Liability Trends, Issues and Jury Verdicts: Impact on Insurance Liability and Excess Casualty Markets

Insurance Information Institute

October 2003

Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038 Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org Presentation Outline

• P/C Insurance Overview • Liability Issues

• P/C Macro Cost Drivers

• US Legal System: Is it Out of Control

• Case Studies

• Overview of Primary & Excess Liability Markets

• Pricing & Profitability Considerations

• Corporate Governance

•Q&A P/C FINANCIAL OVERVIEW Highlights: Property/Casualty First Half 2003 2003 2002 Change Net Written Prem. 202,828 182,760 +11.0% Loss & LAE 142,129 134,897 +5.4% Net UW Gain (Loss) (2,070) (11,422) -81.9% Net Inv. Income 18,268 17,894 +2.1% Net Income (a.t.) 14,496 4,371 +231.6% Surplus* 312,455 284,300 +9.9% Combined Ratio 99.8 105.1 -5.3 pts.

*Comparison with year-end 2002 Strength of Recent Hard Markets

25% by Real NWP Growth

1975-78 1985-87 2001-03 20% Real NWP Growth During Past 3 Hard Markets 15% 1975-78: 8.6% 10% 1985-87: 14.5% 2001-03F: 8.8% 5%

0%

-5% Current $ Real $ -10% 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute *2003 figure is estimate on first half result. P/C Net Income After Taxes 1991-2003* ($ Millions)

y2001 was the first year ever $40,000 with a full year net loss $36,819 y2002 ROE = 1.0% $30,773 $30,000 y2003 ROE = 9.7%* $24,404 $21,865 $19,316 $20,598 $20,559 $20,000 $14,178 $14,496 $10,870 $10,000 $5,840 $2,903 $0

-$10,000 -$6,970 91 92 93 94 95 96 97 98 99 00 01 02 03* *First half 2003 Sources: A.M. Best, ISO, Insurance Information Institute. ROE: P/C vs. All Industries 1987–2003E* 20%

15%

10%

5%

0%

-5% 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03F US P/C Insurers All US Industries *2003 p/c estimate based on first half data. Source: Insurance Information Institute; Fortune ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2003E

20% The gap between the industry’s cost of capital and

15% its rate of return is narrowing

10% 1.8 pts

5% 14.6 pts 10.2 pts

US P/C insurers missed their 0% cost of capital by an average 6.9 points from 1991 to 2002 -5% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E Source: The Geneva Association, Ins. Information Inst. ROE Cost of Capital P/C Industry Combined Ratio 120 Combined 2001 = 115.7 Ratios 115 2002 = 107.2 1970s: 100.3 1980s: 109.2 2003First Half = 99.8 1990s: 107.7 110 2000s: 111.0

105

100

95 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 Sources: A.M. Best; ISO, III *Based on First Half 2003 results. *First half 2003 figures fo Source: A.M. Best, ISO, Reinsurance Associati 100 110 120 130 140 150 160 170 90

9 1 110.5 108.8

9

2

126.5 Reinsurance vs. P/CIndustry 115.8

9 r full industry from ISO; 1

3 Reinsurance 105.0 y well. ever forreinsurers;2003was badas y 106.9 2003: Bigimprovement infirst half 2001’s combinedratiowasthe worst-

9 4 113.6

108.5 Combined Ratio:

9 5 119.2 106.5 on of America, Insurance Information Institute

9

6 All Lines Combined Ratio st 104.8 half reinsusrance 105.8

9 7 100.8 101.6

9 8 100.5

figures from RAA. 105.6

9 9 114.3 107.7

0 0 106.5 110.0

0 1 162.5 115.7

0 2 121.3 107.2

0

3* 97.9 99.8 Underwriting Gain (Loss) 1975-2003*

$10

$0

($10)

($20)

$ Billions ($30)

($40) Based on first half results, 2003 will likely be a much better year in terms of underwriting losses. ($50) First half losses totaled $2.71 billion or $5.42 billion on an annualized basis ($60) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

*2003 figure of $5.42 billion is annualized based on first quarter underwriting loss of $2.71 billion Source: A.M. Best, Insurance Information Institute Source: NCCI; William M. Mercer 10% 15% -5% 0% 5%

29 49 69 89 00 203p 02 01 00 99 98 97 96 95 94 93 92 10.1% 1.3% Med ClaimCosts RisingSharply 8.0% -2.1%

-1.1% 9.0% Health careinflationisaffecting the , Insurance Information Institute. what systemitisdeliveredthrough Health Costs Benefit

2.1% cost ofmedicalcare,nomatter 5.1%

2.5% 6.4%

0.2% 7.3%

6.1%

WC 5.7%

7.3% 7.4%

8.1% 7.6%

11.2% 10.7%

14.7% 12.0% 14.0% World’s Most Dangerous Lines of Insurance (Combined Ratio + 1 Std. Deviation)

Earthquake 407.3 Med Mal 135.6 Other Liability 135.1 Reinsurance 133.9 Homeowners 133.3 Allied Lines 131.6 Aircraft 129.3 Comm. M ulti Peril 121.8 Comm. Auto Liab. 119.3 Workers Comp 118.7 F arm M ulti Peril 117.1 Commercial--All 116.3 Ocean Marine 115.1 Fire 114.6 All Lines 112.9 PP Auto Liab 111 Personal--All Lines 109.7 Comm Auto PD 109.1 Boiler & M achine 107 Group A&H 106.6 Other A&H 103.4 Priv Pass PD 102.9 Inland Marine 101.7 Fidelity 101.3 Other 100 Surety 84.1 Burglary & Theft 73.3

70 80 90 100 110 120 130 140 150 Source: Insurance Information Institute, calculated from A.M. Best combined ratio data 1992-2001. (IN)SOLVENCY ISSUES Seismic Shift in P/C Insurer Ratings

Shift in IFS Ratings Distribution (by Group) Aa3

30 Decline in Average Rating

25 A1

20 1998 2003

15 A2 10

5 A3 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Aaa Aa A Baa

10 5 Upgrades / Downgrades: North America • Ratings in persistent, accelerating decline. 0 • Aaa ratings appear an endangered species. -5 -10 • Mainly commercial insurers and reinsurers. -15 -20 ¾ Is 2003 the trough? -25 -30 1998 1999 2000 2001 2002 Source: Moody’s P/C Company Insolvency Rates, 1993 to 2002

•Insurer insolvencies are increasing 1.33% •10-yr industry failure rate: 0.72% 1.20% •Failure rating for B+ or better rating: 0.49% 1.03% •Failure rate for D through B rating: 1.29% 1.02% 10-yr Failure Rate 0.79% = 0.72% 0.58% 0.60%

