g ERC Commercial Umbrella Trends CAS Seminar on Reinsurance June 1-3, 2003 Sheraton Society Hill Philadelphia, Pennsylvania

2 Umbrella Trends Shortfall in Claims Reserves Increases in Loss Trends Capacity Restrictions New Causes of Loss Reduction in Investment Returns What Will Develop in 2004?

3 Where Have We Been? –Historical profit margins have deteriorated significantly in the last few years. –Rates have increased, but have not kept up with deteriorating loss experience –Auto has been responsible for much of the adverse experience; GL to follow? –National/Specialty segments drive deterioration –The industry needs to better understand the underlying trends

4 –Significant Loss Trends –Increasing Ultimate Loss Ratios –Attachment Point Erosion –A $1 million dollar attachment isn’t what it used to be! –Severity and Frequency of losses in umbrella is putting pressure on umbrella profitability –Companies pushing higher retentions Where Have We Been? Higher Attachments Needed to Keep Pace With Loss Trends

5 Attachment points should be adjusted with inflation

6 We estimate that an attachment point of $1 million in 1990 is equivalent to between $4 million and $5 million in 2003 Attachment points should be adjusted with inflation

7 Financial Impact of Changes to Attachment Points Change from $5 mill xs of $1 mill to $5 mill xs of $2 mill is equivalent to a 50% rate increase (one-third of losses eliminated)

8 LOB Loss Trend - Severity Sources of data –ISO Severity Data –Jury Verdict Research Data –Fit to Untrended Ultimate Loss Ratios –Analysis of Ground-up Losses Conclusions –Use 18% annual Severity Trend from present –Severity Trend tempered to 8% for Regional-type business

9 Umbrella Loss Severities - ISO Data ISO data by layer allows us to estimate the trend for claims that are likely to penetrate reinsurance layers. ISO’s data indicates a jump in the excess trend data, particularly for Auto Also demonstrates leveraged effect of trend

10 Excess Trend Factors Calculate layers by subtraction: –$100,000 minus $25,000 = $75 x $25 Fit trend lines to excess severities Develop trend factors by each excess layer

11 ISO Excess Severities - Comm Auto Year Endedx25% ch.x100% ch.x500% ch.x1M% ch. 12/31/199513, , , /30/199612, %7, %1, % % 12/31/199612, %7, %1, % % 6/30/199712, %7, %1, % % 12/31/199712, %8, %2, % % 6/30/199813, %8, %2, % % 12/31/199813, %8, %2, % % 6/30/199914, %8, %2, % % 12/31/199915, %9, %2, % % 6/30/200016, %10, %3, % % 12/31/200017, %11, %3, % % 6/30/200118, %12, %3, % % Average Annual 24 PT:7.7%9.8%14.4%18.6% Change 12 PT:13.7%16.5%21.7%23.2% Intermediate Points not Displayed

12 ISO Excess Severities - Products

13 ISO Excess Severities - Prem/Ops

14 ISO Excess Severities - Summary 60.0%40.0% Auto XS AutoGLGL Adj. XS 25KXS 100KXS 500KXS 1MSel 1MXS 100Kto 1MWtd XS 10 Yr Fits3.36%4.28%6.29%8.13% 6.92%13.16%10.14% 10 Yr xcl '00 (GL)3.36%4.28%6.29%8.13% 7.53%14.31%10.60% 5 Yr Fits7.68%9.79%14.39%18.60% 3.97%7.55%14.18% 5 Yr xcl '00 (GL)7.68%9.79%14.39%18.60% 10.60%20.14%19.21% 3 Yr Fits5.80%16.52%21.69%23.21% 0.33%0.47%14.11% 3 Yr xcl '00 (GL)5.80%16.52%21.69%23.21% 4.62%6.50%16.52% Notes:1) GL Trends were fit to combined Prem Ops and Products data. The corresponding weighted averages obtained using trends by subline are18.64% and18.00% for the 5 yr and 3 yr fits, respectively. 2) Auto/GL split of 60%/40% based on general observations of umbrella loss activity. GL Subline weights are 65% Prem-Ops, 35% Products, based on ISO loss data. 3) Paid trends used in this exhibit for Auto, seems more representative of observed trends. 4) 5 Yr Fits for Auto are actually 6 year fits. 5) Averages without 2000 year are displayed for GL only, where fluctuations were noted in the individual subline data for that year. 6) GL xs 100K adjusted based on correponding relationship between auto layers.

