incurred losses.

Findings Deloitte Consulting was able to replicate and understand Oliver Wyman’s methodology, noting that there are aspects of Oliver Wyman’s Actuarial Audit Report where additional documentation would further assist a reviewing actuary understand and evaluate their analysis. As their approach focuses on a single actuarial method by type of loss, we also noted additional actuarial methods could provide greater insight on the dynamics affecting the reserves.

The BWC’s recorded reserves for unpaid loss and loss adjustment expense as of June 30, 2008 appears reasonable when considering a risk margin for variability in unpaid losses or a contingency provision for the risk that future investment yields are less than anticipated. However, the BWC’s recorded reserves do not include an explicit risk margin and, therefore, appear conservative. This conservatism adds some strength to the BWC’s financial statements beyond that indicated by the current level of net assets.

For the State Insurance Fund, Deloitte Consulting’s actuarial central estimate of the discounted losses for unpaid claims as of June 30, 2008, based on data as of December 31, 2007, is $1.9 billion, or 13%, lower than that estimated in Oliver Wyman’s December 31, 2007 Quarterly Audit Report. The majority of the difference is associated with medical on lost time claims and varies by employer groups. Deloitte Consulting’s estimate is 8% lower for Private Employers, 29% lower for Public Employers – Taxing Districts, and 31% lower for Public Employers – State Agencies. On a nominal (undiscounted) basis, Deloitte Consulting’s actuarial central estimate is $5.4 billion, or 19% lower than that estimated in Oliver Wyman’s December 31, 2007 Quarterly Audit Report. The percentage difference between Deloitte Consulting and Oliver Wyman is smaller on a discounted basis due to differences in the respective estimated payment patterns

Deloitte Consulting’s actuarial central estimate of discounted losses for unpaid claims does not include a risk margin or contingency provision. Therefore, Deloitte Consulting cautions that the difference in the discounted unpaid loss estimates between Oliver Wyman and Deloitte Consulting should not be interpreted as indicating that the BWC’s recorded reserves need to be adjusted at this time.

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There are substantial uncertainties in estimating the loss and loss adjustment expenses for unpaid claims. Examples include but are not limited to the rate of inflation to assume for future medical and compensation payments, the projected development for losses as they age beyond the observable development periods (for example, beyond 30 years to 50 years or more), the impact of the transition to MIRA II on operational tactics which might affect future payments, the deviation of future investment yields from those anticipated in the discount factor, and the inherent variability in losses over time. Deloitte Consulting also noted a favorable frequency trend which, if it mitigates or reverses, could introduce more uncertainty in the ratemaking and reserving process.

In addition, there has been an increase in Lump Sum Settlement activity and related loss payments in recent years. This activity could potentially lead to a significant reduction in ultimate loss estimates and cash flow projections for open claims. Deloitte Consulting’s limited analysis on the potential impact of the increased Lump Sum Settlement activity is promising, but there is significant uncertainty. Therefore, Oliver Wyman’s and Deloitte Consulting’s discounted unpaid claim estimates for Private Employers, Public Employers – Taxing Districts and Public Employers – State Agencies business within the State Insurance Fund do not recognize the potential cost savings from the increase in LSS activity other than what has been observed in the development data to date.

The Disabled Workers Relief Fund (“DWRF”) pays benefits on permanent total disability claims for annual cost of living adjustments for claims that fall below a certain threshold. The number of claims eligible for DWRF benefits as well as the amount of the benefit increase over time as the threshold is adjusted upward based on the consumer price index. Therefore, the unpaid claim obligations of the DWRF and the future assessments needed to pay the DWRF benefits are subject to significant risk and uncertainty due to a potentially highly leverage effect of future inflation. This uncertainty may add significant stress to Ohio’s workers’ compensation system and state economy through potentially higher future assessments to fund DWRF benefits associated with claims that have already occurred.

The BWC does not appear to effectively review the third-party actuarial analysis to understand the performance of estimates over time or assess the appropriateness of the methodologies and reasonableness of the factors and assumptions they incorporate. Although the BWC provides incremental payment data by Fund, type of loss and accident to the third-party actuary quarterly, the BWC does not appear to own the historical claim development data incorporated in the third-party actuarial analysis;

The following comprises Deloitte Consulting's primary recommendations for the Actuarial Audit Reserves. Our recommendations are made in this context and we recognize that the BWC has many of these recommended solutions already under study and in various stages of implementation.

• Include a Reserve Risk Margin or Contingency Provision - The BWC’s recorded reserves do not include an explicit risk margin for variability in the losses or a contingency provision for the risk that future investment yields are less than anticipated. Provisions in both areas should be included when evaluating the financial strength of the “funded” obligations managed by the BWC. A reserve risk provision could be included in recorded reserves but should be considered when evaluating the financial strength and net assets of the BWC even if the financial statements do not.

Deloitte Consulting also recommends using a discount factor that is more reflective of a risk-free rate. This would alleviate the need for a separate investment risk provision;

• Disclose Significant Risk Provisions, Margins or Discounts - The BWC should disclose any significant risk provisions, margins or discounts to the extent they are included in the financial statements;

• Require an Annual Statement of Actuarial Opinion - While there is an annual report on the actuarial audit reserves, there should be a Statement of Actuarial Opinion issued by a qualified actuary to support the amounts recorded in the BWC’s financial statements The Statement of Actuarial Opinion, as well as other actuarial work related to recorded reserves, should comply with Actuarial Standards of Practice Numbers 7, 20, 23, 36, 41 and 43 and any other applicable standards. All applicable provisions of these standards should be addressed;

• Conduct Further In-depth Studies of Potential Savings from Lump sum settlements - The increase in lump sum settlement activity in recent years could potentially lead to a significant reduction in ultimate losses and future cash flow projections. Deloitte Consulting’s initial analysis of the impact of the increased emphasis on lump sum settlements is promising, but further in-depth study of the potential savings is recommended.

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t The

re assessments needed to pay the DWRF benefits. The BWC should conduct further y

on internal data analysis and performing various reviews, tests and validations of the third party unpaid claim estimates. The

of this Report discusses additional findings and recommendations to those above. The Deloitte Consulting team appreciates the considerable time and effort dedicated by BWC constituents over the course of our discovery.

• Conduct Further Analysis of the Risk of Inflation on the DWRF - The DWRF pays benefits on permanentotal disability claims for annual cost of living adjustments for claims that fall below a certain threshold.number of claims eligible for DWRF benefits as well as the amount of the benefit increase over time as the threshold is adjusted upward based on the consumer price index. Therefore, the DWRF is subject to significant risk and uncertainty due to a potentially high leverage effect of inflation on the obligations of the DWRF and on the futuanalysis of the risk of inflation on this fund since future inflation is subject to significant changes over relativelshort periods of time.

• Increase Internal BWC Emphasis on Actuarial Audit Reserves - The BWC should consider one or more approaches to test or validate the unpaid claim estimates provided in the third party actuarial audit reviews. Specifically, as the BWC builds its internal actuarial resources, more effort can be focused

BWC should also focus on understanding trends and sources of uncertainty on reserves; The “Conclusion” section

The Situation Task Background

RFP Task Reference

RFP Task Description Task Category

Section 5.1.2 #15, page 13

Evaluate the methodology and reasonability of the expected payments established by the BWC’s independent actuarial consultant. Loss Reserves

Section 5.1.2 #21, page 14

Review the actuarial audit reserves established by the BWC’s independent actuarial consultant to establish objective quality management principles and methods by which to review the performance of the workers’ compensation system.

Loss Reserves

The BWC’s recorded reserves of loss and loss adjustment expense for unpaid claims, and the expected future payment of those reserves, are based on Oliver Wyman Actuarial Consulting, Inc.’s (“Oliver Wyman”; formerly Mercer Oliver Wyman) Actuarial Audit Analysis. The BWC records its reserves of loss and loss adjustment expense for unpaid claims on a discounted basis using a 5% interest rate without any explicit risk margin or contingency provision.

As part of the BWC Comprehensive Study, this report comprises Deloitte Consulting’s deliverable of Section 5.1.2 Task #15 and #21 of the BWC’s Request for Proposal (RFP). To accomplish these tasks, Deloitte Consulting’s objective was to evaluate the actuarial audit reserves and expected payments established by Oliver Wyman and assist the BWC in establishing objective quality management principles and methods by which to review these reserves. Deloitte Consulting did not evaluate the reserves for purposes of recording an amount in the financial statements.