30 30 38 0.28% 0.21% 0.23%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: A.M. Best; Insurance Information Institute Reason for P/C Insolvencies (218 Insolvencies, 1993-2002)

Impaired Affiliate 3% Deficient Loss Unidentified Reserves 17% 51% Reserve CAT Losses deficiencies 3% account for more than half Reinsurer Failure of all p/c 0% insurers insolvencies Chan ge in Business 3% Discounted Ops 8% Overstated Assets 2% Alleged Fraud Rapid Growth 3% 10% Source: A.M. Best, Insurance Information Institute P/C Insurance Industry Prior Year Reserve Development* $ Billions, Calendar Year Basis $25 $22.7

$20 Adverse reserve development of about $23 billion accounted for most of the $15 industry’s 2002 underwriting loss and “ate” much of the industry’s $37 billion $9.9 $10 increase in earned premiums $5 $2.3 $2.2 $1.2 $0.3 $0 ($1.5) ($0.3) ($5) ($3.7) ($6.7) ($10) ($8.5) ($7.5) ($10.0) ($15) 90 91 92 93 94 95 96 97 98 99 00 01 02 *Negative numbers indicate favorable development; positive figures represent adverse development. Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities Combined Ratio: Impact of Reserve Changes (Points)

Points (Reduced)/Increased

7 Adverse reserve development 6.3 6 totaling an estimated $23 billion 5.2 5 added more than 6 points to the p/c 4 combines ratio in 2002 3 2 1 0.5 0 -1 (0.4) -2 -3 (2.4) 1998 1999 2000 2001 2002

Source: ISO, A.M. Best, MorganStanley. LIABILITY ISSUES: Dollars and $ense Cost of U.S. Tort System ($ Billions)

Tort costs consumed 2.0% of GDP annually on average since 1990, $350 expected to rise to 2.4% of GDP by 2005! $298 $300 Per capita “tort tax” expected to rise to $1,000 by 2005, up from $721 in 2001 $250 Even a modest reduction in tort costs would be more $205 stimulative than the $674 billion Bush tax/spending plan $180 $200 $167 $169 $159 $156 $156 $141 $144 $148 $150 $129 $130

$100 $50

$0 90 91 92 93 94 95 96 97 98 99 00 01 05F

Source: Tillinghast-Towers Perrin. 2005 forecasts from Tillinghast. Tort Costs as a % of GDP*

Denmark 0.4% High tort costs put the U.S. economy at

U.K. 0.6% a significant disadvantage.

France 0.8%

Japan 0.8%

Canada 0.8%

Switzerland 0.9%

Spain 1.0%

Australia 1.1%

Belgium 1.1%

Germany 1.3%

Italy 1.7%

U.S. 1.9%

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% *1998 (latest available) Source: Tillinghast-Towers Perrin Highest Indemnity Award for a Single Bodily Injury

U.S. $124.0 Switzerland $10.8 Australia $7.3 Germany $7.2 Belgium $5.9 UK $5.8 France $5.5 Canada$5.0 Geography Matters Italy$4.3 U.S. awards are gargantuan compared Spain$3.4 Hong Kong$3.3 to those in other countries Japan$3.2 Austria$2.0 Sweden$1.9 Norway$1.4 Denmark$0.6 Portugal$0.6

$0 $20 $40 $60 $80 $100 $120 $140

Sources: Swiss Re; 2003 Marsh Limits of Liability Survey Personal, Commercial & Self (Un) Insured Tort Costs*

Commercial Lines Personal Lines Self (Un)Insured

$180 Total = $157.7 Billion $160

$140 Total = $120.2 Billion $29.6 $120 $20.1

Billions $100 $70.9 $80 $51.0 Total = $39.5 Billion $60

$40 $5.4 $17.1 $57.2 $20 $49.1 $17.0 $0 1980 1990 2000 *Excludes medical malpractice Source: Tillinghast-Towers Perrin Where the Tort Dollar Goes (2000)

Tort System is extremely Claimants' inefficient: Attorney Fees Awards for yOnly 20% 17% Economic Loss of the tort 20% dollar compensates victims for economic Administration losses Awards for 25% yAt least Non-Economic 58% of every Loss tort dollar 22% never reaches the victim Defense Costs 16% Source: Tillinghast-Towers Perrin There is a Glimmer of Hope for Tort Reform Best Chance for Tort Reform in Years • Medical Malpractice ¾ States—already happening: 20+ states have caps ¾ Federal reform discussed in Congress but bill failed in Senate • Class Action Reform ¾ Class Action Fairness Act ¾ Presently 2 or 3 votes short in the Senate. Vote in October???? • Asbestos Reform ¾ Fairness in Asbestos Injury Resolution of 2003; Sept. vote? • Punitive Damages—What’s Reasonable ¾ Supreme Court ruled favorably in Campbell v. State Farm Summary of Class Action Legislation: H.R. 1125 & S. 274 • Interstate class actions can be removed to fed courts if: ¾ Amount of suit exceeds $5 million, and ¾ Plaintiffs and defendants are from different states • Prohibits fed court from approving settlement if: ¾ Members would receive non-cash settlement or must expend funds to receive settlement. ¾ Member must pay sums to class counsel resulting in net loss ¾ Greater sums paid to members closer to court ¾ Class representative receives greater share than other members • Notice Requirements (to join, settle cases) • Report to Senate/House Judiciary Cmtes. on best practices Are We Finally Seeing Punitives Reigned In by the Supreme Court? In BMW of North America v. Gore (1996)the Supreme Court ruled in an Alabama case that 500 punitive awards that were 500 to 1 were excessive (actual damages in the case, which 500:1 involved the repainting of a car, were $4,000 but the jury awarded the plaintiff $2 million) 400 In Campbell v. State Farm (2003) the Supreme Court In Campbell v. State Farm the Court ruled in a 22-year old Utah added that “…few awards exceeding a 300 case that punitive awards single- digit ratio between punitive and that were 145 to 1 were compensatory damages will satisfy due excessive (actual damages in process…Single digit multipliers are 200 the case, which involved more likely to comport with due process, insurer bad faith were $1 145:1 still achieving the State’s deterrence million) and retribution goals…” 100 10:1 ??

Ratio ofPunitive Award to Compensatory 0 1996 2003 The Future? Sources: Insurance Information Institute Categories of Liability With Highest % of Punitive Awards

40% The Supreme Court’s Campbell v. State Farm ruling that a ratio of punitive to compensatory damages “single digits” is excessive is especially 31% important for these categories of liability which 30% are hit with punitives with above-average frequency.

