1. Exploding Liability Trends Introductory Slides Jeff Dollinger, FCAS Employers Reinsurance Corporation g ERC ®

2. Introduction Rates are rising sharply for most casualty lines of business. Is it time to jump in the water and write large amounts of business? Not such a simple question –Interest rates are low –Severity trends are up sharply between 1996 and 2001 across many lines of business Word of Caution: The following slides are just a quick snapshot of many line of business. Please see more detailed sessions at this seminar g

3. Workers Compensation Indemnity WC indemnity trend is rising & outpacing wage inflation. g

4. Workers Compensation Medical WC medical trend outpaces medical CPI and is increasing. g

5. D&O: Severity Trend in Securities Class Action Settlements g

6. D&O Severity Trend Increasing average severity driven by sharp increase in the frequency of huge losses in 1999 and later. Prior to 1999 losses over 100 million were virtually unheard of. Considering only cash payments, there were … –Two in 1999 (Cendant 1: $342 mil & Waste Mgmt 1: $220 mil) –Two in 2000 (Cendant 2: $3.2 bil & Ikon: $111 mil) –Three in 2001 (Waste Mgmt 2: $457 mil, Sunbeam: $125 mil, & 3- Com: $229 mil) 2002 Looks like the worst year on record. –Three already settled (Dollar General: $162 mil, Conseco: $120 mil, & Bank of America: $490 mil) –Potential big cases looming: Tyco, Nortel, Worldcom, Adelphia, Lucent, Global Crossing, Dynergy,…and Enron g

7. Jury Verdict Research Data on GL, AL, and Medical Malpractice Vehicular liability settlements were up 27% per year from 1994 to 1999. Average GL - premises operations jury award rose by 11% per year between 1994 and 2000. Mean Medical malpractice jury awards rose from $362,000 in 1994 to $1 million in 2000, an 18% annual average increase. Trend from 1999 to 2000 was particularly bad. For all personal injury cases, the median jury award was up 26% in 2000. Statistics are from various press releases made by Jury Verdict Research. g

8. Umbrella Ultimate Loss Ratios: Middle Market Commercial Books All 5 companies show a pattern similar to the sample average. The sharp increase after 1996 was due to rate decreases & increasing loss trends. g

9. Umbrella - ISO ILF Curves As umbrella loss trends got worse, ISO excess factors decreased. Be careful about using the 2001 ISO curves for pricing umbrella business. g

10. Introduction of Speakers Medical Stop Loss –Leading indicator of adverse loss trends due to fast development. –Rates started going up in 1999, early than for other LOB's. –Rate increases caused P&C reinsurers to enter the market. –Surprisingly high loss trends caused many P&C reinsurers to lose money in 1999 and 2000. Commercial Umbrella –A lagging indicator due to long development tail. –Clearly demonstrates the increased frequency of large losses. –Will surprisingly high loss trends in recent years prevent carriers from making money, despite large rate increases? g