1. Trends in Commercial Auto and General Liability Joseph M. Palmer, FCAS, CPCU Assistant Vice President Increased Limits & Rating Plans Division Insurance Services Office, Inc.

2. Commercial Automobile Overview Latest Basic Limit Trends Latest Basic Limit Trends Higher Limits Trends Higher Limits Trends Recent History Recent History Frequency Trends Frequency Trends ILF Review Trends ILF Review Trends Loss Layer Trends Loss Layer Trends

3. Commercial Auto Liability Severity Trends Trends Based on Calendar Year Data Through Latest Evaluation (9/30/2002) Trends Based on Calendar Year Data Through Latest Evaluation (9/30/2002) State Data Credibility Weighted With Multistate Data State Data Credibility Weighted With Multistate Data 24-pt. & 12-pt. (Quarterly) Fits Examined 24-pt. & 12-pt. (Quarterly) Fits Examined 12-pt. Fits Generally Used 12-pt. Fits Generally Used Incurred Data Also Examined Incurred Data Also Examined

4. Commercial Automobile Bodily Injury Data Through 9/30/2002 Data Through 9/30/2002 Paid Loss Data --- $25,000 Limit Paid Loss Data --- $25,000 Limit  12-point:+ 3.8%  24-point:+ 3.0%

5. Commercial Automobile Bodily Injury Data Through 6/30/2002 Data Through 6/30/2002 Incurred Loss Data --- $25,000 Limit Incurred Loss Data --- $25,000 Limit  12-point:+ 3.9%  24-point:+ 3.9%

6. Commercial Automobile Bodily Injury Data Through 9/30/2002 Data Through 9/30/2002 Paid Loss Data --- $100,000 Limit Paid Loss Data --- $100,000 Limit  12-point:+ 4.9%  24-point:+ 4.1%

7. Commercial Automobile Bodily Injury Data Through 6/30/2002 Data Through 6/30/2002 Incurred Loss Data --- $100,000 Limit Incurred Loss Data --- $100,000 Limit  12-point:+ 5.7%  24-point:+ 5.2%

8. Commercial Auto Bodily Injury History of 25K and 100K Trends March, 1999 through Oct. 2002

9. Commercial Automobile Bodily Injury Data Through 9/30/2002 Data Through 9/30/2002 Paid Loss Data --- $1 Million Limit Paid Loss Data --- $1 Million Limit  12-point:+ 6.8%  24-point:+ 6.7%

10. Commercial Automobile Bodily Injury Data Through 9/30/2002 Data Through 9/30/2002 Paid Loss Data --- Total Limits Paid Loss Data --- Total Limits  12-point:+ 7.5%  24-point:+ 7.1%

11. Commercial Automobile Bodily Injury Data Through 6/30/2002 Data Through 6/30/2002 Incurred Loss Data --- Total Limits Incurred Loss Data --- Total Limits  12-point:+ 6.6%  24-point:+ 6.5%

12. Commercial Auto Bodily Injury History of 1 Million and Total Limits Trends March, 1999 through Oct. 2002

13. Commercial Automobile Property Damage Data Through 9/30/2002 Data Through 9/30/2002 Paid Loss Data --- Total Limits Paid Loss Data --- Total Limits  12-point:+ 6.8%  24-point:+ 5.7%

14. Commercial Automobile Property Damage Data Through 6/30/2002 Data Through 6/30/2002 Incurred Loss Data --- Total Limits Incurred Loss Data --- Total Limits  12-point:+ 5.4%  24-point:+ 5.0%

15. Commercial Auto Property Damage History of Total Limits Trends March, 1999 through Oct. 2002

16. Commercial Automobile Statewide Variation Bodily Injury Severity Bodily Injury Severity  Low Statewide Credibility  All Commercial Auto Data used in analyses  Only 4 States with Greater than 15% Credibility  Limited Variation between States after Trends are Credibility-Weighted

17. Commercial Automobile Bodily Injury Frequency Trends 3/31/1996 through 12/31/2001

18. Commercial Automobile Property Damage Frequency Trends 3/31/1996 through 12/31/2001

19. Commercial Automobile Policy Limit Distribution ISO Database Composition: ISO Database Composition:  70% at $1 Million Limit  5% at $300,000 Limit  15% at $500,000 Limit  5% at $2 Million Limit Varies by Table Varies by Table

20. Commercial Automobile ILF Review Trends

21. Commercial Automobile Bodily Injury Excess Trends Data Through 9/30/2002 Data Through 9/30/2002 Paid Loss Data --- Excess Limits Paid Loss Data --- Excess Limits $400,000 xs $100,000 $400,000 xs $100,000  12-point:+ 9.0%  24-point:+ 9.4%

22. Commercial Automobile Bodily Injury Excess Trends Data Through 9/30/2002 Data Through 9/30/2002 Paid Loss Data --- Excess Limits Paid Loss Data --- Excess Limits $500,000 xs $500,000 $500,000 xs $500,000  12-point:+ 11.0%  24-point:+ 14.9%

23. General Liability Overview Latest Trends --- Basic, Total, ALAE Latest Trends --- Basic, Total, ALAE Recent History Recent History Frequency Trends Frequency Trends ILF Review Trends ILF Review Trends