20% 19% 20%

10% 10% 9% 6% 5%

0% Business Vehi cul ar Personal Products Premises Police Other Negligence Liability Negligence Liability Liability Negligence Liabilities

Source: Jury Verdict Research; Insurance Information Institute. Median Punitive Award for Most Frequent Categories of Liability, 2001

$200,000 $1,300,000

$150,000 $133,400$134,500

$100,000 $90,000

$50,000 $38,250 $40,000 $30,000

$0 Vehi cul ar Personal Police Premises Business Overall Products Liability Negligence Negligence Liability Negligence Liability

Source: Jury Verdict Research; Insurance Information Institute. P/C COST DRIVERS

Macro Factors U.S. Policyholder Surplus: 1975-2003* $350

$ 47 B i Surplus (capacity) peaked at ll $300 io $336.3 Billion in mid-1999 and n fell by 15.5% ($52 billion) to $250 $284.3 billion at year-end 2002 (a trough?) $200 •Surplus during the first half of

$ Billions 2003 rose by $28.2B or 9.9% to $150 $312.5B

$100 “Surplus” is a measure of underwriting capacity. It is $50 analogous to “Owners Equity” or “Net Worth” in non-insurance organizations $0 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03*

Source: A.M. Best, Insurance Information Institute *First Half Capacity of Lloyd’s Market

yAfter remaining stable at around GBP10bn, Lloyd’s capacity has increased by over 40% in the last three £15 years. £14.4 £14 y2003 capacity is GBP14.4bn, 18% higher than 2002.

£13 £12.2 £12 £10.9 £11.1 £11 £10.2 £10.3 £10.2 £10.0 £9.9 £10.1 £10 £8.9 £9 £8 93 94 95 96 97 98 99 00 01 02 03

Source: Lloyd’s Number of Captive Formations & Liquidations 1993 to 2002

yHard market fueling captive formation 500 462 yCorporate collapses and captive consolidations fueled the upward trend in captive liquidations in 2002. 400 316 311 305 294 289 290 300 250 245 243 238 202 200 170 150 156 154 135 113 103 100 102

0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

New Captives Liquidated Captives Source: AM Best, Tillinghast-Towers Perrin Rate On Line Index (1989=100)

260 250 240 Prices rising, limits falling: 230 ROL up significantly 220 210 200 190 180 170 160 150 140 130 120 110 100 89 90 91 92 93 94 95 96 97 98 99 00 01 02*

Source: Guy Carpenter * III Estimate Gross Premiums Breakdown: Net vs. Ceded

Net Premiums Written Reinsurance Ceded Ceded: 13.6% $500

$450 Ceded: 18.0% $61 Ceded: 15.8%Ceded: 17.2% In Billions $400 Ceded: 14.3% $72 Ceded: 13.6% $62 $389 $350 $53 $300 $43 $46 $327 $300 $250 $284 $274 $278 $200 $150 Cession rate fell from 18.0% in 2001 to 13.6% in 2002 $100 (est). Less reinsurance is available. $50 $0 1997 1998 1999 2000 2001E 2002E

Source: A.M. Best. Source: NCCI; William M. Mercer 10% 15% -5% 0% 5%

29 49 69 89 00 02 01 00 99 98 97 96 95 94 93 92 10.1%

1.3% Med ClaimCosts RisingSharply

8.0% -2.1%

-1.1% 9.0% Health careinflationisaffecting the , Insurance Information Institute. what systemitisdeliveredthrough Health Costs Benefit 2.1% cost ofmedicalcare,nomatter 5.1%

2.5% 6.4%

0.2% 7.3%

WC 6.1% 5.7%

7.3% 7.4%

8.1% 7.6%

11.2% 10.7%

14.7% 12.0% Net Investment Income

$45 Investment income fell 2.8%in 2002 $36 but rose 2.1% in -$5 .6 Bil first half of 2003 lion $27 History (US$) Billions 1997 Peak = $41.5B $18 2000= $40.7B 2001 = $37.7B $9 2002 = $36.7B 2003E = $36.5B $0 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03E Note: 2003 estimate is based on annualized first half investment income of $18.268 billion. Source: A.M. Best, Insurance Information Institute Total Returns for Large Company Stocks: 1970-2003* 40% S&P 500 up 30% 17.1% so far this year 20%

10%

0%

-10% y2002 was 3rd consecutive year of decline for stocks -20% yWill it be the last? -30% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

*As of October 3 , 2003. Source: Ibbotson Associates, Insurance Information Institute Property/Casualty Insurance Industry Investment Gain*

$ Billions $57.9 $60 $56.9 $52.3 $51.9 $50 $47.2 $45.6 $42.8 $44.4

$40 $35.4 $36.6

$30 Investment gains are simply $20 returning to “pre-bubble” levels

$10

$0 94 95 96 97 98 99 00 01 02 03E

*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses. Source: Insurance Services Office; Insurance Information Institute estimate annualized as of 6/30/03. THE U.S. LEGAL SYSTEM: IS IT OUT OF CONTROL?

TRENDS, CONDITIONS & OUTLOOK TORT-ure

• Asbestos New • Silicosis • “Toxic” Mold • Medical Malpractice • Construction Defects • Lead • Fast/Fattening Foods & Obesity New • Reality TV New • Arsenic Treated Lumber • Guns • Genetically Modified Foods & Labeling • Generic Drugs, Pharmaceuticals & Medical Devices • Security exposures (workplace violence, post-9/11 issues) • Slavery 2002 Top Ten Verdicts

Value Issue State $28 Billion Tobacco (Product Liability) Florida $2.2 Billion Negligence (Pharmacy Mal) Missouri $270 Million Personal Injury (Burn) Kentucky $225 Million Product Liability (Rollover) Texas $150 Million Tobacco (Product Liability) Oregon $122 Million Product Liab. (Auto Accident) Virginia $97.2 Million Business Fraud California $95.2 Million Med Mal (Birth Injury) New York $91 Million Medical Malpractice New York $80 Million Med Mal (Birth Injury) New York $80 Million Prod. Liab/Personal Inj. (Auto) Missouri

Source: LawyersWeekly USA, January 2003. States With the Most Top 10 Jury Awards 1995-2002

•79% (63/80) of Top 10 awards came from 20 18 just 7 states between 1995-2002 •23 States have had no award in the top 10

15 13 12

10 7 5 44 5

0 NY CA TX MO FL GA AL

Source: Lawyers Weekly USA; Insurance Information Institute. Business Leaders Ranking of Liability Systems for 2003

Best States Worst States 1. Delaware 41. New Mexico 2. Nebraska 42. South Carolina 3. Iowa 43. Hawaii 4. South Dakota 44. California 5. Indiana 45. Arkansas 6. North Dakota 46. Texas 7. Utah 47. Louisiana 8. Virginia 48. Alabama 9. Minnesota 49. West Virginia 10. New Hampshire 50. Mississippi

Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute. The Nation’s Judicial Hellholes

CALIFORNIA Alameda Madison County County, IL Los Angeles County City of St. Louis, MO San Francisco I County TEXAS Jefferson Mississippi’s County 22nd Judicial District Hidalgo County Starr County

Orleans Parish, LA

Source: American Tort Reform Association; Insurance Information Institute Verdicts of $100+ Million

27 30

25 17 18 20

15

10

5

0 1998 1999 2000

Source: Marsh, 2001 Limits of Liability Report % of Jury Awards with Punitive Damages, by Jurisdiction

1994-2000

30% 25% 25%

20% 17% 14% 15% 12% 11% 11% 10% 10% 9% 8% 8%

5% 4%

0%

a a i . ni ai vg A Idaho laska Utah rgi aw labam A arolina H .S. C Vi Vermont A S. Dakota . U S New Mexico W.

