1. www.guycarp.com Severity Exposed - October 2010

2. www.guycarp.com Severity Exposed - Putting the jacket back on October 2010

3. 2 Guy Carpenter Instant vs Homemade – Single Claimant Severity  Severity can arrive a couple of different ways, kind of like oatmeal – Instant in the form of a serious catastrophic claim – Burns / Brains – Homemade / slow cooked via deterioration of reserves and additional health problems of injured workers “in the system” – Unlike oatmeal, unforeseen severity to a portfolio can be unhealthy  A long-term, broad market view of losses will provide some severity indicators  AASCIF provides a great environment for non-competing companies to exchange data, experience and strategies to identify and attempt to mitigate severity volatility  Intermediary and Consultant have tools to help to reveal severity volatility

4. 3 Guy Carpenter Guy Carpenter Severity Indicator / Portfolio Management Tool - Reveal™  Others may have similar tools. Some of you may have created your own severity tool / index  Reveal™, by Guy Carpenter was created to provide a refined, class code level look at severity beyond Hazard Groupings – What was originally a four tiered system is now seven tiered system – better but still contains some gaps – Computer power and actuarial science have been combined to produce a more refined view of severity  Created with industry data by state  For class codes without the volume to produce credibility, algorithms were created using other state and/or similar class code experience

5. 4 Guy Carpenter Plotting the Class Codes Relative Frequency by Class Code Individual Class Codes Lower than Hazard Group Higher than Hazard Group A point plotted near “1” represents a class code that has historically had an “average” number of observed Permanent Total claims, compared to the Hazard Group average. A point significantly above or below has had a disproportionate number of PT claims, compared to the class’s HG average. These Class Codes have a higher relative frequency of 5-7 times the hazard group Ratio of Permanent Total Claims to Temporary Total Claims

6. 5 Guy Carpenter Guy Carpenter Severity Indicator / Portfolio Management Tool - Reveal™  Both ceding companies and reinsurers tend to rely on Hazard Groups for their severity indicators. – With severity driven class code data on your side you can refine….  …Underwriting / Loss Control / Claims handling to address severity classes  …/enhance chances of profitability when reviewing growth initiatives  …(change) reinsurer opinions of severity within a portfolio, reduce reinsurance pricing  …indentify pockets of exposure, policies which may warrant strategic reinsurance purchasing (facultative reinsurance)

7. Using Reinsurance to Mitigate Severity Volatility -

8. 7 Guy Carpenter Reinsurance as a backstop Single Claimant vs Multiple Claimant losses  Lots of “two’s” in the reinsurance discussion today – Two types of reinsurance Treaty and Facultative  Treaty – reinsurance to cover a portfolio of policies  Facultative – reinsurance to cover losses from a single policy* – Two forms of reinsurance Pro-Rata and Excess of Loss  Pro-rata – first dollar sharing of premium and losses  Excess of Loss – reinsurance pays once a deductible has been exceeded – Two forms of Excess of Loss reinsurance  Multiple claimant coverage – industrial accident, natural perils, terrorism. Also called Catastrophe reinsurance  Single claimant coverage – also called working layer

9. 8 Guy Carpenter Reinsurance as a backstop Single Claimant vs Multiple Claimant losses  Multiple Claimant (Catastrophe) Reinsurance  Several products, ample reinsurance capacity and price flexibility for multi-claimant, Catastrophe reinsurance. – Steady price decreases 2003 – Third-party catastrophe models for earthquake and terrorism create common ground for evaluating loss possibilities  Price is market driven by the market’s cost of capital to cover limits offered – Terms and Conditions typically allow for loss from a single claimant of up to $10M. More is available, but at a price

10. 9 Guy Carpenter Reinsurance as a backstop Single Claimant Coverage  Single Claimant severity exposure is typically mitigated with Working layer reinsurance coverage.  Two typical tranches (if purchased) – Single claimant coverage in layers up to $5M per occurrence – Single claimant losses between $5M and $10M – Very few buy reinsurance excess of $10M although there is capacity available. (watch this space !)  Strength of Ceding company balance sheet, Hazard Group mix, historical losses and risk appetite of Executives and Board usually factor into the decision for working layers structures.  Instant severity and developed (homemade) severity volatility can be covered by the same structures

11. 10 Guy Carpenter Reinsurance as a backstop Single Claimant Coverage  Typical terms and conditions for a working layer providing single claimant coverage – Per Occurrence – determined by the date of loss – Typically a fixed aggregate limits either…  …purchased in advance  …limited by a number of reinstatements, which may result in some additional premium – Usually a sunset provision of seven or ten years  Requires that a claim be reported to reinsurers within the sunset date. – Limits to $10M available  As a part of an overall Enterprise Risk Management strategy, conservative accident year strategies create good calendar year strategies.

12. 11 Guy Carpenter Reinsurance as a backstop Single Claimant Coverage – higher limits  More inquiries from clients for limits greater than $10M  Tough to find middle ground for ceding companies and reinsurers  Possible strategies – Pooling of risk by more than one company to purchase reinsurance – Multi-year agreements for reduced annual limits – Change layering. Update current $5M xs $5M layers to $10M xs $5M – Modify the multi-claimant catastrophe coverages to allow for a single claimant loss greater than $10M (which is typically the cap)  Intermediaries and reinsurers can provide a valuable view of the risk (and mitigating structures) to complement a company’s internal view of the risk of severity volatility

13. 12 Guy Carpenter Closing  Additional client stories – 15+ year client – One historical loss greater than $5M. Within three weeks in 2010, one claim $9M one claim $6M. Both single claimant losses – We have a client with a single claimant incurred loss greater than $30M.  Few believe a company can eliminate the possibility of severity loss volatility. However, there are tools and strategies which can reduce dependency on “good luck”

14. www.guycarp.com Questions / Discussion Aaron Bueler, Workers Compensation Specialty Practice Leader, Managing Director – Guy Carpenter, Seattle Jason Denechaud, Director of Accident, Health & Workers Compensation Underwriting, Catlin US

15. www.guycarp.com

16. Severity Exposed - Putting the jacket back on October 2010