Process The process to complete Deloitte Consulting’s evaluation of the actuarial audit reserves and expected payments involved the following activities:

• Interviews with the BWC and Oliver Wyman to discuss the data, processes and actuarial methodologies incorporated in Oliver Wyman’s analysis;

• Review of the June 30, 2007 Oliver Wyman Annual Actuarial Audit Report and the December 31, 2007 Oliver Wyman Quarterly Actuarial Audit Report (collectively referred to as “Actuarial Audit Report”) to understand and assess Oliver Wyman’s actuarial process, methodologies and underlying assumptions used to determine Oliver Wyman’s discounted unpaid loss and loss adjustment expense estimate and expected future payments for each of the following Funds administered by the BWC: • State Insurance Fund (“SIF”); • Disabled Workers’ Relief Fund (“DRWF”); • Coal-Workers Pneumoconiosis Fund (“CWPF”); • Public Work-Relief Employees’ Compensation Fund (“PWREF”); • Marine Industry Fund (“MIF”); • Self-Insuring Employers Guaranty Fund (“SIEFG”); and • Administrative Cost Fund (“ACF”).

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• A comprehensive actuarial analysis of the Private Employers (“PA”), Public Employers – Taxing Districts (“PEC”) and Public Employers – State Agencies (“PES”) business within the SIF to determine Deloitte Consulting’s own actuarial central estimate of losses for unpaid claims as of June 30, 2008 and expected future payments using data as of December 31, 2007;

• An actual versus expected analysis of paid losses from January 1, 2008 through June 30, 2008 to determine if any changes in the Deloitte Consulting’s actuarial central estimate based on data as of December 31, 2007 are necessary; and

• Preparation of conclusions and recommendations.

Please refer to the “Information & Data Gathered Section” of this Report for a list of information and data utilized by Deloitte Consulting and the “Review & Analysis” Section for a description of the process and methodologies used by both Oliver Wyman and Deloitte Consulting.

Primary Constituents BWC Administrator, Chief Financial Officer and Chief Actuarial Officer - Responsible for recorded reserves in the BWC’s financial statements;

Actuarial Committee of the BWC Board - Responsible for reviewing and approving the recording reserves in the BWC’s financial statements;

BWC Actuarial Department – Responsible for collection of Data and assessing reasonableness of Oliver Wyman estimate of actuarial audit reserves and expected payments; and

Oliver Wyman – Third party actuary responsible to establish actuarial audit reserves and expected payments.

Information & Data Gathered Interviews Deloitte Consulting practitioners conducted initial and follow-up discussions with BWC leadership and staff as well as the BWC’s third-party actuary, Oliver Wyman, to understand the unpaid loss and loss adjustment expense obligations of each BWC Fund and the derivation of each Fund’s recorded reserves. The following individuals were very helpful in answering our questions and responding to requests for information and data.

The BWC

• Chief Actuarial Officer • Director, Actuarial Department • Project Lead, Assistant Director – Actuarial Department • Actuarial Supervisor, Actuarial Department • Actuarial Supervisor, Actuarial Department

Assistant Legal Director, Subrogation

Supporting Actuary

sible officers and Oliver Wyman. Specifically, we were provided with the following:

rt title “Actuarial Audit of the

ual Audit Report title “Actuarial Audit of the Workers’ Compensation as of

eport title “Actuarial Audit of the Workers’ Compensation State June

it Report title “Actuarial Audit of the Workers’ Compensation State June

• Legal •

Oliver Wyman

• Lead Actuary • Supporting Actuary •

Information/Data eloitte Consulting was provided loss information and other data prepared and provided by responD

and employees of the BWC Provided by the BWC

• Oliver Wyman Actuarial Consulting’s December 31, 2007 Quarterly RepoWorkers’ Compensation State Insurance Fund and Related Funds Administered by the Ohio Bureau of Workers’ Compensation as of June 30, 2008” dated February 11, 2008;

• Oliver Wyman Actuarial Consulting’s AnnState Insurance Fund and Related Funds Administered by the Ohio Bureau of Workers’ CompensationJune 30, 2007” dated August 24, 2007;

• Mercer Oliver Wyman’s Annual Audit RInsurance Fund and Related Funds Administered by the Ohio Bureau of Workers’ Compensation as of 30, 2006” dated September 12, 2006;

• Mercer Oliver Wyman’s Annual AudInsurance Fund and Related Funds Administered by the Ohio Bureau of Workers’ Compensation as of 30, 2005” dated August 24, 2005;

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• Mercer Oliver Wyman’s Annual Audit Report title “Actuarial Audit of the Workers’ Compensation State Insurance Fund and Related Funds Administered by the Ohio Bureau of Workers’ Compensation as of June 30, 2004” dated September 17, 2004;

• Mercer’s Annual Audit Report title “Actuarial Audit of the Workers’ Compensation State Insurance Fund anRelated Funds Administered by the Ohio Bureau of Workers’ Compensation and the Industrial CommissionOhio as of June 30, 2003” dated September 25, 2003;

d of

002;

port title “Actuarial Audit of the Workers’ Compensation State Insurance

ough 2007; and

Multiple databases of claimant level cumulative paid loss data by benefit type for all State Insurance Fund um settlement as of December 31, 2007 evaluated semi-annually (6/30 and

e ployers, Public Employer Taxing Districts and

ed

gh 1995 evaluated annually through loyers s

January 1, 1980 for permanent total

• MMC Enterprise Risk’s Annual Audit Report title “Actuarial Audit of the Workers’ Compensation State Insurance Fund and Related Funds Administered by the Ohio Bureau of Workers’ Compensation and the Industrial Commission of Ohio as of June 30, 2002” dated September 16, 2

• William M Mercer’s Annual Audit Report title “Actuarial Audit of the Workers’ Compensation State Insurance Fund and Related Funds Administered by the Ohio Bureau of Workers’ Compensation and the Industrial Commission of Ohio as of December 31, 1992” dated February 26, 1993;

• William M Mercer’s Annual Audit ReFund and Related Funds Administered by the Ohio Bureau of Workers’ Compensation and the Industrial Commission of Ohio as of December 31, 1991” dated February 26, 1992;

• 2007 State Insurance Fund payroll separately for Private Employers, Public Employer Taxing Districts and Public Employers State Agencies;

• Database of transaction level claim data for past 20 years for the State Insurance Fund and other related Funds;

• Multiple databases of claimant level MIRA I case reserves by benefit type and Fund evaluated semi-annually (6/30 and 12/31) from 2002 thr

•claims categorized as lump s12/31) from 1993 through 2007. Payments made prior to January 1, 1993 were not included in the cumulativepaid loss data for each claim.

Provided by Oliver Wyman

• Historical incremental paid loss triangles for accident years 1977 through 2007 evaluated annually from Jun30, 1992 through June 30, 2007 separately for Private EmPublic Employers State Agencies as well as compensation benefit type and medical provider type. Incremental paid losses prior to January 1, 1992 were not included;

• Historical accident year incremental paid loss triangles evaluated annually through December 31, 2007 separately for each of the other Related Funds;

• Historical accident year cumulative lost time and permanent total disability reported claim counts evaluated annually from December 31, 1987 through December 31, 2006 separately for Private Employers, Public Employer Taxing Districts and Public Employers State Agencies of the SIF;

• Cumulative lost time and permanent total disability reported claim counts by accident year as of December 31, 2008;

• Case reserves by accident year evaluated semi-annually (6/30 and 12/31) from 2002 through 2007 combinfor all compensation types other than permanent total disability and death. Provided separately for each Fund;

• Historical incremental paid loss triangles for accident years 1965 throuDecember 31, 1995 separately for Private Employers, Public Employer Taxing Districts and Public EmpState Agencies as well as compensation benefit type and medical provider type. Incremental paid lossewere not included prior to January 1, 1979 for medical only claims,

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ry 1, 1987 for additional award benefits, and January 1, 1989

luated quarterly from June 30, 1992 through December 31, 2007 separately by Fund and benefit type;

• March 31, 2008 and June 30, 2008 quarter ending incremental paid losses for accident years 1954 through 2008 separately by Fund and benefit type; and

• State Insurance Fund payroll for calendar years 1997 through 2006 separately for Private Employers, Public Employer Taxing Districts and Public Employers State Agencies.

disability and death benefits, January 1, 1985 for percent permanent partial, permanent partial, temporary partial and lump sum settlement benefits, Januafor lump sum advancement benefits and medical on lost time claims;

• Incremental paid losses for accident years 1953 through 2007 eva

Review & Analysis BWC Recorded Reserves The recorded loss and loss adjustment expense reserves from the BWC’s June 30, 2008 fiscal year ending audited financial statements are displayed below separately for the State Insurance Fund and all other related Funds. The BWC records its loss and loss adjustment expense reserves on a discounted basis using an interest rate of 5%.

RecordedReserves

Discounted Reserves

State Insurance Fund 15,656Disabled Workers Relief Fund 1,895Coal-Workers Pneumoconiosis Fund 63Public Work-Relief Employees’ Compensation Fund 4Marine Industry Fund 3Self-Insuring Employers Guaranty Fund 719Administrative Cost Fund 1,095

Total Discounted Reserves 19,435

Included in the $15.7 billion SIF recorded reserves are approximately $14.8 billion for PA, PEC and PES business combined, $0.2 billion for the Self Insured Surplus Fund and $0.7 billion for Health Partnership Program (“HPP”) administrative expenses.