Source: Jury Verdict Research, Current Award Trends in Personal Injury (2002 edition) % of Jury Awards with Punitive Damages, by Jurisdiction*

1995-2001

14% 13% 13% 12% 10% 10% 9% 9% 8% 8% 7% 6% 6% 4% 4% 2%

0%

. n ky ota c k u a rolina Texas consi Hawaii D a s ent .S. Avg Virginia Montana S. Wi K U W. S. C *Data for AL, AK, AZ, ID, MS, NE, NM, ND, VT and WY were listed as “N/A” by JVR. Several of these states had above-average punitive award rates in previous issues of the JVR publication. Source: Jury Verdict Research, Current Award Trends in Personal Injury (2002 edition) % of Jury Awards of $1 Million or More, by Jurisdiction (1995-2001)*

30% Top Five Bottom Five 27% 25% 20% 20% 19% 19% 17% 15% 12% 10%

4% 5% 3%3% 3%

0%

k na ts a or xas k e Avg. T IA/KS w Y / nnessee .S. e ouisia e U N L sachuset CT Nebras Oklahoma T Pennsylvania Mas *Compensatory awards only. Data for AK, AZ, ID, MS, NM, ND, VT and WY were listed as “N/A” by JVR. Several of these states had above-average punitive award rates in previous issues of the JVR publication. Source: Jury Verdict Research, Current Award Trends in Personal Injury (2002 edition) Average Jury Awards 1994 vs. 2001

1994 2001 9,113 $9,000 $8,000 $7,000 $6,000 $5,000

($000) 3,902 $4,000

$3,000 2,288 $2,000 1,727 1,744 1,365 1,185 1,140 789 759 $1,000 419 187 323 333 $0 Overall Vehicular Premises Business Wrongful Medical Products Liability Liability Negligence* Death Malpractice Liability *Figure is for 2000 (latest available) Source: Jury Verdict Research; Insurance Information Institute. Trends in Million Dollar Verdicts*

100% 90% 95-97 98-99 2000-2001 80%

Very sharp jumps in multi-million %

8 70% dollar awards in recent years across 6 virtually all types of defendants

% 59%

60% 4

5

%

7

%

4 50% 4

4 43% 42%

40% 36%

30% 27% 25%

% 21% 21%

7

20% 1

%

0 11% 11%

1 10%

% 8%

10% 6 4% 4% 0% Vehi cul ar Personal Premises Business Government Medical Products Liability Negligence Liability Negligence Negligence Malpractice Liability *Verdicts of $1 million or more. Source: Jury Verdict Research; Insurance Information Institute. Probability of Plaintiff Verdict is Rising

1994 1997 2001 Premises Liability 43% 45% 57%

Business Negligence NA 57% 66%

Vehicular Liability 58% 59% 68%

Products Liability 39% 39% 56%

Source: Jury Verdict Research, 2002 Current Award Trends Excess Layer Hit With Leveraged Impact of Increase in Trend

Assumptions: Primary Limit of $1 M Ground Up Trend of 7.0%

Total Primary Excess % Loss Total Primary Excess Claim Loss Loss Loss Trend Loss Loss Loss

1 0.900 0.900 0 7.0 0.963 0.963 0 2 1.000 1.000 0 7.0 1.070 1.000 0.070 3 2.000 1.000 1.00 7.0 2.140 1.000 1.140 Total 3.900 2.900 1.00 4.173 2.963 1.210

Loss Trend: % 7.02.2% 21.0% Trend in excess layers is 3 times the ground-up trend and nearly 10 times the primary trend Factors Driving Severity

Why Are Awards Getting Bigger? z More Sophisticated & Innovative Plaintiff’s Bar z Trial Bar is Flush With Cash

z Rush to file cases before reform legislation z Medical Inflation z Venue—Judicial “Hellholes” in these states: − TX, MS, AL, CA, NY, FL, IL, LA z Class Actions z Erosion of Tort Reform/Acceptance of “Junk Science” as Fact z Jury Desensitization to Money/Deep Pockets Syndrome z Sensationalized Media Coverage (e.g., Mold) z Concern over Corporate Image—Cos. Quick to Settle z Some US Corporations do Really Dumb Things (Enron,etc.) EXAMPLES CASE STUDY 1:

SILICOSIS Silica: An Emerging Problem

ƒ Crystalline silica, or quartz, is the second most common mineral in the earth’s crust and a major component of sand, rock and mineral ores. ƒ Overexposure to respirable crystalline silica can cause a disabling and sometimes fatal lung disease known as silicosis. ƒ More than 1 million US workers are exposed to crystalline silica and each year more than 250 of them die with silicosis. Source: National Institute for Occupational Safety and Health (NIOSH) and the Department of Labor (DOL) Occupations At Greatest Risk Of Silica Exposure • Construction - sandblasting, rock drilling • Mining - cutting or drilling through sandstone and granite • Foundry work - grinding, moldings • Stone cutting - sawing, abrasive blasting, chipping, grinding • Glass manufacturing • Agriculture - such as plowing or harvesting • Shipbuilding - abrasive blasting • Ceramics, clay, and pottery • Railroad - setting and laying track • Manufacturing of soaps and detergents • Manufacturing and use of abrasives

Source: National Institute for Occupational Safety and Health (NIOSH) and the Department of Labor (DOL) Claims Filed Against U.S. Silica 18,000 By Claimant (1997-2003) 16,000 15,342

14,000 • Leading industrial sand producer U.S. Silica 12,000 today faces more than 22,000 silica claims! • Some 15,342 plaintiffs have named the 10,000 company in lawsuits so far in 2003 - triple the 8,000 number seen in 2002! 6,000 5,142 4,000 2,000 1,371 93 153 505 654 0 1997 1998 1999 2000 2001 2002 2003* Some 87% of the lawsuits filed are from Mississippi and Texas!

