1. The Underwriting Cycle Are Loss Reserves Reasonable in Light of Potential Underwriting Cycle Biases? December 2, 2011 PwC Actuarial and Insurance Management Solutions (AIMS)

2. Slide 2 Agenda Introduction Pricing trends Inspection of reserve adequacy Implications on profitability

3. Introduction Slide 3

4. Slide 4 What is the underwriting cycle? Soft market Excessive capital Highly competitive Inadequate premiums Easing of terms & conditions Hard market Less capital available Less competition Better price adequacy Stricter terms & conditions

5. Slide 5 How does the underwriting cycle impact reserves? Pricing Bias Potential Reserving Bias

6. Slide 6 How does reserve adequacy impact pricing? Reserving Bias Potential Pricing Bias

7. Slide 7 Inherent link? Reserving Bias Pricing Bias

8. Pricing trends Slide 8

9. Slide 9 Pricing trends poll According to MarketScout’s “Market Barometer Report”, what is the average monthly composite P&C rate change for 2011? a)+5% or more – happy days are here again b)0% to +5% – rates are moderately up c)0% to -5% – rates are moderately down d)-5% or less – where is the bottom?

10. Slide 10 Industry average rate changes Source: www.MarketScout.com

11. Slide 11 Industry average earned rate index Source: www.MarketScout.com

12. Slide 12 Industry average earned rate index Source: www.MarketScout.com hard market soft market

13. Inspection of reserve adequacy Slide 13

14. Slide 14 Reserve accuracy poll At year-end 2010, what percentage of US P&C insurance companies’ hindsight reserves from year-end 2004 were within -10% to +10% of their originally recorded value? a)73% – isn’t it called actuarial “science”? b)52% – but on the other hand, there’s loads of judgment c)37% – loads and loads of judgment d)12% – but at least it can’t be negative

15. Slide 15 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $1 million Source: SNL, 2010

16. Slide 16 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $500 million Source: SNL, 2010

17. Slide 17 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $1 million, ex 2000 & prior Source: SNL, 2010

18. Slide 18 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $500 million, ex 2000 & prior Source: SNL, 2010

19. Slide 19 Percentage of companies with 2010 hindsight reserves within 10% of initial recorded reserves Companies with initial recorded reserves in excess of $1 million – by line of business Source: SNL, 2010

20. Slide 20 Calendar year-end hindsight (redundancy)/deficiency Emerged (redundancy)/deficiency as a % of initial booked reserves Source: SNL, 2010

21. Slide 21 Accident year hindsight (redundancy)/deficiency Emerged (redundancy)/deficiency as a % of initial booked reserves Source: SNL, 2010

22. Slide 22 Accident year and calendar year hindsight emergence Emerged (redundancy)/deficiency as a % of initial booked reserves Source: SNL, 2010

23. Implications on profitability Slide 23

24. Slide 24 The current market Lengthy soft market Potentially inadequate rates on recent accident years Possible optimistic pricing & reserving 5 consecutive years of reserve take-downs Calendar year operating results propped up by prior year releases Releases mask accident year profitability issues Erosion of reserve redundancies Weak macro-economic environment Low investment income

25. Slide 25 What drives the move from a soft to hard market? According to the III, need the confluence of 4 criteria 1.Sustained period of large underwriting losses 2.Material decline in surplus/capacity 3.Tight reinsurance market 4.Renewed underwriting & pricing discipline

26. Slide 26 Prospective implications of underwriting cycle Is trouble ahead? Several consecutive years of inadequate rates Reserve redundancies used up? Low investment returns Market reactions before turn? M&A Coverage modifications

27. Slide 27 PwC Actuarial & Insurance Management Solutions Scott Cederburg, FCAS, MAAA r.scott.cederburg@us.pwc.com (678) 419-1539

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