Reserves recorded on a discounted basis are only sufficient to cover unpaid claims when combined with expected future income generated from the investment of assets that support the recorded reserves. The BWC’s undiscounted reserves are approximately $36.4 billion and, therefore, the future investment income inherent in the BWC’s recorded reserves is approximately $17.0 billion.

Certain unpaid claim obligations of the SIF and other related Funds are funded on a pay-as-you-go basis and do not have real assets supporting the recorded reserves. For these unfunded obligations, the BWC records an unbilled premium/assessment receivable similar to the recorded reserves. The following chart displays the unbilled premium/assessment receivable associated with the unfunded unpaid claim obligations as well as the funded unpaid claim obligations, which are supported by real assets.

Funded and Unfunded Recorded Reserves as of June 30, 2008 ($ Millions)

Funded Unfunded

State Insurance Fund 14,776 880Disabled Workers Relief Fund 396 1,499Coal-Workers Pneumoconiosis Fund 63 0Public Work-Relief Employees’ Compensation Fund 4 0Marine Industry Fund 3 0Self-Insuring Employers Guaranty Fund 46 673Administrative Cost Fund 216 879

Total Recorded Reserves 15,504 3,931

The unfunded portion of the SIF is associated with PES and Self Insured business while the funded portion includes PA, PEC and HPP administrative expenses.

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Oliver Wyman Actuarial Analysis The BWC engaged Oliver Wyman to perform an annual estimate of the unpaid loss and loss adjustment expense for the SIF and related Funds as of June 30th and quarterly evaluations as of September 30th, December 31st and March 31st. Oliver Wyman and its predecessors have been performing unpaid loss and loss adjustment expense analyses for SIF and related Funds administered by the BWC since 1990. Deloitte Consulting understands that BWC management records its fiscal year ending June 30th unpaid loss and loss adjustment expense reserves after considering Oliver Wyman’s discounted unpaid loss estimate from their annual June 30th reserve audit. Further, BWC management may adjust its September 30th, December 31st and March 31st quarter-ending recorded unpaid loss and loss adjustment expense reserves based on Oliver Wyman’s quarterly reviews, if deemed appropriate.

The performance of quarterly interim evaluations, as of September 30th, December 31st and March 31st, is an appropriate process that allows the BWC to understand claim data development throughout the fiscal year and monitor potential impacts on the BWC’s recorded loss and loss adjustment expense reserves. However, prior to the issuance of the fiscal year-end June 30th financial statements there exists a limited time frame for the completion of the annual estimate of the unpaid loss and loss adjustment expense by the third-party actuary, Oliver Wyman. This potentially limits the third-party actuary’s ability to enhance their analysis through new or revised processes or methods, if necessary. Further, the BWC may not have sufficient time to review the third-party Actuarial Audit Report in detail in order to make judgments about the findings. An evaluation date prior to June 30th for the Annual Actuarial Audit would provide more time prior to the close of the financial statements for the third-party analysis and the BWC’s review of third party’s findings.

State Insurance Fund Oliver Wyman determines separate unpaid claim estimates for PA, PEC and PES business types within the SIF. Within each business type, estimates were determined separately for medical only, medical on lost time claims by provider type, and for each compensation type (known as type of loss throughout this Report). The following table displays each compensation type and medical provider type analyzed separately by Oliver Wyman:

Compensation Type Medical on Lost Time Provider Type

Permanent Total Disability Hospitals

Temporary Total Disability Physicians

Death Claims Pharmacies

Percent Permanent Partial Chiropractors

Permanent Partial Rehabilitations

Temporary Partial & Change of Occupation (1986)

Living Maintenance

Lump Sum Settlements

Lump Sum Advancements

Additional Awards

The estimation of unpaid losses separately for each compensation type is appropriate based on the amount of claim data available for each compensation type, varying development or persistency patterns between each compensation type and changing distributions of compensation types over time. Although estimating unpaid medical losses associated with lost time claims separately by provider type is uncommon in the industry, it is a reasonable approach for the BWC given the magnitude of the claim data. However, only methodologies that rely on incremental payment relationships can be utilized since sufficient cumulative claim data is not available prior to January 1, 1989.

Separate estimates are determined for PA, PEC, and PES due to pricing and financial statement liability reporting and unbilled premium receivable requirements. Although this is a reasonable process, consideration should be

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given to PA development or persistency patterns when selecting such assumptions for certain types of loss for PEC and PES as there is less claim data available.

Oliver Wyman’s approach to determine their estimate of unpaid losses relies heavily on the BWC’s historical claim data organized into annual incremental payments by accident year. More common actuarial methodologies based on historical cumulative paid loss development data were not considered. Methodologies that rely on historical incurred claim data, defined as paid losses plus outstanding case reserve estimates, were not performed. It is our understanding that Oliver Wyman believes MIRA I case reserve estimates do not lend themselves to methodologies that project total unpaid losses due to a limited number of valuation points and inconsistencies. Different estimates of unpaid losses are possible using varying types of data and methods.

While the Actuarial Audit Report contains detailed analyses using multiple methodologies, the unpaid loss estimates within each type of loss are based on a single actuarial methodology employing incremental paid loss data. Actuarial Standard of Practice No. 43 on unpaid loss estimates indicates the need to consider the use of multiple methods, unless reliance upon a single method model is reasonable given the circumstances. Given the potential variability in unpaid loss estimates, a comparison of estimates from different methods for the same type of loss may assist the BWC in assessing reserve risk.

State Insurance Fund - Runoff of Oliver Wyman Undiscounted Estimates Comparing actuarial ultimate loss estimates over time may provide an understanding of the level of variability inherent in the estimates, the impact of certain changes in social, legal or workers’ compensation environments, and/or gage the performance of prior actuarial loss estimates. Although the Actuarial Audit Report includes a retrospective review and comparison of current unpaid loss estimates to prior unpaid loss estimates, it does not provide sufficient detail to allow the BWC to understand changes and trends. Specifically, the Actuarial Audit Report simply compares the current and prior unpaid loss estimates on a discounted basis for all accident years combined. The retrospective analysis should be performed on an undiscounted basis by accident year and type of loss in order to allow the BWC to develop a more thorough understanding of the changes in the unpaid loss estimates and their magnitude overtime.

Deloitte Consulting performed a comparison, or runoff, of Oliver Wyman’s undiscounted estimates from the 2002 through 2007 Annual Actuarial Audit Reports as well as the December 31, 2007 Quarterly Actuarial Audit Report. This comparison shows Oliver Wyman’s undiscounted estimates for medical have sizable year-to-year reductions while their estimates for compensation have been relatively consistent. The following two charts show the change in Oliver Wyman’s undiscounted estimates for accident years 1990 through 2003 from valuation dates June 30, 2002 through December 31, 2007 separately for PA medical on lost time claims and compensation:

PA - Medical on Lost Time Claims Estimate ($Millions)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Accident Year

OW-6/02 OW-6/03 OW-6/04 OW-6/05 OW-6/06 OW-6/07 OW-12/07

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PA - Compensation Claims Estimate ($Millions)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Accident Year

OW-6/02 OW-6/03 OW-6/04 OW-6/05 OW-6/06 OW-6/07 OW-12/07

Oliver Wyman’s PA undiscounted estimates for accident years 1978 through 2007 have decreased by approximately $4.8 billion from the June 30, 2002 Annual Actuarial Audit Report to the December 31, 2007 Quarterly Actuarial Audit Report of which $4.9 billion is for medical. Deloitte Consulting also observed that the reductions in Oliver Wyman’s estimates have been more sizable for both PEC and PES. The following chart displays the change in Oliver Wyman’s undiscounted estimates from the June 30, 2002 Annual Actuarial Audit Report to the December 31, 2007 Quarterly Actuarial Audit Report separately for PA, PEC and PES as well as for medical and compensation.

Change in Oliver Wyman Undiscounted Estimates From June 30, 2002 through December 31, 2007 ($Millions)

Medical Compensation Total

Change Change Changefrom Original Percent from Original Percent from Original Percent

6/02-12/07 Estimate^ Change 6/02-12/07 Estimate^ Change 6/02-12/07 Estimate^ Change

PA (4,934) 27,190 -18% 114 25,780 0% (4,820) 52,970 -9%PEC (2,745) 7,231 -38% (251) 3,824 -7% (2,996) 11,055 -27%PES (1,078) 2,594 -42% (132) 1,211 -11% (1,211) 3,805 -32%Total (8,757) 37,015 -24% (269) 30,816 -1% (9,027) 67,831 -13%

^ Oliver Wyman Original Estimate for Accident Years 2003-2007 and Oliver Wyman's Estimate as of June 30, 2002 for Accident Years 1978-2002

As observed in the chart above, Oliver Wyman’s undiscounted estimates have decreased approximately $3.0 billion for PEC and $1.2 billion PES, which equate to a 27% and 32% decrease of Oliver Wyman’s original undiscounted estimates, respectively. These percent decreases are sizable compared to the 9% decrease observed for PA. Oliver Wyman’s original undiscounted estimates are defined as their estimates as of age 12 months for accident years 2003 through 2007 (i.e., Oliver Wyman’s June 30, 2003 estimate for accident year 2003, Oliver Wyman’s June 30, 2004 estimate for accident year 2004, etc.) and their estimates as of June 30, 2002 for accident years 1978 through 2002.