Source: Coalition for Litigation Justice; (* through 6/30/03) CASE STUDY 2:

“TOXIC” MOLD Texas: Mold Losses/Claims Are Finally Moderating*

$250 Paid Losses 30000 * Claim Count 25000 $200

20000 $150 15000

$100($Millions) 10000 Count Claim

$50 5000 Water Damage Paid Losses

02 02 $0 2 02 -02 c- 0 1 1 02 - -02 g ct-02 e 01 r-02 r-02 un Jul-02 O Nov-02D 1 1 01 01 - a J Au Sep- 01 - g-01p an- M Ap May un- Jul-01 Oct-0Nov-01Dec-0J Feb-0 an- J Au Se J Feb-0Mar-01Apr-0May

* Data are for TDI Cause 61: Discharge – Other Damage. Not all claims in cause 61 are mold and mold claims may Source: Texas Department of Insurance; Insurance Information Institute also arise from other (non-water) causes of loss. California: Surging Water Claim Frequency and Costs: Symptom of Growing Mold Problem

•Water losses paid rose 151% from 1997 to 2002 and 77% since 1999 $600 38% •Water claims accounted for less $562.4 $550 36% than 1/4 of all HO claims in 36% 1997, now they for 1/3. $496.3 $500 34% $441.6 33% $450 32% 32% $400 31% 30% $350 $316.5 $298.9 28% $300 27% California may be 26% $250 $224.1 in a drought, but 24% 24% $200 homeowners say

$150 they’re drowning 22%

$100 20% 1997 1998 1999 2000 2001 2002

Paid Water Losses ($ Mill) Water Claims as % of All Homeowners Claims

Source: Insurance Information Network of California; Insurance Information Institute Where are the Next Battlefields for Mold? • Homeowners issue probably crested in 2002 • Migration to commercial area affects many lines: ¾Commercial Property Commercial Liability ¾Products Liability Builders Risk/Construction Defects ¾Workers Comp… • Hot Spots: ¾ Apartments/Condos/Co-ops Office Structures (e.g., IBM) ¾ Schools Municipal Buildings ¾Cars? (GM case in NC) • Trend toward class actions since science doesn’t support massive individual non-economic damages ¾Much more lucrative for trial lawyers to form class Source: Insurance Information Institute. CASE STUDY 3:

CONSTRUCTION DEFECT/BUIDER’S RISK Construction Defect Problem

• Growing number of lawsuits target: ¾ Builders, Contractors, Developers, Sub-Contractors, Material Suppliers, Product Manufacturers, Architects & Engineers. • Construction defect claims include: ¾ Subsidence, collapse, cracks in walls & foundations. ¾ Leaking roofs, windows, doors, foundations. ¾ Dry rot of wood or other building materials, pest infestations. ¾ Mold, code violations, improper specification of building materials. • Hotspots: ¾ California, Nevada, Colorado, Texas, the Carolinas, Florida, New York. Construction Defect Litigation Destroying CA Condo Market Ratio of Losses Paid Out to Premiums Taken In $2.95 $3.00 Condo construction in parts of CA has $2.75 come to a virtual stop. $2.50 Insurer costs rose 58% in just 2 years! $2.25

$2.00 $1.87 “Right-to-Cure” laws now in 5 $1.75 states: AZ, CA, NV, TX, WA $1.50 16 considering $1.25 such laws. $1.00 1998 2000

Source: ISO, Insurance Information Institute CASE STUDY 4:

OBESITY/FAST FOOD Fast Food/Junk Science: Edible Asbestos?

•Are the food service & manufacturing industry’s vulnerable to suits over obesity? •McDonald’s sued in late 2002 over allegations that their food makes people fat (DISMISSED) •Kraft sued earlier this year over trans fats in Oreo cookies (DROPPED)

Source: Insurance Information Institute Prevalence of Overweight and Obesity among US Adults (aged 20-74 years)

Obese (BMI>30) 70 64% Overweight (BMI 25.0-29.9) 56% 60 47% 31 50 23

40 15 Nearly 2/3 of US adults are

% overweight or obese, up 30 from 47% in the late 1970s 20 32 33 33 10

0 NHANES II (1976-80) NHANES III (1988-94) NHANES (1999-2000)

Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition Examination Survey (NHANES); Insurance Information Institute Adult Body Mass Index

BMI Weight Status

Below 18.5 Underweight

18.5-24.9 Normal

25.0-29.9 Overweight

30.0 and Above Obese

Source: Centers of Disease Control and Prevention (CDC). Prevalence of Obesity 2000

Obesity epidemic: only Colorado has an obesity prevalence of less than 10%

<10% 15%-19% ≥20%

Source: Behavioral Risk Factor Surveillance System; Insurance Information Institute Prevalence of Overweight and Obesity Among Children and Adolescents

15% 16 15% Ages 6-11 14 11% 11% 12 Ages 12-19 10 % 7% 8 6% In the past two decades the 5% percentage of overweight 6 4% children has more than 4 doubled and the percentage of adolescents who are 2 overweight has tripled 0 NHANES I (1971-74) NHANES II (1976-80) NHANES III (1988-94) NHANES (1999-2000) Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition Examination Survey (NHANES); Insurance Information Institute Obesity More Prevalent than Smoking, Heavy Drinking or Poverty

80 • More Americans are 70% 67% obese/overweight than smoke 70 or drink heavily combined. 58% 60 • More Americans are 50 obese/overweight than live in poverty 40 30 25%

20 12% 10 0 Obese Aging from 30 Living in Current Heavy Drinker to 50 Poverty Smoker

Source: RAND Health; Insurance Information Institute Potentially Vulnerable Industries

Many Industries are Potentially At Risk: • Agriculture • Food Processors & Manufacturers • Beverage Makers • Food Distributors, Grocers • Restaurants & Franchisees • Advertising Agencies • TV Networks/Magazines/Newspapers • Toy Manufacturers (i.e., co-marketers) • Sporting Event/Entertainment Organizers

Source: Insurance Information Institute Possible Legal Liability Theories in Obesity Cases • Products Liability ¾ Product dangerous/defective and caused health hazard • Personal Injury ¾ Obesity, overweight, diabetes, heart condition, high blood pressure, stroke • Negligence ¾ Knew product was hazardous to health; knew product was addictive? • Strict Liability ¾ Extreme hazard • Failure to Warn ¾ Failed to disclose that product associated with various diseases • Breach of Warranty ¾ Product not as healthy as purported • Misrepresentation ¾ Health claims valid? • Negligent/reckless marketing or ¾ Market product w/o stating health risks; distribution market to children (like in gun suits) • Advertising Liability ¾ Advertising misled consumers (esp children) • Government Subrogation ¾ E.g. Tobacco settlement w/states; fast food “sin” tax CASE STUDY 4:

