1. 2005 CAS Ratemaking Seminar Pricing and Market Conditions: Financial Lines Measuring Risk for D&O Liability Ben Fidlow, FCAS, MAAA

2. 2 March 2004 CAS Ratemaking Seminar Executive Protection (D&O) Risks  Securities Class Action Lawsuits Brought by shareholders themselves Derivative Actions – Brought by shareholders on behalf of the company itself  Individual Shareholder Lawsuits  Employment Practices Litigation  Other Third-Party Lawsuits (government/regulators, competitors, clients/customers)

3. 3 March 2004 CAS Ratemaking Seminar Biggest Risk = Securities Class Actions  Exposure Base – Total Assets, Revenue, Market Capitalization Pricing – Current market cap, 52-week high MC, moving averages, historical price dips Reserving – Class period MC loss, event MC loss, maximum dollar loss, bounce-back effect, loss relative to the market as a whole  Expectation is the Key How to measure it? When is it misplaced?

4. 4 March 2004 CAS Ratemaking Seminar Securities Class Action - Data Issues  Lack of Loss and Exposure Data  Anomalies IPO Laddering Analysts Mutual Fund Scandal Insurance Bid-Rigging  Median vs. Mean Market Cap Loss Settlements  Historical Financial Data Mergers Bankruptcies  Settlement Amounts vs. Actual Insurer Losses

5. 5 March 2004 CAS Ratemaking Seminar Actuarial Science – Where Do We Fit In?  Not Easy – Why? Parameter Risk  Price Monitoring Renewal Analysis – Premium per million of limit (Rate Per Million) – Adjust for attachment, change in market cap, coverage terms – Changes in perceived risk levels – Exclude certain accounts Non-renewals Overall portfolio Monitor specific pricing statistics  Assist Underwriting Set benchmarks, minimums Actuarial input into rating plans Black Box Explicitly recognize and define risk characteristics

6. 6 March 2004 CAS Ratemaking Seminar D&O Actuarial Science – Specifics  Trend Frequency – Look at number of filings, what is the universe of publicly traded companies? Severity – Consultants and other agencies track settlements by Settlement Year – Analysis should be done by Filed Year Equity run-up of the late ‘90s and subsequent bubble burst Downward bias (bigger claims take longer to settle) – Annualized Factor – Risk Segmentation – Limits Usage Need to reflect current economic environment

7. March 2004 CAS Ratemaking Seminar 7 Correlation to Market Cap Loss

8. March 2004 CAS Ratemaking Seminar 8 Settlements - Filed Year vs. Settlement Year Data as of 6/01/04

9. 9 March 2004 CAS Ratemaking Seminar D&O Actuarial Science – Specifics  Severity Distributions Rate on Line – Excess pricing should be mathematically, not competitively driven Segmentation into Homogeneous Groups – Market Cap Size – Industry Companion Suits (Institutional Investor) Other D&O Claim Types

10. March 2004 CAS Ratemaking Seminar 10 Segmentation – Average Settlements by Filed Year Data as of 6/01/04 * 1998 Mega Cap amount limits Cendant to $500M *

11. March 2004 CAS Ratemaking Seminar 11 Segmentation – Average and Median Settlements by Filed Year Data as of 6/01/04 * 1998 Mega Cap Average amount limits Cendant to $500M *

12. Questions?