State Insurance Fund – Medical Methodology For medical only and medical on lost time claims (all provider types), Oliver Wyman used a calendar year incremental paid severity development method. In this method, estimated payments in the following fiscal calendar year for a given accident year are determined as the current fiscal calendar year payment times a persistency factor and an implicit inflation load. This is repeated for each future fiscal calendar year within each accident year until all future fiscal calendar years are projected to ultimate. For a given accident year, all future fiscal calendar year projections are then summed together to determine the accident year’s nominal (undiscounted) unpaid claim estimate.

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The persistency factors were selected judgmentally by Oliver Wyman base on analyzing the relationship of historical incremental paid loss severities from one development age to the next within each fiscal calendar year (“calendar year persistency factors”). The historical incremental paid loss severity triangle was calculated by dividing the historical incremental paid loss triangle by the estimated ultimate number of lost time claims for each accident year. Oliver Wyman only included 30 years of development history in the triangle although development exists for at least 55 years. The June 30, 2007 Oliver Wyman Annual Audit Report does not provide sufficient detail on how future calendar payments were determined beyond 30 years of development. However, based on our discussions with Oliver Wyman, we understand persistency factors beyond 30 years of development were selected based on Ohio workers compensation mortality rates. To allow for more transparency within the Annual Actuarial Audit Report, Oliver Wyman should show the calculation of estimated payments beyond 30 years of development or provide a descriptive example.

By analyzing historical persistency factors within each fiscal calendar year instead of within each accident year, as more common actuarial methods do, observed historical severity trends are removed from the persistency factors. As a result, an explicit load for future inflation must be included when projecting future calendar year payments. The fiscal calendar year inflation assumptions were selected judgmentally by Oliver Wyman based on a review of industry medical inflation trends as well as observed severity trends within the SIF’s own historical experience.

In the June 30, 2007 Annual Actuarial Audit Report and the December 31, 2007 Quarterly Actuarial Audit Report, Oliver Wyman selected an 11% medical inflation assumption for the July 1, 2007 to June 30, 2008 calendar period and a 9% annual inflation assumption for payments beyond June 30, 2008. Although these assumptions are reasonable, they are somewhat conservative compared to countrywide multi-year average trends and those observed within the BWC’s own data by Deloitte Consulting. Specifically, the 5 year, 10 year and 20 year average medical trends observed by the NCCI are approximately 7.4%, 8.5% and 7.5%, respectively, while those observed within the BWC’s own data by Deloitte Consulting are around 6% to 7%. Oliver Wyman also notes on Page 3 of Appendix A in the June 30, 2007 Annual Actuarial Audit Report for medical payments per lost time claim that “the overall average trend for all provider types and development periods has been approximately 5 – 6%”.

This non-traditional actuarial development method was incorporated by Oliver Wyman in the mid 1990’s due to changes in the SIF medical benefits. At the time, the historical paid development history was thought to not be predictive of future medical payments. This method assumes differences in the incremental paid loss severities at the same age of development between different accident years is solely due to inflation and does not consider potential varying size of loss distributions among accident years. Therefore, this methodology becomes more appropriate as the number of claims increases reducing the potential variance between accident year size-of-loss distributions. To limit potential distortions that may occur in the unpaid claim estimate from varying size-of-loss distributions, consideration could be given to observed accident year persistency factors relative to calendar year persistency factors.

This method also assumes that the distribution of the number of claims for each provider type is consistent with the number of lost time claims. To the extent that this is not true, potential distortions may exist. To eliminate this potential distortion, the incremental paid loss severity triangle could be calculated by dividing the incremental paid loss triangle by the number of ultimate claims for given medical type under review instead of the number of ultimate lost time claims.

For segments with smaller amounts of data, unusual unpaid claim estimates are more likely using this methodology. For example, Oliver Wyman’s nominal unpaid loss estimate for the PA Other Health provider type of approximately $3.15 billion as of June 30, 2007 is 137 times the actual annual loss payments from July 1, 2006 to June 30, 2007 of approximately $23 million. In other words, it would take 137 years for the BWC to pay Oliver Wyman’s unpaid loss estimate at the current annual payment rate. This is not realistic unless there is a substantial medical benefit change for PA Other Health in the future. The following chart displays the implied medical on loss time claims unpaid loss to annual payment ratios by provider type for PA business as well as actual loss payments from July 1, 2006 through June 30, 2007 and Oliver Wyman’s nominal unpaid loss estimate as of June 30, 2007.

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Private Employers - Medical on Lost Time Claims ($ Millions)

7/1/06-6/30/07 Oliver Wyman Nominal Unpaid LossProvider Loss Payments Unpaid Loss Estimate to Annual

Type Amount % of Total Amount % of Total Payment Ratio

Hospitals 200 37% 1,403 14% 7Physicians 135 25% 1,177 12% 9Pharmacy 99 18% 3,666 37% 37

Chiropractor 31 6% 251 3% 8Rehabilitation 56 10% 333 3% 6

Other 23 4% 3,146 32% 137

Total 543 100% 9,976 100% 18

For PEC and PES, the Oliver Wyman unpaid loss estimates for medical on lost time claims are substantially greater than PA for each provider type relative to actual annual loss payments. The following chart displays unpaid loss estimate to annual payment ratios separately for PA, PEC and PES by provider type:

Oliver Wyman Unpaid Loss Estimate to Annual Payment RatioAs of June 30, 2007

0

25

50

75

100

125

150

175

200

225

Hosp

itals

Phys

ician

s

Pharm

acy

Chiro

practo

r

Reha

bilita

tion

Othe

r Hea

lthTo

tal

Unp

aid

Loss

to A

nnua

l Pay

men

t Rat

io

PA PECPES Total

The unpaid loss estimate to annual payment ratio for all provider types combined is 18 for PA, 41 for PEC and 46 for PES. Although there may exist varying payment patterns between PA, PEC and PES, the unpaid loss to annual payment ratios between PA, PEC and PES should be more consistent. Therefore, Oliver Wyman’s unpaid loss estimates for PEC and PES appear conservative relative to the unpaid loss estimate for PA. Similar to PA Other Health, all provider types within PEC and PES have a limited amount of data making the unpaid loss estimates more susceptible to unusual estimates from varying size-of-loss distributions among accident years.

Deloitte consulting also observed that the unpaid loss estimates using the calendar year persistency method for smaller provider types are susceptible to large fluctuations. For example, for PA Other Health, the Oliver Wyman ultimate loss estimate for accident year 2005 increased from approximately $285 million in the June 30, 2007 Annual Actuarial Audit Report to approximately $348 million in the December 31, 2007 Quarterly Actuarial Audit Report, an increase of approximately $63 million, while actual payments were only $0.2 million higher than expected from June 30, 2007 to December 31, 2007.

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State Insurance Fund – Temporary Total and Living Maintenance Methodology For temporary total and living maintenance loss types, Oliver Wyman relied on a calendar year incremental paid severity development method similar to that used for medical except the historical incremental paid severity triangle was normalized for changes in the average weekly benefit by accident year. Unlike medical, an inflation load is not necessary since Oliver Wyman normalized for changes in the average weekly wage.

This method applied to temporary total and living maintenance is not subject to the same degree of concern as medical due to varying size-of-loss distributions between accidents years. For temporary total and living maintenance, the amount of benefit paid is a function of the injured workers weekly wage capped at certain minimums/maximums as opposed to medical, which is a function of the severity of the injury and is not capped. However, the method is still subject to potential distortions to the extent that the number of temporary total claims (or living maintenance claims) relative to total lost time claims varies between accident years as well as the distribution of weekly wages relative to the state average weekly wage varies between accident years.

State Insurance Fund – Death Claims Methodology For death claims, Oliver Wyman primarily relied on an accident year incremental paid development method. In this method, estimated payments in the following fiscal calendar year for a given accident year are determined as the current fiscal calendar year payment times a persistency factor. This is repeated for each future fiscal calendar year within each accident year until all future fiscal calendar years are projected. For a given accident year, all future fiscal calendar year projections are then summed together to determine the accident year’s nominal (undiscounted) unpaid claim estimate.

