Presentation from NAPEO that addresses Risk Management as a Strategic Business Unit.

1. NAPEO Risk Management Conference March 25, 2009 Tampa, Florida Risk Management as a Strategic Business Unit

2. Introduction Session Objectives Discuss the strategic role of Risk Management inside your PEO Determine whether Risk Management is a “service” or a “product” Provide an overview of PEO Risk Management Strategy Positioning Financial Performance Metrics Macro Performance Metrics

3. Strategy/Positioning(Opportunity) Why is Risk Management important to PEO clients? From a “safety” perspective: 98% of businesses in America today have < 100 wses 87% of businesses in America today have < 20 wses 50% of all workplace fatalities occur in businesses with <100 wses 33% of all workplace fatalities occur in businesses with <20 wses (statistics based on NIOSH White Paper) PEOs are uniquely qualified to deliver valuable safety services to their clients

4. Strategy/Positioning(Opportunity) Other General Risk Management Considerations Employees who might use workers compensation as a hedge against downsizing Employees who might use workers compensation as a substitute for a weak or missing employee benefits plan General human resources practices and avoiding claims related to employment practices liability

5. Strategy/Positioning(Barriers) Issue: What carrier limitations do I have? What is the carrier’s admitted geography? What is the carrier’s financial rating? What is the carrier’s underwriting appetite? Issue: Where are my clients? How can I cover the geographic spread? What is the average client size? Issue: What’s the right service model and staffing level for my client base and operating budget?

6. Strategy/Positioning What’s troubling CEOs? (2004 Conference Board Survey of CEOs) Issue: Is top line growth satisfactory? Question: is risk management adding to or detracting from this effort? Issue: Is customer loyalty/retention at an acceptable level? Question: Does risk management add value, detract from value, or is it neutral to my clients? Could or should either of these be different in my PEO?

7. Strategy/Positioning Do you want risk management to be a sustainable (long term) competitive advantage or a contestable (short term) competitive advantage? Workers Compensation Risk Management Program Components: Carrier Quality and Plan Design Client Value Proposition PEO Risk Management Operating Platform Actual Client Experience

8. Strategy/Positioning Carrier Quality and Plan Design Is carrier rating and admitted geography important to you and your clients? Are your clients buying because of workers compensation? If not, is it a barrier to sales? Is the financial structure of your program best suited to your needs?

9. Strategy/Positioning Value Proposition/Client Experience What does your risk management value proposition look like? What do you promise? What do you deliver? What can I expect as a client? Risk Selection Residual markets have depopulated by 10% in the past year (PEO sized clients). Who are you getting? Are clients leaving you due to better workers compensation pricing elsewhere?

10. Strategy/Positioning The real questions are— What will you excel at? What won’t you do? Competitive advantages erode over time and must stay fresh

11. The “Myth of Excellence”(by Fred Crawford and Ryan Matthews) Five opportunities to engage customers—Price, Service, Access, Product, Customer Experience Consumer Relevancy of each of the five “touch points” is on three levels: Acceptance: customer views as “par” for the industry. No sense of loyalty, transactional relationships Preference: customer prefers your company to another due to a deeper level of respect, access, and quality Seeking: customer will seek you out above the competition

12. The “Myth of Excellence” The Trap: Complacency “73 percent of executives think their firms have an edge on their competitors” (Chief Executive/Arthur D. Little poll) The Myth: No company (even excellent companies) can perform at a level of excellence in all five areas at once The Goal: Dominate in one area Differentiate in one area Meet the industry par in the remaining three areas

13. Strategic Goals Grow the top line Retain existing clients Questions: When you think of your risk management program can you think of an area where you clearly dominate your segment? Is it the right area to dominate? Why should a client “buy” your risk management value proposition?

14. Rate Your Risk Management Platform(1 to 5: 5= dominate, 4= differentiate)

15. Strategic Goals How will you achieve “excellence”? Carrier Reputation/Relationship Excellent Service—Claims and Risk Control Ease of Doing Business—Underwriting Approval Coverage Design—National Platform Client Experience and Stewardship Where do you want to “dominate”? Where do you want to “differentiate”?

16. MR2P(Managing Risk to Profitability) Early PEOs depended on workers compensation arbitrage in their pricing models Today’s profitable PEOs Recognize the importance of high quality, long-term carrier relationships Strive to implement “best in class” risk management practices Manage workers compensation as a “product” with a profit/loss mindset

17. Goals(“Without a vision the people will perish”) Do you have a clear vision for your risk management platform? Do you know what you want to achieve? Can your leadership team articulate your vision? Does your leadership team support your vision? Have you established performance goals and metrics that support your vision?

18. Financial Performance Measures Total Cost of Risk (TCOR) Loss Ratio Expense Ratio Risk Management Income Statement

19. Total Cost of Risk Losses Due to Accidents (fully developed) Program Costs (reinsurance, claims handling expenses, carrier loss control, taxes, etc…) Agent /Broker Fee or Commission Internal Staff expense (administration, claims management, risk control, etc…)

20. Financial Performance Ratios Loss Ratio = losses/premium (what’s acceptable?) Expense Ratio = expenses/premium Combined Ratio = losses + expenses/premium These are common ratios used by carriers in evaluating their performance—why should you think differently?

21. Risk Management Income Statement Revenues Premium Consulting Fees (if any) Total Revenues Expenses Losses Program Costs Agent/Broker Fees Internal Expenses Total Expenses Profit/Loss

22. Macro Performance Metrics Table of Truth New Claims Frequency New Claims Reporting Lag Time Claims Closing Rate Loss Ratio Exposure Base

23. Challenges in the Current Environment Issue: Premium reductions in certain states are resulting in substantially less program revenue Results: 1. Higher loss ratios 2. Higher expense ratios-staffing costs remain constant or increase 3. Less pricing flexibility 4. Compressed margins 5. Higher mod rates

24. Challenges in the Current Environment Issue: Carrier Performance 1. Declining operating performance 2. Lack of investment income 3. Lack of new capital Results: 1. Potential change in program structure 2. More selective underwriting 3. Potentially decreased capacity for PEO space

25. Summary Risk Management can be viewed as either a “service” or a “product.” Excellence in Risk Management requires a clear vision with defined performance metrics Risk Management strategy requires identifying an area of domination and an area of differentiation with a focus on customer acceptance Risk Management can and should be measured financially in terms of financial performance and profit margin