REALITY TV 2003: Media Attention Reality TV ¾ “Bachelor Pad a Mess” y Yahoo News, September 24, 2003 ¾ “Irish Reality Show is More Like a Nightmare” y New York Times, June 23, 2003 ¾ “Hospital Patients Sue Reality TV Show for Fraud y New Jersey Law Journal, July 23, 2003 ¾ “Reality Shows Spark Insurer Fears” y National Underwriter, February 10, 2003 ¾ “Growing Rowdier, TV Reality Shows are Attracting Suits” y New York Times, January 7, 2003 Legal Realities: TV Lawsuits Reality TV lawsuits address such issues as: • Personal injury • Legality of waivers signed by show participants • Defamation/Humiliation • Use of hidden cameras Reality TV shows are breaking new ground, but • Misrepresentation for program producers the • Alleged rigging of shows risks are increasing • Breach of contract • Copyright • Property Damage at Filming Venues

Source: Broadcasting & Cable, Insurance Information Institute CASE STUDY 5:

DRAM SHOP/VICARIOUS LIQUOR LIABILITY Dram Shop Liability Definition: • Liability of establishments arising out of the sale of alcohol to obviously intoxicated persons or minor who subsequently cause death or injury to third-parties as a result of alcohol- related crashes •Some 44 states and territories have dram shop liability laws or statutes States with laws help reduce alcohol-related injury because: ¾ There is more publicity regarding liability ¾ Alcohol servers and management are more aware of liability ¾ More alcohol establishments obtain liablity insurance ¾ There are fewer low-price drink promotions ¾ More servers check ID

Source: Mothers Against Drunk Driving (MADD) and Alcohol-Related Injury & Violence (ARIV) 2003: Media Attention Dram Shop Liability In the Papers ¾ “Perry Mason Moment, A $39 Million Verdict: Outback Restaurant Loses Dram Shop Action” y National Law Journal, July 7, 2003 ¾ “Eatery Pays Millions For Drunk Driver” y The Guardian (Charlottetown), June 21, 2003 ¾ “DUI Suit Settled For $21 million; Man in Crash That Killed 3 Drank at TGI Fridays" y The Courier-Journal (Louisville, KY), June 20, 2003 ¾ “Bar Ordered to Pay $1 million in Death of Patron: Denim & Diamonds Plans to Appeal Verdict in Lawsuit" y Kansas City Star, April 15, 2003 Alcohol-Related Crash Fatalities 1992-2002

18,500 17,970 17,858 18,000 17,473 17,448 17,380 17,247 17,500 17,218

17,000 16,580 16,500 16,189 16,020 16,000 15,976 • In 2002, 17,970 people died in alcohol- 15,500 related crashes, up 3% from 17,448 in 2001. 15,000 • Alcohol-related crash fatalities accounted for 42% of all crash fatalities in 2002. 14,500 92 93 94 95 96 97 98 99 00 01 02*

Sources: US Dept. of Transportation, National Highway Traffic Safety Administration * Preliminary data Economic Costs of Impaired Driving in the US According to a study by economists at the Public Services Research Institute: • Alcohol-related crashes in the US cost the public an estimated $114.3bn in 2000 • Average alcohol-related fatality costs $3.5m • Societal costs of alcohol-related crashes in the US average $1.00 per drink consumed • Alcohol-related crashes accounted for est. 18% of the $103bn in US auto insurance payments • Reducing alcohol-related crashed by 10% would save $1.8bn in claims payments and loss adjustment

expenses Source: Taylor, Miller & Cox 2002 CASE STUDY 6:

EMPLOYMENT PRACTICES LIABILITY Employment Practices Liability: Median Compensatory Award ($000)

($ 000) $220 $200.0 $200 $182.5 $180 $175.0

$150.8 $160 $146.6 $140.9 $140 $128.0 $120

$100 1996 1997 1998 1999 2000 2001 2002 Source: Trends in Employment Practices Liability, LRP Publications. Median Compensatory Award for Discrimination Cases

$250 $222 $200 $200

Thousands $150 $150 $128 $114 $100 $85

$50

$0 1994 1995 1996 1997 1998 1999

Source: Jury Verdict Research Median Compensatory Award by Type of Discrimination Case EPL FACTORS yNew laws yConfusing language $300,000 yCourt broadening decisions $268,926 $250,000 yHeightened public awareness yWorkplace demographics $200,000 yRacists, biggots & dummies $175,001 $150,000 $150,000 $121,951 $100,000 $100,000

$50,000

$0 Sex Race Overall Disability Age

Source: Jury Verdict Research Median Age of Labor Force: On the Rise

The median age of the labor force will approach 41 years by 2008 – a very high level by historical standards 45

40.7

40 38.7

35.9 34.8 35

30 1978 1988 1998 2008 Projected

Source: Bureau of Labor Statistics CASE STUDY 7:

CYBER RISK The Cost of Worms & Viruses ($ Billions)

Love Bug virus (2000) $10bn

Klez worm (2002) $9bn

Code Red I and II worms (2001) $2.6bn

Nimda virus (2001) $590m to $2bn • Estimated cleanup and lost $1bn Slammer worm (2003) productivity costs of worms and viruses can add up to Melissa virus (1999) $80m billions of dollars! • Microsoft being sued as $0 $2 $4product $6 liability $8 case $10 $12

Source: USA TODAY, September 3, 2003 Nature & Distribution of Costs Associated With Computer Crime

Laptop Financial Theft Other Theft of Fraud 3% Proprietary Insider 2% 5% Info Abuse of Net 37% Access 6%

Virus Total cost of computer 14% crimes and other Denial of information security Service breaches is high: 33% $201.8 million in 2003 for 251 firms Source: 2003 CSI/FBI Computer Crime and Security Survey responding to survey Cyber-Risk Gaps in Insurance Coverage Despite increasing risks, only 7% of respondents knew they had Insured by a specific insurance geared to 7% specific policy cyber-risks!