The persistency factors were selected judgmentally by Oliver Wyman based on analyzing the relationship of historical incremental paid losses from one development age to the next within each accident year. Similar to medical, it is our understanding that persistency factors beyond 30 years of development were selected based on Ohio workers compensation mortality rates.

State Insurance Fund – All Other Compensation Types Methodology For all other compensation types including, permanent total disability, percent permanent partial, permanent partial, temporary partial, wage loss/living maintenance wage loss, lump sum settlements, lump sum advancements and additional awards, Oliver Wyman utilized an Incremental Index Payment Method.

The nominal unpaid claim estimate for a given accident year is determined by multiplying the average remaining number of weeks per ultimate claim by the average weekly wage and the ultimate number of claims in the Incremental Index Payment Method. For a given accident year, the average remaining number of weeks per ultimate claim is the accumulation of the average number of weeks of benefit per ultimate claim for each future annual period. The average number of weeks of benefit per ultimate claim for each future annual period were selected judgmentally by Oliver Wyman based on analyzing a historical triangle of the average number of weeks of benefit per ultimate claim. The average number of weeks of benefit per ultimate claim triangle was calculated as the incremental paid loss triangle divided by the number of ultimate claims and average weekly benefit. Please note that the June 30, 2007 Oliver Wyman Annual Audit Report defines a “composite factor” as the number of ultimate claims times the average weekly benefit.

This methodology is additive in nature and not multiplicative. Therefore, the estimated remaining number of weeks of benefit for a given accident year may be distorted to the extent there have been changes to the underlying benefit structure, other than normal annual changes in maximum weekly wage, over time.

State Insurance Fund – Accident Year 1976 and Prior The June 30, 2007 Oliver Wyman Annual Audit Report does not have sufficient documentation for the unpaid loss estimate associated with accident years 1976 and prior. However, based on our discussions with Oliver Wyman, we understand that their unpaid loss estimate for accident years 1976 and prior was determined by multiplying the most recent calendar year payments (from July 1, 2006 to June 30, 2007) for accident year 1976 and prior by the ratio of Oliver Wyman’s unpaid loss estimate to most recent calendar year payments for accident year 1977. This process to determine unpaid losses may not produce stable or accurate estimates as it solely relies on the relationship of the unpaid loss estimate to the most recent calendar year payments for one accident year.

15

Alternative methodologies that incorporate historical paid loss development data should be considered to estimate unpaid losses for accident years 1976 & prior since sufficient historical paid loss data are available for accident years back to at least 1953.

State Insurance Fund – Self-Insured The Self-Insured Surplus Fund included in the SIF provides for claims occurring prior to 1987 associated with bankrupt self-insureds, disallowed claim reimbursements and rehabilitation claims. Offsetting these liabilities is a potential recovery from remaining surety bonds.

Oliver Wyman’s unpaid loss estimate for bankrupt self-insureds associated with claims occurring prior to 1987 was determined in concert with their unpaid loss estimate for claims occurring in 1987 and subsequent, which are provided for under the Self-Insuring Employers Guaranty Fund (“SIEGF”).

The Oliver Wyman unpaid loss estimate for disallowed claim reimbursements and rehabilitation claims was determined by multiplying the amount of payments made during the most recent fiscal calendar year associated with disallowed claim reimbursements and rehabilitation claims by a ratio of payments made during the most recent fiscal calendar year for Private Employers to Oliver Wyman’s estimated discounted unpaid loss estimate for Private Employers.

State Insurance Fund – Health Partnership Program Administration Expense The SIF is required to reimburse managed care organizations (“MCOs”) for administration of the Health Partnership Program (“HPP”).

Oliver Wyman relied on the common paid-to-paid methodology to determine an estimate of unpaid loss adjustment expense associated with the HPP. Specifically, a selected paid to paid ratio was applied to 50% of Oliver Wyman’s SIF discounted unpaid claim estimate to determine a discounted unpaid loss adjustment expense estimate for HPP. In applying this method, Oliver Wyman assumed one-half of loss adjustment expenses are paid in the year of injury while the remainder will be paid throughout the life of the claim. Oliver Wyman also assumed that all claims occurring prior to the evaluation date have been reported. This is assumptions is aggressive based historical claim reporting patterns, which indicated lost time claims are not 100% reported as of 12 months of development.

The paid-to-paid ratio was selected judgmentally by Oliver Wyman based on the observed ratio of actual MCO payments to SIF loss payments during fiscal calendar year ending June 30, 2007. In selecting the paid to paid ratio, consideration should be given to observed paid to paid to ratios for multiple fiscal years instead of just the most recent.

Disabled Workers’ Relief Fund The Disabled Workers’ Relief Fund (“DWRF”) provides supplementary payments for cost of living adjustments to workers whose combined permanent total disability benefit plus social security disability benefit are lower than the DWRF entitlement amount (threshold). The number of claims eligible for DWRF benefits as well as the amount of the benefit increase over time as the threshold is adjusted upward based on the consumer price index. The DWRF I provides supplementary cost of living payments on claims that occurred prior to 1987 while the DWRF II provides for claims that occurred in 1987 and after. Senate Bill 307 established DWRF II, with the apparent legislative intent of an actuarially solvent pre-funding of DWRF benefits for injuries occurring in 1987 and subsequent. This pre-funding caused the DWRF II fund to grow. However, a formal Attorney General opinion in 1993 required that DWRF II operate on a terminal funding or pay as you go basis.

Deloitte Consulting reviewed Oliver Wyman’s unpaid loss estimates from their June 30, 2007 Annual Actuarial Audit Report and December 31, 2007 Quarterly Actuarial Audit Report. Based on this review, it appears Oliver Wyman’s unpaid loss estimate for the DWRF as of June 30, 2008 is reasonable. The DWRF is subject to significant risk and uncertainty due to a potentially high leverage effect of inflation on the obligations of the DWRF and on the future assessments needed to pay the DWRF benefits. The BWC should

16

conduct further analysis of the risk of inflation on this fund since future inflation is subject to significant changes over relatively short periods of time.

Coal-Workers Pneumoconiosis Fund The Coal-Workers Pneumoconiosis Fund (“CWPF”) provides voluntary coverage to employers who have employee exposure to coal dust. Such employers are required by federal law to provide such coverage to their workers. Employers may purchase coverage from the BWC through the CWPF, from a private insurer or self-insure. CWPF provides permanent and total disability benefits and medical payments to employees who have contracted pneumoconiosis (known as black lung disease) in the course of employment as well as death benefits for surviving spouses. The federal government sets benefit levels and determines claim eligibility for benefits. The CWPF provides voluntary coverage.

The methodology in Oliver Wyman’s June 30, 2007 Annual Actuarial Audit Report and December 31, 2007 Quarterly Audit Report appears appropriate and the factors and assumptions it incorporates appear reasonable.

Public Work-Relief Employees’ Compensation Fund The Public Work-Relief Employees’ Compensation Fund (“PWRE”) provides workers’ compensation benefits for workers who are engaged in any public relief employment and receiving “work-relief” in the form of public funds or goods in exchange for any service or labor rendered in connection with any public relief employment. Employers are public employer taxing districts or public employer state agencies. Injured workers covered under the PWRE are entitled to the same benefits as other injured workers without any exceptions.

The methodology in Oliver Wyman’s June 30, 2007 Annual Actuarial Audit Report and December 31, 2007 Quarterly Audit Report to estimate unpaid losses is appropriate based on the limited size of the liability associated with the PWRE.

Marine Industry Fund The Marine Industry Fund provides voluntary coverage to employers who have employees who work on or about navigable waters, as required by the Federal Longshoremen and Harbor Workers’ Act. Employers may purchase coverage from the BWC through the MIF, from a private insurer or self-insure.

A Marine Fund claim is filed with both the Department of Labor and the BWC. The Federal Government determines the claimant eligibility for benefits and sets the benefit levels. An injured worker may only receive lost time benefits from the federal claim or the BWC claim, but not from both for the same period. Medical benefits may be paid from either the federal claim or the BWC claim as long as duplicate payments do not occur. Injured workers covered under the Marine Industry Fund are entitled to the same benefits as other injured workers except for the following: • Living Maintenance and Living Maintenance Wage Loss benefits • Lump Sum Advancements • Rehabilitation Services only as ordered by the Department of Labor The methodology in Oliver Wyman’s June 30, 2007 Annual Actuarial Audit Report and December 31, 2007 Quarterly Audit Report to estimate unpaid losses is appropriate based on the limited size of the liability associated with the MIF.

Self-Insuring Employers Guaranty Fund The Self-Insuring Employers Guaranty Fund (“SIEGF”) provides for medical and compensation benefits for workers injured in 1987 and subsequent associated with bankrupt self-insureds. Claims with injury dates prior to 1987 are provided for in the Self-Insured Surplus Fund included in the SIF. In 1986, Senate Bill 307 created the Surety Bond Fund to provide security to cover the cost of claims in the event of bankruptcy or default. It was replaced in 1993 by the SIEGF for claims with injury dates after 1986.

