1. Loss Reserving: Is It Broken? What Can Be Done Better? Casualty Loss Reserve Seminar September 14, 2004 Chuck Emma, Pinnacle Tom Ryan, Milliman John J. Kollar, ISO

2. Some Criticisms “Actuaries are signing off on reserves that turn out to be wildly inaccurate.” Standard & Poors “Are actuaries to blame for the huge shortfalls in reserves…?” Insurance Day “Are actuaries hiding the bad news?” National Underwriter

3. ISO Study of Loss and Loss Adjustment Expense Reserves A. Industry B. Individual Insurer Casualty Loss Reserve Seminar September 14, 2004 John J. Kollar, ISO

4. A. Industry Loss Reserve Analysis More than 900 insurer groups Year-ended 12/31/03 Schedule P data compiled by A. M. Best More than 95% of LLAE reserves for studied lines PRELIMINARY RESULTS

5. Lines studied PP Auto Liability HO/Farmowners Com. Auto Liability Other & Products Liab. Claims-Made Other Liab. Occurrence Com. Multi-Peril Med Mal Occurrence Med Mal Claims-Made Products Occurrence Reinsurance (Non- Proportional Liability) Workers Comp

6. Some Key Points All indications are PRELIMINARY; we have not yet selected final LDFs & ranges Excludes reserves for environmental and asbestos (E&A) claims –Possibly $40B to $50B deficient No adjustment has yet been made for further development of 9/11 losses –Estimated insured losses: $20B to $30B –U.S. net insured losses: $8B to $12B Adjustments have been made for other major catastrophes

7. Methodologies Paid link-ratio technique Case-incurred link-ratio technique Consistent with 2001 ISO study

8. Factors affecting analysis Data quality Development factors Tail factors Professional judgment

9. Conventions Each deficiency/redundancy expressed as percentage of indicated undiscounted reserve as estimated by ISO –Positive percentages indicate deficiencies –Negative percentages indicate redundancies

10. Preliminary Summary Indications of Reserve Deficiencies Paid Case Incurred Lines Studied+ 9% +10% All Other Lines+ 4% + 4% Total – all lines+ 8% +10% In Dollars$35B$40B Note: excludes E & A

11. Perspective (Preliminary) Reserve adequacy has improved for 2 consecutive years –Reserves are 6 to 9 percentage points more adequate at year-end 2003 than at year-end 2001

12. Preliminary Indications by Line Lines with significant deficiencies Paid Case Inc. Other Liability Occurrence+ 8%+ 3% Products Occurrence + 1%+13% Com. Multi-Peril+ 6%+ 8% Workers Comp+20%+27% Reinsurance (Non-Prop.) +29% +26%

13. Preliminary Indications by Line Other Lines PaidCase Inc. Priv. Pass. Auto Liability- 1%- 4% Homeowners/Farmowners- 3%- 3% Commercial Auto Liability- 4%+ 3% Claims Made Other & Prod.- 5%- 7% Medical Malpractice – Occ.- 1%+10% Medical Malpractice – C-M.- 2%- 1%

14. LALAE Ratios: Accident Year vs. Calendar Year Reserve adequacy deteriorated for at least 7 years but then improved in 2002 & 2003.

15. Loss Reserve Changes vs. Industry Profitability, All Lines Changes in reserves are correlated with profitability.

16. Indicated Reserve Deficiencies vs. Industry Profitability Since 1997, changes in estimated deficiencies have mirrored changes in overall profitability.

17. Retrospective Estimated Deficiencies & Economic Discount, All Studied Lines Even discounted reserves have been inadequate since 2000.

18. ISO Industry Loss Reserve Analysis Final, More complete analysis, as well as methodology and selections for each line, in Loss and Loss Adjustment Expense Reserves at Year-End 2003: Technical Analysis Separate analysis of loss adjustment expenses in: Loss and Loss Adjustment Expense Reserves at Year-End 2003: ALAE Supplement

19. B. Individual Insurer Analysis For accident years 1992 to 1995 combined, compared incurred losses from Schedule Ps for 1995 and 2001 Analyzed individual experience of more than 800 insurers that were common to both Schedule Ps Lines studied: –Commercial auto liability –Other liability –Workers comp –All lines combined

20. Distribution of Insurers by Change in All Lines AY Loss & ALAE Ratios Note: Based on comparison of ’95 and ‘01 Schedule P data for AYs ’92 to ’95 combined. From ’95 to ’01, 68% of studied insurers cut estimated ultimate loss ratios for AYs ’92 to ’95.

21. Market Share by Change in All Lines AY Loss & ALAE Ratios Note: Based on comparison of ’95 and ‘01 Schedule P data for AYs ’92 to ’95 combined. From ’95 to ’01, insurers representing 90% of studied premium cut estimated ultimate loss ratios for AYs ’92 to ’95.

22. Future Plans Analyze reserve changes through year-end 2003 Explore ways of improving reserve estimates –Credibility weighing an insurer’s data with larger data sets –Use of more refined data sets Geography Class –Alternative methodologies