24. General Liability --- Severity Trends Based on Accident Year Paid Experience (including ALAE) Trends Based on Accident Year Paid Experience (including ALAE) Recent Points Heavily Dependent on LDFs Recent Points Heavily Dependent on LDFs 10-yr., 8-yr., & 6-yr. Fits Examined to Select Severity Trend Factor 10-yr., 8-yr., & 6-yr. Fits Examined to Select Severity Trend Factor Multistate Review --- Separately by Subline Multistate Review --- Separately by Subline Stability is a Concern Stability is a Concern

25. General Liability --- OL&T BI Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 3.1% ALAE ALAE  + 6.3% Losses and ALAE Losses and ALAE  $100,000 Limit: + 4.0%  Total Limits:+ 5.4%

26. General Liability --- OL&T PD Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 6.1% ALAE ALAE  + 10.5% Losses and ALAE Losses and ALAE  $100,000 Limit: + 8.2%  Total Limits:+ 8.6%

27. General Liability OL&T Severity Trends Calendar 1997 through Fiscal 2003

28. General Liability --- M&C BI Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 2.3% ALAE ALAE  + 5.6% Losses and ALAE Losses and ALAE  $100,000 Limit: + 3.6%  Total Limits:+ 4.7%

29. General Liability --- M&C PD Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 6.7% ALAE ALAE  + 7.1% Losses and ALAE Losses and ALAE  $100,000 Limit: + 6.8%  Total Limits:+ 7.2%

30. General Liability M&C Severity Trends Calendar 1997 through Fiscal 2003

31. General Liability --- Products BI Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 2.3% ALAE ALAE  + 7.8% Losses and ALAE Losses and ALAE  $100,000 Limit: + 5.2%  Total Limits:+ 4.3%

32. General Liability --- Products (a) BI Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 2.6% ALAE ALAE  + 12.4% Losses and ALAE Losses and ALAE  $100,000 Limit: + 8.2%  Total Limits:+ 7.1%

33. General Liability --- Products PD Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 4.2% ALAE ALAE  + 7.4% Losses and ALAE Losses and ALAE  $100,000 Limit: + 5.8%  Total Limits:+ 5.4%

34. General Liability --- Products (a) PD Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 7.0% ALAE ALAE  + 10.6% Losses and ALAE Losses and ALAE  $100,000 Limit: + 8.8%  Total Limits:+ 10.2%

35. General Liability Products Severity Trends

36. General Liability --- LP/CO BI Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 3.7% ALAE ALAE  + 9.3% Losses and ALAE Losses and ALAE  $100,000 Limit: + 6.3%  Total Limits:+ 8.7%

37. General Liability --- LP/CO (a) BI Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  - 2.4% ALAE ALAE  - 0.8% Losses and ALAE Losses and ALAE  $100,000 Limit: - 1.5%  Total Limits:- 2.4%

38. General Liability --- LP/CO PD Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 6.5% ALAE ALAE  + 8.8% Losses and ALAE Losses and ALAE  $100,000 Limit: + 7.4%  Total Limits:+ 7.4%

39. General Liability --- LP/CO (a) PD Severity Trends (10 yr.) $100,000 Indemnity $100,000 Indemnity  + 9.8% ALAE ALAE  + 12.1% Losses and ALAE Losses and ALAE  $100,000 Limit: + 10.9%  Total Limits:+ 9.8%

40. General Liability LP/CO Severity Trends

41. General Liability OL&T Frequency Trends

42. General Liability M&C Frequency Trends

43. General Liability ILF Review Trends

44. General Liability Policy Limit Distribution ISO Database Composition: ISO Database Composition:  85% at $1 Million Limit  4% at $500,000 Limit  5-6% at $2 Million Limit  1-2% at $5 Million Limit

45. Sample Definition of Construction Defects A construction defect is “the failure of the building or any building component to be erected in a reasonably workman like manner or to perform in the manner intended by the manufacturer or reasonably expected by the buyer, which proximately causes damage to the structure.” (CA State Jury Instructions)

46. Types of Defects Many courts have recognized two primary categories of defects for which damages are recoverable: Defects in design, workmanship and materials Defects in design, workmanship and materials Landslide and earth settlement problems Landslide and earth settlement problems

47. Examples of Design Defects Faulty drainage Faulty drainage Improper landscaping and irrigation Improper landscaping and irrigation Improper materials Improper materials Structural failure or collapse Structural failure or collapse Defective plumbing Defective plumbing Faulty electrical wiring Faulty electrical wiring Inadequate environmental controls Defective lighting or security Insufficient insulation Poor sound protection

48. Landslide Problems Expansive soils Expansive soils Underground water or streams Underground water or streams Ancient land slides Ancient land slides Vertical settlement Vertical settlement Horizontal movement Horizontal movement Land sliding Surface failures Improper compaction Inadequate grading and drainage

49. Completed Operations Data ISO Data ISO Data Data does not identify construction defects claims Data does not identify construction defects claims Completed Operations Completed Operations Looked at latest 5 years (1997 – 2001) Looked at latest 5 years (1997 – 2001) California data is not included California data is not included

50. Five Year Experience Ratios Completed Operations Experience Ratio – Amount needed to cover losses only Experience Ratio – Amount needed to cover losses only All states (ex. CA) = 1.46 All states (ex. CA) = 1.46 Top 5 Top 5  Nevada – 7.56  Oregon – 2.48  South Carolina – 2.30  Washington – 2.17  Arizona – 2.05

51. Trends in Commercial Auto and General Liability Joseph M. Palmer, FCAS, CPCU Assistant Vice President Increased Limits & Rating Plans Division Insurance Services Office, Inc. 201-469-2599