17

Oliver Wyman estimates unpaid losses for bankrupt self-insureds combined for claims occurring prior to 1987 and subsequent to 1986. The methodology in Oliver Wyman’s June 30, 2007 Annual Actuarial Audit Report and December 31, 2007 Quarterly Audit Report is appropriate and the factors and assumptions they incorporate are reasonable.

Administrative Cost Fund The Administrative Cost Fund (“ACF”) provides for administrative expenses for the BWC and Industrial Commission as well as for Rehabilitation and a portion of Safety and Hygiene services. Oliver Wyman relied on the common paid-to-paid methodology to determine an estimate of future administrative expenses associated with all Funds expected to be paid from the ACF. Specifically, for each Fund a selected paid-to-paid was applied to 50% of Oliver Wyman’s discounted unpaid claim estimate to determine a discounted unpaid administrative expense estimate. In applying this method, Oliver Wyman assumed one-half of administrative expenses are paid in the year of injury while the remainder will be paid throughout the life of the claim. Oliver Wyman also assumed that all claims occurring prior to the evaluation date have been reported. This assumption is aggressive based on historical claim reporting patterns, which indicate lost time claims are not 100% reported as of 12 months of development. The paid-to-paid ratio was selected judgmentally by Oliver Wyman based on the observed ratio of actual loss adjustment expense payments to benefit payments for all Funds combined excluding the HPP benefits within the SIF during fiscal calendar year ending June 30, 2007. In selecting the paid to paid ratio, consideration should be given to observed paid to paid to ratios for multiple fiscal years instead of just the most recent.

18

Deloitte Consulting Actuarial Analysis

Introduction Deloitte Consulting performed an independent actuarial analysis of the PA, PEC and PES business within the SIF to assist the BWC in establishing objective quality management principles and methods by which to review the performance of the workers' compensation system. Unpaid loss estimates as of June 30, 2008 were determined separately for medical only claims, medical on lost time claims and each compensation type using data evaluated as of December 31, 2007. Subsequent to June 30, 2008, Deloitte Consulting performed an actual versus expected analysis of paid losses from January 1, 2008 through June 30, 2008. Deloitte Consulting did not determine its own unpaid loss estimate for purposes of recording an amount in the financial statement.

Deloitte Consulting’s actuarial analysis incorporated multiple methodologies based on both incremental and cumulative to date accident year data as well as both paid to date losses and incurred to date losses (paid losses plus MIRA case reserves). These methodologies are described under the “Methodology” section below.

It was necessary for Deloitte Consulting to construct cumulative paid and incurred loss triangles evaluated annually as of June 30th based on several sources of information in order to apply methodologies that rely on cumulative development data. Cumulative paid loss triangles are not maintained by Oliver Wyman as they only rely on methodologies based on incremental payment data. In addition, the BWC is not able to generate cumulative to date claim payments due to system conversions/upgrades in the early 1990’s where information associated with certain historical payment transactions were not transferred. Deloitte Consulting’s processes to generate cumulative paid and incurred loss triangles are described in detail along with the underlying data under the “Paid Loss Development” section below.

Summary of Results A Summary of Deloitte Consulting’s selected nominal and discounted unpaid loss estimates for the PA, PEC and PES business within the SIF as of June 30, 2008 are displayed below as well as the unpaid loss estimates from the December 31, 2007 Oliver Wyman Quarter Actuarial Audit Report. The discounted unpaid loss estimates are based on data as of December 31, 2007 and are discounted using a 5% interest rate selected by the BWC.

State Insurance Fund - PA, PEC and PES Unpaid Loss Estimates as of June 30, 2008Based on Data as of December 31, 2007 ($Millions)

Nominal Unpaid Loss Estimates Discounted Unpaid Loss EstimatesDeloitte Oliver Difference Deloitte Oliver Difference

Consulting Wyman Dollars Percent Consulting Wyman Dollars PercentPA

Medical 7,721 10,923 (3,202) -29% 4,455 5,445 (990) -18%Compensation 11,373 11,004 369 3% 6,612 6,633 (20) 0%Total 19,094 21,927 (2,833) -13% 11,067 12,077 (1,010) -8%

PECMedical 1,210 3,031 (1,821) -60% 699 1,367 (668) -49%Compensation 1,670 1,666 4 0% 990 1,001 (11) -1%Total 2,880 4,697 (1,817) -39% 1,689 2,368 (679) -29%

PESMedical 374 1,129 (755) -67% 217 472 (255) -54%Compensation 496 439 57 13% 297 273 24 9%Total 871 1,568 (698) -44% 514 745 (231) -31%

TotalMedical 9,305 15,083 (5,778) -38% 5,371 7,284 (1,913) -26%Compensation 13,540 13,109 431 3% 7,899 7,907 (7) 0%Total 22,845 28,192 (5,347) -19% 13,271 15,191 (1,920) -13%

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As observed in the chart above, Deloitte Consulting’s nominal unpaid loss estimate of approximately $22.8 billion for PA, PEC and PES combined is approximately $5.4 billion or 19% lower than Oliver Wyman’s estimate of $28.2 billion. For medical, Deloitte Consulting’s nominal unpaid loss estimate of $9.3 billion is significantly below Oliver Wyman’s estimate of $15.1 billion while Deloitte Consulting’s nominal unpaid loss estimate of $13.5 billion for compensation is modestly higher than Oliver Wyman’s estimate of $13.1 billion. The differences are more pronounced for PEC and PES than for PA. Specifically, Deloitte Consulting’s nominal unpaid loss estimate is 39% and 44% lower for PEC and PES, respectively, compared to 13% lower for PA. The direction of these differences is consistent with the observed changes in Oliver Wyman’s estimates annually since June 30, 2002 as discussed under the “Oliver Wyman Actuarial Analysis” section above.

On a discounted basis, the difference between Deloitte Consulting and Oliver Wyman is $1.9 billion or 13% compared the nominal difference of 19% for PA, PEC and PES combined. There is a smaller difference on a discounted basis than on a nominal basis as the difference between the Deloitte Consulting and Oliver Wyman expected future calendar year payments increases each year going forward, where Oliver Wyman is higher.

Deloitte Consulting also determined a discounted unpaid loss estimate using an interest rate of 4% instead of 5%. This resulted in a discounted unpaid loss estimate of $14.5 billion for PA, PEC and PES combined, which is approximately $0.7 billion or 4% lower than Oliver Wyman’s discounted unpaid loss estimate of $15.2 billion discounted at 5%.

The discounted unpaid loss estimates in the table above are expected to be sufficient to cover unpaid losses only when combined with the expected interest income that would be generated if those reserve balances obtained at least a 5% return from investments. According to Actuarial Standard of Practice No. 20 on discounted reserves, the actuary should be aware that a discounted reserve is an inadequate estimate of economic value unless appropriate risk margins are included to account for risk associated with the timing of the payments and the interest rate. The Oliver Wyman discounted unpaid loss estimates and the BWC recorded reserves do not appear to include an explicit risk margin, although some assumptions may reflect the risk of underestimation. As such, the Deloitte Consulting discounted unpaid loss estimates displayed in the table above also do not include a risk margin to allow for a comparison to Oliver Wyman’s discounted unpaid loss estimates. Deloitte Consulting determined risk margin estimates for the funded unpaid claim liability as part of the “Net Asset Tasks”.

2008 Actual Versus Expected Payments Deloitte Consulting performed an actual versus expected analysis of paid losses from January 1, 2008 through June 30, 2008 to determine the reasonableness of their June 30, 2008 unpaid loss estimate based on data evaluated as of December 31, 2007. The expected payments from January 1, 2008 through June 30, 2008 are based on the factors and assumptions selected by Deloitte Consulting in their analysis using data as of December 31, 2007.

Actual payments from January 1, 2008 through June 30, 2008 for PA, PEC and PES business combined were approximately $955 million compared to expected payments of approximately $965 million. The $10 million less in actual payments than expected equates to a difference of only 1%. Actual payments were less than expected for all types of loss except LSS as the increased LSS activity continued shifting payments from non-LSS types of loss to LSS. Overall, the Deloitte Consulting unpaid loss estimate as of June 30, 2008 based on date evaluated as of December 31, 2007 is consistent with what Deloitte Consulting would expect using data evaluated as of June 30, 2008. Please see Summary 1, Exhibit 3 under Appendix A.

Please note that Oliver Wyman did adjust their June 30, 2008 unpaid loss estimate for PA, PEC and PES downward from $15,190 million in the December 31, 2007 Quarterly Audit Report to $14,838 million in the June 30, 2008 Annual Audit Report.

Diagnostics The following three charts shows Deloitte Consulting and Oliver Wyman nominal loss rates for PA business, defined as ultimate loss per $100 of payroll, separately for total medical and compensation, medical on lost time claims and compensation.