15 Fitted Auto Liability Excess Layer Severity Trend (Base: March 1997) Mar-97 Jun-97 Sep-97Dec-97 Mar-98 Jun-98 Sep-98Dec-98 Mar-99 Jun-99 Sep-99Dec-99 Mar-00 Jun-00 Sep-00Dec-00 Mar-01 Jun-01 Year Ended Relative Layer Loss Severities Losses xs $25K; annualized trend=9.8% Losses xs $100K; anuualized trend=12.2% Losses xs $500K; annualized trend=18.1% Based on Tillinghast analysis of information published by ISO Loss trends exhibit a leveraged effect as limit increases

16 Fitted vs Actual Loss Severities for Auto Liability Losses xs $500k (Annual Loss Trend =18.1%) 1,500 2,000 2,500 3,000 3,500 4,000 Mar-97 May-97 Jul-97 Sep-97 Nov-97 Jan-98 Mar-98 May-98 Jul-98 Sep-98 Nov-98 Jan-99 Mar-99 May-99 Jul-99 Sep-99 Nov-99 Jan-00 Mar-00 May-00 Jul-00 Sep-00 Nov-00 Jan-01 Mar-01 May-01 Year Ended Loss Severities Actual Fitted The long-term fit is good; slightly higher than average trends in more recent points Based on Tillinghast analysis of information published by ISO

17 Jury Verdict Research Data - Summary Overall Award TrendsAuto Liability Trends MedianMean 1994$45,000$419, $48,000$646, $39,354$554, $43,449$618, $47,339$661, $39,832$854, $50,000$1,167,949 All Yr Fit 0.5%14.6% 3 Yr Fit 2.8%32.8% Wtd 60% Auto / 40% GL All Yr Fit10.30% 3 Yr Fit20.74%

18 Jury Verdict Research Data by Subline MedianMeanMedianMeanMedianMean 1994$21,499$187, $61,233$333, $434,247$1,744, $20,000$191, $77,950$461, $497,000$2,552, $18,360$284, $75,000$259, $700,000$2,660, $16,449$232, $94,500$350, $537,500$3,477, $20,000$187, $100,034$625, $1,197,885$2,918, $16,293$281, $100,000$655, $1,600,000$6,270, $20,000$268, $114,862$698, $1,800,000$6,817,086 All Yr Fit -1.9%5.3% All Yr Fit 10.0%14.5% All Yr Fit 29.1%23.8% 3 Yr Fit 0.0%19.7% 3 Yr Fit 7.2%5.7% 3 Yr Fit 22.6%52.8%

19 Mean Overall Jury Verdicts (fitted annual trend: 14.6%) Source: Tillinghast analysis of information published by Jury Verdict Research Non-insurance data shows steep upward liability cost trends

20 Trend Fit to Historical Ultimate Experience Notes: 1) MM Loss Ratios developed to ultimate and adjusted to current rate level 2) Total Comm developed to Ultimate only, includes all National/Specialty Umbrella results Middle MarketTotal Comm Umb Annual YearOn-Level BFOn-Level LDFChangeEst. UltimatesChange %12.73% %23.38%83.7% %16.66%-28.7% %24.35%46.2% %27.60%13.3%68.00% %26.68%-3.3%60.30%-11.3% %20.69%-22.5%56.50%-6.3% %34.40%66.3%115.80%105.0% %63.44%84.4%105.10%-9.2% %45.03%-29.0%132.90%26.5% %51.33%14.0% % -6.5% % All Yr Fit 13.7%13.6% '95 - forward 15.5%19.4% '97 - forward 9.6%9.0%

