Correlation Risk in the Post-Enron World Professional Liability ExecuSummit September 21, 2004 Chris Duca Chris Duca Navigators Pro Navigators Pro September 21, 2004 New York

Large Growing Marketplace  621,000 Private Firms w/ > 20 Employees  12,000 Publicly Traded Corporations  94.5 Million Employees (82% of U.S. Work Force)

Large Fragmented Market  Management Liability $6.5 Billion $6.5 Billion  Professional Liability $2.0 Billion $2.0 Billion 40% of firms w/ 40% of firms w/ > 20 employees > 20 employees 55% of U.S. workforce 55% of U.S. workforce w/ >20 employees w/ >20 employees

Multiple Product Strategy  Lower Risk through Product Diversification  Lower Risk through Industry Diversification  Broaden and Deepen Business and Broker Relationships  Cross Sell Marketing and Lower Acquisition Cost of Client  Strengthen Market Position  Service the Market and Client (“Outside In”) (“Outside In”)

What is Correlation Risk? “Efforts to lower risk through product and industry diversification fail and result in the aggregation of exposure.” “Efforts to lower risk through product and industry diversification fail and result in the aggregation of exposure.”

New Exposures  Professional Liability - Accountants, Lawyers, Banks, - Accountants, Lawyers, Banks, Investment Banks Investment Banks  Management Liability - D&O, Fidelity, Fiduciary, EPL - D&O, Fidelity, Fiduciary, EPL

Investing Public  $7 Trillion in Investor Losses  Corporate Governance Failures  Democratization (<50%)  Higher Volatility  Tech Bubble Burst  Accounting Restatements  IPO Laddering Litigation

Securities Laws  Sarbanes Oxley Act of 2002  Securities Act of 1933  Securities Exchange Act of 1934  Primary Violator Liability  “Aiding and Abetting” Liability

Claimants Claimants  SEC  State Attorney General  Shareholders  Creditors  Bankruptcy Trustees

Legal Landscape Legal Landscape  SEC Wells Notice  SEC Litigation  Attorney General Lawsuit  Class Action Securities Lawsuit  Bankruptcy Trustee Lawsuit

Regulatory Actions Regulatory Actions  SarBox (Rule 404) Implementation  Aiding & Abetting Liability  Well’s Notice  DOJ and SEC  State Attorney General

Securities Class Actions  Central Bank Case of Denver Supreme Court Decision Supreme Court Decision  Second Circuit “bright line” test  Tenth Circuit substantial participation test”  Fifth Circuit “ SEC approach to liability test” (Judge Harmon Enron Decision) (Judge Harmon Enron Decision)

Legal Trends  Active Plaintiff’s Bar  Fewer Dismissals  Whistleblower Factor  Regulatory Action  Corporate Governance

Service Provider Client Profile  Industry Sector  Execution  Financial Flexibility  Stock Volatility  Market Capitalization  Corporate Governance

D&O Liability  Compliance with SarbOx / SROs  Independent Board / Committees  Integrity  Corporate Culture  Robust Internal Controls  Disclosure / Transparency  Execution

Uncertainty Increases Risk Aversion “While change itself is certain, what form it takes is uncertain.” “…as we move forward we realize how much we don’t understand.” - Alan Greenspan – Federal Reserve Chairman - Alan Greenspan – Federal Reserve Chairman November 14, 2003 November 14, 2003

Insurance Demand Increases “Insurance deals with the problem by spreading risk and converting potentially large unknown costs into a steady stream of known insurance premiums that facilitates the forward planning so essential to an effective business operation.” Alan Greenspan – Federal Reserve Chairman October 17, 2001 October 17, 2001

Key Issues for Insurers  Risk Tolerance / Avoidance  Underwriting Review  Complex Claims Handling  Stress Test Portfolio / Use of Copulas  Underwriting Scope of Coverage  Financial Management

Summary  New Emerging Exposures for Service Firms  Changing Legal Environment  Market Demand for Insurance Solutions  Insurers Evaluating Correlation Risk  Risk Management, Mitigation or Avoidance? Avoidance?

Q&A? Q&A?