Insurance Market Report 2002 The New Uncertainties Allen F. Hyman Managing Director Marsh Industry Practices

September 11, 2001

September 11, 2001: New Dimensions of Risk Targets of risk Financial size of risks Concentrations/Aggregations of risk Spread of risk

September 11, 2001: New Dimensions of Risk Target – Who is vulnerable? Size Concentrations/Aggregations Spread

September 11, 2001: New Dimensions of Risk Target Size – Probable maximum loss – Wide range of estimates Concentrations/Aggregations Spread

The Worst Terrorist Attacks: Insured Property Losses Amount EventCountry ($USB)Year WTC, Pentagon US20-35*2001 NatWest bombingUK Manchester, car bombingUK London, financial district bombingUK WTC bombingUS * Includes business interruption

September 11, 2001: New Dimensions of Risk Target Size Concentrations/Aggregations – Workers compensation – Other lines Spread

September 11, 2001: New Dimensions of Risk Target Size Concentrations/Aggregations Spread

September 11, 2002: Lines Affected Property – Physical damage, $10-15B – Business interruption, $10-$20B Third-party liability, $10-$20B Aviation, $10-15B Life / Disability, $5-10B Workers compensation, $5-$10B

September 11, 2001: Responses Insurance markets Insurance buyers and their brokers Governments

September 11, 2001: Responses Insurance marketplace – Exclusions – Stand-alone market Insureds Governments

September 11, 2001: Responses Insurance marketplace Insureds – Risk control Governments

September 11, 2001: Responses Insurance marketplace – Exclusions – Stand-alone market Insureds – Risk control Governments – Relief legislation – Pools – Catastrophe rate load

One Thing That Hasnt Changed: The Question of Insurability Is terrorism insurable by private sector? – Degree of uncertainty? Need to quantify exposures – Computer modeling – Account for new variables Northridge Blind-thrust faults 9-11 Concentrations/ Aggregations of risk

As if 9-11 Wasnt Bad Enough... Enron

Property/Casualty Insurance Industry Overview

Changes to Policyholders Surplus: Signaling a Hard Market Start of Hard Market Start of Hard Market Start of Hard Market (est.) Data Source: A.M. Best Company Start of Hard Market

A Historical Perspective The Pain Threshold

Market Symptoms 1976 – Affordability – Govt a relatively unknown as exposed – Civil Rights – Workers Compensation – Immunity – GL too broad

Market Symptoms – Availability – Affordability – Cash Flow Underwriting – Interest Rates - high – Combined ratios – high – Rejection of classes of business – Insurance became political

Market Symptoms 2001 – Years of soft market – Record Dow indicators – High combined ratios – Reinsurance shift – Coverage constriction – Retention increases – Limit reductions – 9/11

Premium Increases 720% 122% avg

Timeliness of Final Quote

Terms of Retention (Increase or Decrease) 91% avg

Change In Limits Increase -14.5% avg incl no change -32% for those who had a change

Did you have terrorism coverage before?

Was terrorism offered at renewal?

Did you buy terrorism?

Consolidated P/C Industry Net Income (US$B) Data Source: A.M. Best Company

Net Premium Growth Data Source: A.M. Best Company (% Change)

Consolidated P/C Industry Combined Ratio Data Source: A.M. Best Company

Insurer Financial Performance (US$B) Data Source: A.M. Best Company

Policyholders Surplus (US$B) Data Source: A.M. Best Company

Where Have All the Profits Gone? Volatile Variables Investment income – Low interest rates Catastrophe losses

P/C Insurers vs. Reinsurers Combined Ratio Data Source: A.M. Best Company

Impact of Catastrophe Losses on Combined Ratio Data Source: A.M. Best Company (est.)

The Worst Catastrophes (i ncluding liability awards) Amount Event Country ($USB)Year 1. Tobacco industry awardUS World Trade Center attacksUS AsbestosUS s+ 4. Hurricane Andrew US Northridge earthquakeUS Alaska oil tanker spillUS Silicone breast implantsUS s 8. Typhoon MireilleJapan Winter storms Lothar-Martin Europe Hurricane Daria Europe (Continued)

The Worst Catastrophes (i ncluding liability awards) Amount Event Country ($USB)Year 11. Hurricane HugoPuerto Rico Auto fuel tank explosionUS Autumn stormEurope Hurricane VivianEurope Hurricane GeorgesUS/Caribbean Intrauterine devicesUS Tank car chemical leakageUS Piper Alpha oil rig explosionUK Leaking chemical pipeUS s/1980s 20. Kobe earthquakeJapan

Workers Compensation Insurers Combined Ratio (Calendar Year) Data Source: A.M. Best Company

Medical Inflation Annual change in average total health benefit cost, NOTE: Results for are based on cost for active and retired employees combined. The change in cost from is based on cost for active employees only. (%)