21 Ground-up Trend Analysis Two Methods of Trending Umbrella Losses –Using Umbrella/Excess Trend –Applying Primary Trend to Ground-up Losses and allocating to layers Second method will capture Leveraged effect of trend Primary Trend = Wtd GL/Auto Trend + 2%

22 Ground-up Trend Analysis Reported Losses Trended LossesRatio Fitted Trend 4,237,037 58,421, ,589,769 16,959, ,996,494 80,777, ,452,226 60,941, ,258,694 43,355, ,507,460 34,302, ,173,063 51,529, ,467,892 55,385, ,783,914 21,052, ,912,441 7,658, ,011,734 1,011, , % Fitted Trend = 14.0% based on development of ground up losses with 7.25% trend

23 Ground-up Trend Analysis Additional data to request for umbrella pricing –Individual umbrella losses with umbrella plus the underlying claim with underlying limits Line of business, date of loss, alae, etc. for each claim –Individual large losses up to 1/2 the umbrella attachment point where there is an umbrella in place

24 Commercial Lines Rate Index Adjusted for Loss Trend Based on estimated commercial lines rate changes and loss trends: Composite from CIAB, CAS & Morgan Stanley Reports

25 -Retention Increases -Existing Capacity Reduction -New Capacity -Portfolio Analysis -New/Evolving Exposures -Reinsurers Looking for Transparency Present Market Observations Companies are Concentrating on Portfolio Analysis to Improve Profit Potential

26 Aggregate Monitoring: -Understanding Total Limits Purchased -WTC Type Aggregations of Limits -Classes of Business Being Insured -Umbrella as a Profit Center -Developing Aggregate Monitoring Process -Fortune Limits in Excess of $100 Million Future Underwriting Issues Trend Towards Identifying Umbrella as its Own Profit Center

27 –Loss Trends Continue to Escalate –New Exposures/No Historical Experience –Investment Income Diminished - Need Underwriting Profit –Aggregate Issues Putting Pressure on Capacity –Statistical Records Needed to Evaluate Umbrella Takeaways

28 Consulting Actuary, Tillinghast–Towers Perrin Mr. Ghezzi is a consulting actuary with Tillinghast in its Boston office. He is a principal of Tillinghast. He is a fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries. Mr. Ghezzi has worked with insurers and reinsurers on most property/casualty lines of business. He has worked extensively with medical professional liability insurers and self-insurers, and is a faculty member of Tillinghast’s Medical Malpractice Seminar. Prior to joining Tillinghast, Mr. Ghezzi was vice president and actuary with Commercial Union Insurance Companies. Mr. Ghezzi began his actuarial career at Insurance Services Office. Mr. Ghezzi is a past president of the Casualty Actuaries of New England, and a current member of the American Academy of Actuaries’ Committee on Property Liability Financial Reporting (COPLFR). Mr. Ghezzi co-authored a paper published by the Casualty Actuarial Society on the impact of federal income taxes on property/casualty insurers. Mr. Ghezzi holds a B.S. in mathematics from the Pennsylvania State University. Thomas L. Ghezzi

29 2nd Vice President - Pricing Actuary GE ERC Gerson Smith is currently the lead pricing actuary of GE ERC's national accounts division, working in GE ERC’s New York office. He has 14 years of experience in the property and casualty insurance industry, nine of those in reinsurance. Mr. Smith was previously with St. Paul Re, where he was the lead pricing actuary for their worldwide Financial Lines unit. He is a fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries. He has presented at numerous seminars, including Casualty Actuaries in Reinsurance and the CAS Reserving Seminar, and has extensive experience presenting actuarial methodologies to clients both in the U.S. and abroad. Gerson Smith