Do not know the 22% answer

Do not have 34% insurance

Risks covered by 33% general policies

0 5 10 15 20 25 30 35 40

Source: Ernst & Young 2003 Global Information Security Survey of 1,400 organizations from 66 countries CASE STUDY 8:

TERRORISM Sept. 11 Industry Loss Estimates ($ Billions)

Property - WTC 1 & 2 $3.5 (9%) Other Life Liability $2.7 (7%) Property - $10.0 (25%) Other $6.0 (15%)

Aviation Liability $3.5 (9%) Biz Interruption Event Workers $11.0 (27%) Cancellation Aviation Hull Comp $1.0 (2%) $0.5 (1%) $2.0 (5%) Consensus Insured Losses Estimate: $40.2B Source: Insurance Information Institute Status of 9/11 Death Claims (Through August 2003)

No Claim Filed Claim Filed but (1,776) No 59% Compensation Sought (205) 7% Out of 3,016 9/11 deaths (excl. hijackers), only 34%of claimants had sought Claim Filed and compensation by Aug. 29, 2003. Compensation The deadline is Dec. 22. Sought (1,035) Will many choose litigation? 34%

•Fund has paid $623.1 million to date •Total could exceed $3 billion

Source: September 11 Victims Compensation Fund; Insurance Information Institute Industry Losses Under Proposed Federal Backstop Using 9/11 Scenario (as interpreted on date of enactment, Nov. 26, 2002)

$14.25B $19.675B Total $30Ind. Loss: $10.875B

$25 $0.925B $2.0B $1.75B Industry

$20 Industry Industry Co-Share $10.575

Co-Share Co-Share $15.75 $18.00 $15

($ Billions) ($ $10 $0.125B Industry $1.125 $18.75 Co-Share $12.50 $5 $8.75 $0 Year 1Year 2Year 3 Industry Retention Surcharge Layer Co-Reinsurance Layer Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPE Source: Insurance Information Institute. Terrorism: Legal Liability Theories Available to Victims

• Negligence

• Express or Implied Contract

• Strict Liability

• Duty to Maintain Secure Common Areas

• Breach of the Voluntary Duty to Protect

• D&O (Duties of care/loyalty/disclosure)

Source: Rivkin Radler LLP WORKERS COMPENSATION OPERATING ENVIRONMENT WC Net Premiums Written

$ Billions

$35 Private Carriers 6.5 $7.0 State Funds $6.5 31.3 31.0 5.3 $6.0 30.3 29.7 $5.5 $30 28.9 29.0 28.2 $5.0 $4.5 26.2 26.0 $4.0 25.1 24.8 24.1 3.2 $3.5 Funds State Private Carrier Private $25 23.2 2.7 $3.0 2.2 22.2 2.3 $2.5 2.3 2.2 $2.0 $20 $1.5 89 90 91 92 93 94 95 96 97 98 99 00 01 02*

*III Estimate Source: A.M. Best WC Combined Ratios

2.9 pts due Calendar Year vs. Ultimate Accident Year to 9/11 137 140 Countrywide—Private Carrier* 133 135 129 Calendar Year 130 125 123 122 Accident Year 122 125 121 121 117 118 120 115 115 112 109 110 107 108 107 Percent 110 102 105 101 100 101 100 97 97 100 95 95 90 90 91 92 93 94 95 96 97 98 99 00 01 02

*Includes dividends to policyholders Accident year is developed to ultimate as 12/31/02; Note: CY figures from AM Best; AY figures from NCCI Source: A.M. Best, NCCI WC Indemnity Claim Costs Has Accelerated Since 1995

Indemnity Claim Cost (000s) 17 Annual Change 1991-1995: +0.3% +7.0% 15 +7.7% Annual Change 1996-2002p: +6.8% +7.8% 13 +7.3% +6.4% -3.1% +5.7% 11 -2.8% +5.8% +1.0% +4.9%+1.7% 9

7

5

6 91 92 93 94 9 97 98 99 00 01 9 9 0 0 19 19 19 19 2 2 002p 19 19 1 1 1995 2 Accident Year

Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002; 2002 data are preliminary. Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI WC Medical Claim Costs Accelerating Too

Medical Claim Cost (000s) 16 +12.0% 15 Annual Change 1991-1995: +4.0% 14 Annual Change 1996-2001: +8.1% +10.7% 13 +7.6% 12 +7.4% +5.7% 11 +7.3% 10 +6.4% +5.1% 9 -2.1%+9.0% +6.8%+1.3% 8 7 6

6 95 2p 993 994 000 001 199 1997 1998 1999 2 2 1991 1992 1 1 19 200 Accident Year

Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002 Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI WC Medical Severity Rising Far Faster than Medical CPI

14% WC medical severity is rising 12.0% 12% 2.7 times faster than the 10.7% medical CPI 10% 7.3% 7.4% 7.6% 7.3 pts 8% 6.4% 5.7% 6% 5.1%

4% 4.5% 4.6% 4.7% 4.1% 3.6% 3.2% 3.5% 2% 2.8% Change in Medical CPI 0% Change Med Costp er Lost Time Claim 1995 1996 1997 1998 1999 2000 2001 2002

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states. Med Costs Share of Total Costs is Increasing Steadily 2002p

1992 Indemnity Medical 47% 53% 1982 Indemnity Medical 52% 48%

Medical 40% Indemnity 60%

Source: NCCI (based on states where NCCI provides ratemaking services). Workers’ Comp: Residual Market Premiums & Combined Ratios

Expect residual market plans/pools to continue grow as market hardens $6 177 and threat of terrorism persists 200 164 169 166 159 180 $5 142 $4.8 160 Combined Ratio 126$4.4 $4.1 117 118 116 116140 $4 $4.0 111 112 102 102 $3.5 96$3.193 98 120 $3 $2.8 100 Billions) $2.6 80 $2.1 $2 $2.0 $1.160 $1.2 40 $1 $1.0 $0.6

Residual MarketResidual Premiums ($ $0.6 20 $0.3$0.3$0.4 $0 0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02* *Incomplete PY Projected to Ultimate Note:Excludes Maine 1988-92. Source: NCCI WC Residual Market Shares

Residual market Residual Market Shares plans/pools are nowhere near where they were a decade ago

30% 26% 24% 23% 21%22% 20% 18% 16% 17%17% 16% 11% 9% 9% 10% 7% 5% 6% 4% 3% 4%

0% 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02p

Source: NCCI LIABILITY:

OVERVIEW OF PRIMARY & EXCESS MARKETS UPDATE ALL Average Total Limits Purchased by All Firms* ($ Millions)

$110 $105.0 $101.8 $100 $99.1 $95.7

$90 $88.7 $85.8 $85.9 $87 $83.2 $80 $77.9

$70 Limits purchased fell by 17.1% between 2000 and 2003. $60 Price/capacity are issues.

