1. Professional Indemnity Reinsurance 12 September 2001

2. 1.1 Contents 1Introduction 2Characteristics of PI 3Basic Functions and Forms of Reinsurance 4XL Reinsurance 5Pro Rata Reinsurance 6Pro Rata v XL 7Stop Loss 8General Comments

3. 1.2Two Fundamental Assumptions In the medium/long-term: 1Original business is profitable 2Cedants pay for their reinsurance recoveries

4. 1.3 Approaches to Designing Reinsurance Program Understand the original business - per risk portfolio Assess needs and Capabilities of cedent Program should support original business Profit maximisation v stable profit stream

5. 2.0 Characteristics of PI

6. 2.1Casualty Reinsurance Spectrum Motor EL PL Products PI D&O W&I EIL

7. 2.2 Nature of Losses Systemic Large single losses -severity Attrition - Frequency Complexity Long Tail

8. 2.3 Original Business Claims Made Each & Every Loss/Aggregate Costs North America Wide Variety of Wordings

9. 2.4 The Market Relatively Compact Subscription market Highly accumulative on target risks Capacity becomes aggregate

10. 3 Basic Functions and Forms of Reinsurance Function Capacity Revenue Result Balance Sheet Form Surplus Treaty/Quota Coded Risk XL Top Layer XL Working XL Low Level Clash XL Stop Loss Quota Share High Level XL Stop Loss

11. 4.0 XL Reinsurance

12. 4.1 Description of Loss Reinsured to the sole judge Follow original policy wording Aggregate Extension Clause Letter of intent Common Cause Event

13. 4.2 Per Insured Per Event LOD/RAD Stacking of Accumulations Congruity of Cover Clash Cover

14. 4.3 ‘Clash’ Cover 20m 10m EventPer insured 1m

15. 4.4 Features to Consider Extent of Costs Break - out Cover Reinstatements / Sideways Cover Reinstatement Premiums Back- up Layers Aggregate Deductibles Profit Commission/Commutation Indexation Breadth of Coverage

16. 5.0 Pro Rata

17. 5.1 General Exposure to systematic/attritional losses QST/FST or ‘ Chute’ Commission Profit Commission

18. 5.2 Features to Consider Definition of Retention Cession Limit in relation to retention Loss Ratio Capacity Procedures for written/signed lines

19. 6 Pro Rata v XL

20. 6.1 XL Pros Premium Retention Administration Cons Retention of attritional claims M & D Premium Definition of Loss Limited Sideways Paid Reinstatements No Commission Not ‘following the fortunes’

21. 6.2 Pro Rata Pros Pay-as-you-use Attritional relief Transparency Reduced risk of Coverage disputes Unlimited sideways cover Overider and profit commission Cons Leakage of profit Adverse cashflow Administrative burden

22. 7 Stop Loss Result dependent on much as Rating levels as claims activity Cyclical nature of results Systematic exposure Long-tail in relation to revenue/underwriting Year

23. 8 General Comments Need for long-term security Transparency Clarity of intention Congruity of Cover Claims Control/Co-operation Event Definitions