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Nominal Loss Rates - PA Total Medical and Compensation

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Accident Year

Loss

per

$10

0 of

Pay

roll

Deloitte Oliver Wyman

Nominal Loss Rates - PA Medical on Lost Time Claims

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Accident Year

Loss

per

$10

0 of

Pay

roll

Deloitte Oliver Wyman

Nominal Loss Rates - PA Compensation

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Accident Year

Loss

per

$10

0 of

Pay

roll

Deloitte Oliver Wyman

As observed in the charts above, the Oliver Wyman nominal loss rates are higher in less mature accident years while the Deloitte Consulting nominal loss rates are higher in more mature accident years. In addition, the difference in less mature accident years is driven by medical on lost time claims.

Although the nominal loss rates have remained relatively stable from the mid 1990’s through 2008, the number of lost time claims has continued to decrease offsetting increasing severity over time. The following three charts display the Deloitte Consulting and Oliver Wyman ultimate frequency and nominal claim severity separately for total medical and compensation, medical on lost time claims and compensation for PA business.

21

Frequency and Severity - PA Total Medical and Compensation

0%

2%

4%

6%

8%

10%

12%

14%

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Cla

ims

per $

100,

000

of P

ayro

ll

-

20

40

60

80

100

120

Loss

per

Cla

im (0

00's

)

Del. Sev. O.W. Sev Del. Freq. O.W. Feq.

Frequency and Severity - PA Medical on Lost Time Claims

0%

2%

4%

6%

8%

10%

12%

14%

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Cla

ims

per $

100,

000

of P

ayro

ll

-

10

20

30

40

50

60

70

Loss

per

Cla

im (0

00's

)

Del. Sev. O.W. Sev Del. Freq. O.W. Feq.

Frequency and Severity - PA Compensation

0%

2%

4%

6%

8%

10%

12%

14%

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Cla

ims

per $

100,

000

of P

ayro

ll

-5101520253035404550

Loss

per

Cla

im (0

00's

)

Del. Sev. O.W. Sev Del. Freq. O.W. Feq.

The charts above show that the higher Oliver Wyman nominal rates in less mature accidents are primarily driven by higher average severity estimates for medical on lost time claims.

The following chart compares Deloitte Consulting and Oliver Wyman PEC and PES nominal loss rates to PA for total medical and compensation.

22

Nominal Loss Rate Comparison - PA, PEC and PES

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Accident Year

Loss

per

$10

0 of

Pay

roll

Del. PA Del. PEC Del. PES O.W. PA O.W. PEC O.W. PES

As observed in the chart above, the Deloitte Consulting PEC and PES nominal loss rates are consistent with each other and lower than PA. However, the Oliver Wyman PEC and PES nominal loss rates are lower than PA in older accident years and higher in younger accident years.

Similar to PA, there has also been a reduction in the frequency of claims over time for PEC and PES. However, the decrease in recent years is more pronounced for PA than for PEC and PES. This is likely due to fewer PA claims being filed as a result of the salary continuation program. The following chart shows the frequency of lost time claims separately for PA, PEC and PES.

Frequency Comparison - PA, PEC and PES

0%

2%

4%

6%

8%

10%

12%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Accident Year

Cla

ims

Per $

100,

000

of P

ayro

ll

PA PEC PES The following three charts compare the Deloitte Consulting and Oliver Wyman nominal severities for PA, PEC and PES separately for total medical and compensation, medical on lost time claims and compensation.

Total Medical and Compensation Severity - PA, PEC and PES

-

20

40

60

80

100

120

140

160

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Accident Year

Seve

rity

($00

0's)

Del. PA Del. PEC Del. PES O.W. PA O.W. PEC O.W. PES

23

Medical on Lost Time Claims Severity - PA, PEC and PES

-

20

40

60

80

100

120

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Accident Year

Seve

rity

($00

0's)

Del. PA Del. PEC Del. PES O.W. PA O.W. PEC O.W. PES

Compensation Severity - PA, PEC and PES

-

10

20

30

40

50

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Accident Year

Seve

rity

($00

0's)

Del. PA Del. PEC Del. PES O.W. PA O.W. PEC O.W. PES

Similar to PA, the Oliver Wyman medical on lost time severities for both PEC and PES are significantly higher in less mature accident years compared to Deloitte Consulting. Further, both the Oliver Wyman PEC and PES severities are significantly higher than PA while the Deloitte Consulting PEC and PES severities are similar to PA.

Lump Sum Settlements Beginning in 2006, the BWC increased its emphases on closing claims through lump sum settlements (“LSS”), which has continued into 2008. It is our understanding that the amount of the lump sum settlement is agreed upon by both the claimant and the BWC. The settlement amount is typically determined based on the net present value of the future expected medical and compensation payments for the given claimant. Upon the lump sum settlement of a claim, the BWC typically has no further liability.

The BWC’s emphasis on LSS has lead to an increase in LSS payments and a decrease in other compensation types in recent years. The following chart displays total compensation, LSS, and compensation excluding LSS payments by accident year.

24

PA - Compensation - Annual Payments by Fiscal Year Ending

-

100

200

300

400

500

600

700

800

900

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Fiscal Year Ending

(Milli

ons)

Total Compensation Total Excluding LSS LSS

As observed in the chart above, the increase in total compensation payments in recent fiscal years is driven by LSS payments while the amount of non-LSS compensation payments has decreased slightly.

We note, increases in settlement activity generally decrease reserve levels and should reduce final total payments but requires payments to be made sooner rather than later. This leads to greater uncertainty in the unpaid loss estimate as the historical development may not be indicative of future development for certain types of loss affected by the increased emphasis of LSS. Further, more uncertainty is introduced through the discount as the timing of the payments becomes less certain.

There has been a reduction in observed paid loss development over the past two years for permanent total disability, death claims and medical on lost time claims while there has been a large increase for LSS since the increased emphasis on lump sum settlements. Please refer to Section 1, Exhibit 2, Sheet 21 of Appendix B to observe the decrease in paid loss development for medical on lost time claims, Section 1, Exhibit 3, Sheet 21 of Appendix B for permanent total disability and Section 1, Exhibit 4, Sheet 21 of Appendix B for death. In addition, please refer to Section 1, Exhibit 10, Sheet 21 of Appendix B to observe the increased development on LSS.

Although the increase in LSS activity may ultimately result in cost savings for the BWC and state employers, measurement of the cost savings benefit is difficult to assess due to limited information. The BWC internal measures to evaluate the performance of LSS are based on individual claim evaluations performed solely for the purpose of determining the LSS amount. Specifically, for a given claim the final settlement amount is compared to the BWC’s estimate of the net present value of the expected future medical and compensation payments. Although this measurement may show promising evidence of future cost savings, it does not provide sufficient support by itself to confirm actual cost savings is occurring or provide support to determine the ultimate amount saved. Certain other factors that make it difficult to assess the cost savings include the following:

• A Large number of LSS claims settle for small amounts;

• Potential exists for certain LSS claims to re-open if it is determined that the settlement agreement does not comply with workers’ compensation statutes. For example, during 2008 the State Supreme Court found that the settlement agreement Mr. Robert Wise signed during 1997 did not strictly adhere to all the requirements enumerated in R.C. 4123.65; and

• LSS payments have become an increasing percentage of MIRA case reserves since the increased emphasis on lump sum settlements began in 2006. The following chart displays LSS payments relative to prior evaluation MIRA case reserves for all LSS claims by fiscal year:

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LSS Payments / Prior Evaluation MIRA Case Reserves

20%

25%

30%

35%

40%

45%

50%

2002 2003 2004 2005 2006 2007 2008Fiscal Year Ending

The BWC should consider a third-party review of current and past LSS claims to develop a better understanding of the expected cost savings and the possible impact on the recorded reserves.

Oliver Wyman’s approach to determine their unpaid claim estimate is to not recognize potential cost savings of the increase in LSS activity until the benefit can be observed in the data. In Deloitte Consulting’s opinion, this is an appropriate and prudent approach due to the uncertainty associated with the increase in LSS activity. Deloitte Consulting’s nominal and discounted unpaid loss estimates displayed earlier are based on a similar approach.

Deloitte Consulting also determined an estimate based on analyzing historical payments excluding payments associated with all LSS claims as of December 31, 2007. This process assumes that all claims that are not currently LSS will develop similar to historical non-LSS claims. This preliminary analysis of the LSS impact indicates potentially significant savings.

Paid Loss Development Data The following chart displays the permanent total disability incremental paid loss triangle for PA included in the June 30, 2007 Oliver Wyman Annual Actuarial Audit Report.

