1. Milliman USA - Slide 1 Underwriting Risk Models: An Assessment Presented by Urban E. Leimkuhler, FCAS, MAAA Manager & Senior Consultant Milliman - Princeton CAS Annual Meeting – New Orleans November 10, 2003

2. Milliman USA - Slide 2 Underwriting Assessment Outline  Underwriting Assessment -The Problem  Potential Solution  Suggested Approach  The Process  Outcome

3. Milliman USA - Slide 3 Underwriting Assessment Compelling Industry Need for Excellence In Underwriting  Low interest rate environment implies higher target underwriting returns  Resulting need to maximize performance at individual risk and portfolio levels  Industry actions affecting underwriting performance and readiness  Value in institutionalizing underwriting excellence

4. Milliman USA - Slide 4 Underwriting Assessment The Problem: Industry failures to effectively train commercial lines underwriters  Insufficient value attached to underwriting as a differentiator in company performance as a differentiator in company performance  Demise of underwriter training programs  Prolonged soft market underwriting and pricing practices and pricing practices  No available quick fixes

5. Milliman USA - Slide 5 Underwriting Assessment Potential Solution: Institutionalize profitable risk selection and management  Analyze and quantify the effectiveness of underwriting and pricing practices  Identify and target opportunities for improvement  Implement changes in processes  Monitor and measure benefits through regular check-ups

6. Milliman USA - Slide 6 Underwriting Assessment Suggested Approach:  Evaluate specific areas for improvement  Strategies and guidelines  Information collection and management  Exposure identification / analysis underlying risk selection  Application of underwriting and pricing practices to individual risk  Monitoring tools  Benchmark and measure performance  Identify and quantify performance gaps  Report to management  Implement improvements  Benchmark performance at multiple levels

7. Milliman USA - Slide 7 Underwriting Assessment The Process  Interviews (Evaluate Process)  File Reviews (Assess Outcomes)  Reports and Graphs

8. Milliman USA - Slide 8 Underwriting Assessment Interviews to Evaluate Process  Strategies and Guidelines  Application of Underwriting / Pricing Practices  Monitoring Tools

9. Milliman USA - Slide 9 Underwriting Assessment Interviews to Evaluate Process  General Manager  Underwriting Manager  Underwriter  Actuary  Loss Control  Claims  Marketing

10. Milliman USA - Slide 10 Underwriting Assessment Interviews to Evaluate Process  Strategies and Guidelines  Application of Underwriting / Pricing Practices  Monitoring Tools

11. Milliman USA - Slide 11 Underwriting Assessment Process Interviews-Strategies and Guidelines  Strategies / plans are defined, communicated and managed and managed  Ongoing market assessment  Pricing programs and goals  Underwriting authority  Ratemaking process / rating plan structure

12. Milliman USA - Slide 12 Underwriting Assessment Interviews to Evaluate Process  Strategies and Guidelines  Application of Underwriting / Pricing Practices  Monitoring Tools

13. Milliman USA - Slide 13 Underwriting Assessment Process Interviews-Underwriting / Pricing Practices - The Underwriter  Use of Loss Control information by Underwriting  Role of Premium Audit  Familiarity with producer capabilities  Management reinforcement through behavior  Feedback loops involving Claims, Actuarial Loss Control and Underwriting Loss Control and Underwriting

14. Milliman USA - Slide 14 Underwriting Assessment Use of Loss Control Information by Underwriting - Interview Questions  How effectively are Loss Control resources deployed by Underwriting?  How are Loss Control recommendations addressed by the Underwriter?  In what other ways is Loss Control asked to assist Underwriting in ensuring effective risk selection, pricing and ongoing risk management? What other information is provided?

15. Milliman USA - Slide 15 Underwriting Assessment Process Interviews-Underwriting / Pricing Practices - The Actuary  Formal rate reviews  Manual rate development  Actuaries / underwriters execute decisions and action plans and action plans  Actuarial role in pricing  Ratemaking data and data quality  Actuarial / operating management coordination

16. Milliman USA - Slide 16 Underwriting Assessment Actuarial / Operating Management Coordination - Interview Questions  What ongoing information and advice is provided by Actuary to Management? provided by Actuary to Management?  What action plans are established - and by whom? by whom?  How effectively are these executed?  How would you characterize relationships between Actuarial and Management? between Actuarial and Management?

17. Milliman USA - Slide 17 Underwriting Assessment Interviews to Evaluate Process  Strategies and Guidelines  Application of Underwriting / Pricing Practices  Monitoring Tools

18. Milliman USA - Slide 18 Underwriting Assessment Process Interviews - Monitoring Tools  Price Monitoring  Producer Monitoring  Automated Profit / Loss Reports  Claims Metrics  Automated Production Reports  Underwriting Reviews / Audits

19. Milliman USA - Slide 19 Underwriting Assessment Sample Interview Screen - Underwriter

20. Milliman USA - Slide 20 Underwriting Assessment Sample Interview Screen - Underwriter

21. Milliman USA - Slide 21 Underwriting Assessment Sample Interview Screen - Actuary

22. Milliman USA - Slide 22 Underwriting Assessment The Process  Interviews (Evaluate Process)  File Reviews (Assess Outcomes)  Reports and Graphs

23. Milliman USA - Slide 23 Underwriting Assessment File Reviews to Assess Outcomes  Information Collection / Management  Application of Underwriting / Pricing Practices  Underwriting Decision

24. Milliman USA - Slide 24 Underwriting Assessment File Reviews - Information Collection / Management  Risk pre-qualification  Application / renewal questionnaire  Availability of loss experience  Loss Control reports  Access to / use of outside information

25. Milliman USA - Slide 25 Underwriting Assessment File Reviews - Underwriting / Pricing Practices  Exposure basis  Classification assignment  Evaluation of underwriting exposures  Coverage considerations  Basis for price decision  Interaction among disciplines that support Underwriting

26. Milliman USA - Slide 26 Underwriting Assessment File Reviews - Underwriting Decision  Risk selection  Underwriting referral / 2 nd opinion

27. Milliman USA - Slide 27 Underwriting Assessment Sample File Review Screen - Policy-Level Data

28. Milliman USA - Slide 28 Underwriting Assessment Sample File Review Screen - LOB Data

29. Milliman USA - Slide 29 Underwriting Assessment Sample File Review Practices Screen

30. Milliman USA - Slide 30 Underwriting Assessment Sample Premium Estimate Screen

31. Milliman USA - Slide 31 Underwriting Assessment The Process  Interviews (Evaluate Process)  File Reviews (Assess Outcomes)  Reports and Charts

32. Milliman USA - Slide 32 Underwriting Assessment

33. Milliman USA - Slide 33 Underwriting Assessment

34. Milliman USA - Slide 34 Underwriting Assessment

35. Milliman USA - Slide 35 Underwriting Assessment The Outcome  Process Effectiveness Scorecard  File Effectiveness Scorecard  Needed Improvements in Performance  Recommendations  Implementation Plan  Platform for Ongoing Benchmarking