1. Risk Integration, Aggregation & Correlation: Domino Effects Chet Szczepanski Chief Actuary Pennsylvania Insurance Department

2. Pennsylvania Experience PIC Reliance PHICO Legion SWIF Special Funds Medical Malpractice

3. Pennsylvania Experience PIC: Medical malpractice writer Discounted reserves Reserve deficiencies Downgraded Doctor’s did not care Speed Up in Court Decision RBC caught them!

4. Pennsylvania Experience Reliance Multi-line writer Business is rating sensitive Heavily leveraged by reinsurance Heavily leveraged by holding company debt

5. Pennsylvania Experience Reliance (continued) Unicover Reserve deficiencies Downgraded Liquidity, liquidity, liquidity

6. Pennsylvania Experience PHICO Medical malpractice writer Rapid expansion into new markets Reserve deficiencies Downgraded Doctors did not care Liquidity not a problem

7. Pennsylvania Experience Legion Multi-line writer Business is rating sensitive Heavily leveraged by reinsurance Downgraded Reserves? Liquidity, liquidity, liquidity

8. Pennsylvania Experience Common Themes: Reserve deficiencies Ratings downgrades Reinsurance Liquidity

9. Pennsylvania Experience SWIF Consistently a leading writer of WC in PA Often the leading writer Market share has varied from 5% to 15% (currently about 13%) Dramatic premium growth to almost $500 Million in 1994 then precipitous drop but now on the rise

10. Pennsylvania Experience SWIF

12. Pennsylvania Experience Medical Malpractice

13. Pricing implication when expected yields drop from 7% to 4%?

14. P&C Industry Asset Distribution for 2001

15. P&C Industry Invested Asset Distribution for 2001

16. Reinsurance Leverage

17. Add rating sensitive business Mix in a downgrade $1,000,000,000 or more in Statutory Deposits $500,000,000 in one Stock Liquidity?

18. Reinsurance Leverage

19. Equity Leverage

20. Conclusions? Risk elements always exist Some are naturally occurring Some are artificially created Interactions can lead to disastrous results

21. Insight? Risk elements must be identified and managed!