Industry Loss Reserve Adequacy A.M. Best’s Perspective 2001 Casualty Loss Reserve Seminar Industry Loss Reserve Adequacy A.M. Best’s Perspective Robert E. Farnam Senior Financial Analyst and Actuary A.M. Best Company

Outline A.M. Best Data A.M. Best Loss Reserve Model Current State of Industry Reserves Industry Reserve Adequacy In Total By Line of Business Core/A&E Conclusions/Expectations

A.M. Best Data 2442 Companies + 13 State Funds AZ, CA, ID, LA, MD, ME, MN, OR, PA, RI, TX, UT, WI Industry Consolidated Schedule P Supplemental Rating Questionnaire Internal/External Actuarial Reports Discussions With Management

A.M. Best Loss Reserve Model Six Separate Methods Two Company-Specific Paid Loss Development Two Company-Specific Case Incurred Loss Development Industry Paid Loss Development Industry Case Incurred Loss Development If Volatile, Default to Fixed Loss Ratio Method Weight Based on Company Credibility Company Credibility Between 40% and 100% Use Coefficient of Variation for the LDFs

State of Industry Reserves Total Carried Reserves = $369.5 Billion Core Reserves = $347.1 Billion A&E Reserves = $22.4 Billion Reserves to Earned Premium Declining Adverse Development in Recent AY’s Higher Initial Loss Pick in Recent AY’s Prior Year Redundancies Are Gone Many Company Reserve Strengthenings

State of Industry Reserves

State of Industry Reserves

State of Industry Reserves

State of Industry Reserves

State of Industry Reserves

Industry Reserve Adequacy Core Reserves Deficient by $41.6 Billion 11% of Total Reserves, 13% of Surplus Statutory Discount = $14.2 Billion “Discounted” Deficiency = $27.4 Billion Predominantly Commercial Lines A&E Reserves Deficient by $57.5 Billion 16% of Total Reserves, 18% of Surplus “Pay-As-You-Go” Funding Industry Survival Ratio = 12x

Industry Reserve Adequacy Increased A&E Costs Acceleration of Asbestos Defendant Bankruptcies Spread of Litigation to Peripheral Defendants Reopened Claims Due to Reclassification Expected Maturation of More Serious Asbestos-Linked Illnesses Increased Number of Plaintiff’s Attorneys Erosion of Traditional Policy Defenses Rush to File Claims Before Federal Tort Reform?

Industry Reserve Adequacy

Industry Reserve Adequacy

Industry Reserve Adequacy

Conclusions/Expectations Still Long Way To Go for Favorable Economic Returns More Reserve Surprises, Especially Among Commercial Lines Writers Price Firming Through 2002, Partially Offset by Rising Claim Costs Weak Operating Performances Continue Downward Rating Actions Continue