Private Employers - Permanent Total DisabilityIncremental Paid Losses (in thousands) - Evaluation in Years

AY 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10.5 11.5 12.5 13.5 14.5 15.51977 6,9811978 7,986 7,7611979 9,160 9,069 9,0501980 8,604 8,922 8,904 9,3821981 8,181 8,391 8,835 9,309 9,3171982 8,077 8,304 8,719 9,429 9,586 9,5401983 7,293 7,197 8,376 9,129 10,152 9,314 9,3231984 7,024 8,156 8,720 10,415 10,581 10,430 9,916 9,9691985 6,904 7,751 9,206 10,470 11,417 12,036 11,508 11,323 11,1231986 4,005 4,939 6,115 8,559 9,926 10,230 9,876 10,233 9,975 9,6681987 2,313 3,351 4,354 7,214 9,280 9,247 9,285 9,306 9,238 9,351 9,0741988 1,351 2,289 3,558 6,911 8,488 9,513 9,169 9,579 9,455 9,517 9,482 9,3461989 359 1,051 1,989 4,593 7,137 8,208 8,539 9,496 9,332 9,517 9,616 9,302 9,7301990 191 567 1,557 3,863 6,380 7,449 7,915 8,898 9,090 9,096 9,489 9,552 10,134 10,2101991 22 161 499 1,897 3,544 5,295 5,910 6,170 7,025 6,913 6,898 7,133 7,322 7,587 7,3091992 0 1 77 764 2,245 3,478 4,084 4,880 5,425 5,827 5,938 6,431 6,435 6,812 6,779 6,5711993 0 5 167 872 1,880 2,915 3,847 4,199 4,779 5,000 5,475 5,835 5,958 5,692 5,9391994 0 17 175 814 1,869 2,765 3,749 4,099 4,680 5,152 5,489 6,124 6,053 5,9941995 0 36 191 1,005 2,100 2,638 3,433 3,850 4,506 5,282 5,725 5,707 5,7511996 1 58 330 942 1,783 2,532 3,360 3,743 4,432 4,991 5,038 5,3531997 0 66 274 1,163 2,043 2,821 3,629 4,277 5,129 5,554 5,7051998 0 95 374 1,391 2,108 3,178 4,589 5,142 5,660 6,0061999 0 43 402 1,101 1,848 2,938 4,316 4,809 5,6972000 0 35 419 1,427 2,781 4,154 5,272 6,1422001 8 123 512 1,422 2,571 3,697 4,5822002 0 143 441 1,284 2,210 3,3832003 0 41 453 1,601 2,3442004 3 88 541 1,2502005 16 108 4142006 0 1362007 0

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As observed in the chart above, permanent total disability paid losses prior to June 30, 1991 are not included for all accident years. This is consistent with all types of loss within the June 30, 2007 Oliver Wyman Annual Actuarial Audit Report. As a result, supplemental information was required beyond that contained within the June 30, 2007 Oliver Wyman Annual Actuarial Audit Report in order to apply actuarial methodologies that rely on cumulative to date accident year data.

Unfortunately, the BWC was not able to generate cumulative to date claim payments prior to June 30, 1991 due to data system changes. Specifically, information associated with certain historical payment transactions were not transferred upon system conversions/upgrades during the early 1990’s.

Based on additional inquiries, Oliver Wyman was able to provide Deloitte Consulting with historical incremental paid loss triangles for accident years 1965 through 1995 evaluated annually through December 31, 1995 separately for PA, PEC and PES as well as compensation benefit type and medical provider type. For example, the following chart displays the permanent total disability December 31, 1995 incremental paid loss triangle for PA provided by Oliver Wyman.

Private Employers - Permanent Total DisabilityIncremental Paid Losses (in thousands) - Evaluation in Years

AY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 161977 288 803 1,386 1,937 2,534 2,831 3,569 4,267 4,947 5,864 6,611 6,869 7,0721978 115 361 750 1,383 2,173 2,568 3,474 4,192 5,311 6,650 7,591 7,796 7,912 7,7751979 36 148 368 830 1,441 1,952 2,882 3,720 5,082 6,308 7,922 8,885 9,260 8,993 9,3411980 20 17 97 352 743 1,226 2,217 3,130 4,702 6,118 7,628 8,183 8,799 8,862 9,337 9,4941981 11 3 88 314 578 1,141 2,119 3,541 4,888 6,803 7,807 8,198 8,749 8,932 9,5061982 2 30 87 389 762 1,343 2,444 4,499 6,645 7,627 8,233 8,410 9,113 9,5041983 0 8 114 258 482 1,205 3,047 5,180 6,484 7,428 7,774 8,663 9,5791984 2 36 126 263 746 2,101 5,061 6,450 7,593 8,499 9,813 10,1941985 0 20 61 301 1,380 4,067 6,347 7,379 8,375 9,749 10,9801986 0 5 22 368 1,946 3,439 4,508 5,459 7,261 9,1531987 4 8 89 869 1,863 2,987 3,747 5,750 8,0501988 0 9 212 878 1,927 2,771 5,075 7,4161989 0 19 196 621 1,605 2,941 5,7161990 2 76 338 886 2,525 5,1511991 1 68 295 1,065 2,6281992 0 20 332 1,1871993 3 43 3471994 0 521995 4

As observed in the chart above, permanent total disability paid losses prior to January 1, 1980 are not included for accident years 1977 through 1979 and that the payments are evaluated annually as of December 31st of each year instead of June 30th as they are in the June 30, 2007 Oliver Wyman Annual Audit Report triangles. This is consistent with all types of loss except the evaluation date prior to which paid losses are not included varies. Specifically, incremental paid losses were not included prior to January 1, 1979 for medical only claims, January 1, 1980 for permanent total disability, temporary total and death benefits, January 1, 1985 for percent permanent partial, permanent partial, temporary partial and lump sum settlement benefits, January 1, 1987 for additional award benefits, and January 1, 1989 for lump sum advancement benefits and medical on lost time claims.

To further supplement the December 31, 1995 incremental paid loss triangles, BWC employees were able to locate William M Mercer’s (predecessor to Oliver Wyman) December 31, 1992 Annual Audit Report. This December 31, 1992 Annual Audit Report did not include any additional incremental paid loss development history for medical only and each compensation type that was not already contained in the December 31, 1995 incremental paid loss triangles. However, it did include a historical incremental paid loss triangle evaluated annually through December 31, 1992 for medical on lost time claims combined for all provider types.

In order to apply methodologies that rely on cumulative development data, Deloitte Consulting generated cumulative paid loss triangles evaluated annually as of June 30th using the following process for each type of loss:

1) Estimate of certain incremental payments not included in the December 31, 1995 triangles provided by Oliver Wyman or the December 31, 1992 Annual Audit Report provided by the BWC. For example, for permanent total disability, Deloitte Consulting estimated annual loss payments from January 1, 1977 through December 31, 1979 for accident years 1977 through 1979. To calculate these estimates, Deloitte Consulting primarily relied on a loss rate approach and an incremental frequency severity approach. In the loss rate approach, the accident year’s payroll was multiplied by an average observed loss rate from subsequent accident years for the given development age adjusted for changes in the statewide average weekly wage and average weekly benefits. In the incremental frequency severity method, an incremental average paid loss per claim was multiplied by the number of ultimate claims to determine the estimate of incremental payments for a given

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accident year/development age. The incremental average paid loss per claim for the development age in question was determined by dividing the incremental average paid loss per claim in the subsequent development age by a persistency factor selected based on observed persistency factors from subsequent accident years for same age of development.

The following chart displays the permanent total disability December 31, 1995 incremental paid loss triangle for PA including the incremental payments estimated by Deloitte Consulting, represented in the shaded area.

Private Employers - Permanent Total DisabilityIncremental Paid Losses (in thousands) - Evaluation in Years

AY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 151977 11 19 120 288 803 1,386 1,937 2,534 2,831 3,569 4,267 4,947 5,864 6,611 6,869 1978 11 19 115 361 750 1,383 2,173 2,568 3,474 4,192 5,311 6,650 7,591 7,796 7,912 1979 11 36 148 368 830 1,441 1,952 2,882 3,720 5,082 6,308 7,922 8,885 9,260 8,993 1980 20 17 97 352 743 1,226 2,217 3,130 4,702 6,118 7,628 8,183 8,799 8,862 9,337 1981 11 3 88 314 578 1,141 2,119 3,541 4,888 6,803 7,807 8,198 8,749 8,932 9,506 1982 2 30 87 389 762 1,343 2,444 4,499 6,645 7,627 8,233 8,410 9,113 9,504 1983 - 8 114 258 482 1,205 3,047 5,180 6,484 7,428 7,774 8,663 9,579 1984 2 36 126 263 746 2,101 5,061 6,450 7,593 8,499 9,813 10,194 1985 0 20 61 301 1,380 4,067 6,347 7,379 8,375 9,749 10,980 1986 0 5 22 368 1,946 3,439 4,508 5,459 7,261 9,153 1987 4 8 89 869 1,863 2,987 3,747 5,750 8,050 1988 - 9 212 878 1,927