$50 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

*Includes underlying primary limits Source: Limits of Liability 2003, Marsh, Inc. Liability Limits – Industry Rankings: Average Limits Purchased, 2003*

Top Five Bottom Five $200 $190 $180 $160 $144 $136 Millions$140 $128 $120 $108 $100 $80 $56 $60 $50 $44 $35 $40 $30 $20

$0 t en . m m co ction n althcare rm quip er a ergy E He n Tele nstru Ph E Utility** o Gov / sp. C & ation (NPOs) Rubber,Plastic em an c ng Ch i Tr Edu Min *As of January 1 **Non-nuclear Source: Limits of Liability 2003, Marsh, Inc. Average Underlying Limits (Attachment Points)

$ Millions $2.2 $2.0 $2.0 $1.9 $1.9 $1.8 $1.8 $1.6 $1.4 $1.2 $1.0

2000 2001 2002 2003

*Source: Marsh, 2003 Limits of Liability Report Average Underlying Limits (Attachment Points)

$ Millions $4.5 $4.0 $4.0 $3.5 $3.0 $3.2 $3.0 $2.7 $2.5 $1.9 $2.0 $2.0 $1.8 $1.9 $1.5 $1.0 2000 2001 2002 2003 Average Auto Liability (@500 Vehicles) GL @ $1B Revenue

*Source: Marsh, 2003 Limits of Liability Report Average Limits by Revenue Class 2000-2003 ($ Millions)

-0.6%* $376 -17.8%* -10.2%* -11.4%* -12.8%* -7.4%* $337 $400 $335 $338 $350 2000 2001 2002 2003 $256

$300 $256 $241 $237 $250 Russian Roulette? Many risks skimping on coverage to save money $200 $148 $146 $150 $129 $88 $94 $92 $100 $78 $70 $59 $53 $61 $45 $50 $48 $50 $37 $0 $0 - $200 M $201 - $500 $501M - $1B $1 - $5B $5 - $10B $10+ B M * Percent Change 2003 over 2002. Source: Marsh, 2003 Limits of Liability Report Average Limits Purchased and Loss Experience ($ Millions)

Once Burned, Twice Shy: Firms suffering $5+ million loss buy $207 $203 $207 176% more coverage $199

$96 $93 $84 $75

2000 2001 2002 2003 Firms Not Firms Experiencing $5 Experiencing $5 Million Loss Million Loss

Source: Marsh, 2002 Limits of Liability Report Excess Liability Market Capacity $3.0 Capacity has dropped 30% since peaking in 2000 $2.5 $2.011 $2.045 $1.941 $1.721 $1.710

Billions $2.0 $1.575 $1.432 $1.405 $1.425 $1.334 $1.5

$1.0

$0.5

$0.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Marsh, 2003 Limits of Liability Report PRICING IN LIABILITY MARKETS Insurance is the Biggest Concern of Small Business Owners

Labor Qlty. Labor Costs Inflation Competition 10% 5% 2% 7% Credit/Int. Rates Regulations 2% 9%

Poor Sales Insurance 18% 28%

Taxes 17% Source: National Federation of Independent Business (June 2003); Insurance Information Institute Council of Insurance Agents & Brokers Rate Survey Second Quarter 2003 Rate Increases By Line of Business No Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100% Comm. Auto 8% 31% 43% 8% 2% 0% 0% Workers Comp 11% 27% 28% 15% 3% 0% 2% General Liability 10% 32% 41% 9% 1% 0% 0% Comm. Umbrella 8% 21% 28% 27% 6% 3% 0% D&O 3% 17% 30% 19% 13% 2% 1% Comm. Property* 17% 32% 23% 5% 2% 0% 0% Construction Risk 8% 18% 26% 17% 7% 1% 1% Terrorism* 27% 18% 13% 4% 1% 0% 1% Business Interr. 21% 38% 16% 3% 0% 0% 0% Surety Bonds 12% 17% 13% 9% 2% 0% 1% Med Mal 1% 2% 4% 20% 11% 12% 6%

Source: Council of Insurance Agents & Brokers. Proportion of Accounts Renewing With Increase of 20% or More, (Select Lines)

D&O Construction Risk GL Terrorism

78%

63% 54% 53% 53% 53% 48% 38% 38% 38% 35% 32% 23% 23% 20% 14% 10% 5%

2002:II 2002:III 2002:IV 2003:I 2003:II

Source: Council of Insurance Agents and Brokers; Insurance Information Institute P/C Soft Spots: % Accounts With Negative Price Change(2nd Qtr 2003)

20% Property-related coverages 17% are clearly the softest segment of the p/c market today. 15%

10% 9% 9%

5% 3% 2% 2% 2% 1% 0% Comm Prop Biz Terror Comm Auto WC GL EPL Umbrella Interruption Source: Council of Insurance Agents & Brokers; Insurance Information Institute Cost of Risk per $1,000 of Revenues: 1990-2002E •Cost of risk to corporations fell $10 42% between 1992 and 2000 $9 $8.30 •Estimated 15% $7.70 increase in 2001, $8 $7.30 25% in 2002 $6.94 $6.49 • About half of 2002 $7 $6.40 increase due to 9/11 $6.10 $5.71 $5.70 $5.55 $6 $5.25 $5.20$4.83 $5

$4 90 91 92 93 94 95 96 97 98 99 00 01E 02E

Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates. Liability: Average Cost per $1,000 of Revenue* 2001 to 2003

$2.50 $2.31 2001 2002 2003 $1.96 $2.00

$1.50 $1.30 $1.25 $1.03

$1.00 $0.94 $0.72 $0.67 $0.67 $0.65

$0.50 $0.42 $0.40 $0.38 $0.33 $0.26 $0.24 $0.23 $0.17 $0.17 $0.13 $0.11 $0.00 $0 - $200M $201M-$500M $501M-$1B $1B-$5B $5B-$10B $10B+ All *Across entire liability program Source: Marsh, 2003 Limits of Liability Report Average Cost per $1 Million Liability Coverage 2001 to 2003

$18,000 2001

2002 $16,882

$16,000 2003 $13,949 $12,649 $14,000 $11,933 $11,614 $12,000 $9,964

$10,000 $8,597 $8,213 $7,606 $7,106 ($000) $8,000 $6,330 $6,464 $6,054 $5,609 $5,531 $5,411 $5,368 $5,317

$6,000 $4,878 $3,830 $4,000 $3,801 $2,000 $0 $0 - $200M $201M- $501M-$1B $1B-$5B $5B-$10B $10B+ All $500M

Source: Marsh, 2003 Limits of Liability Report Casualty Cost of Risk Per $1,000 of Revenue

Workers Compensation General Liability Auto Liability $10 th $9 $0.23 Construction ranks 4 highest of 23 industries in $8 casualty cost of risk, spending on average $6.28 per $1,000 of revenue on its primary casualty program $7 $1.81 $0.54 $6 $5.94 $0.62 $0.75 $5 $1.13 $1.05 $3.66 $4 $3.71 Billions $3 $2 $4.54 $4.34 $2.77 $1 $1.78 $2.34 $0 Governmental Transportation Educational, Construction Personal, Services Non-Profits Business Services, Hotels, Amusements Source: Marsh Casualty Cost of Risk 2003 Liability Limits – Industry Rankings: Average Cost/$1000 Revenue

Bottom 5 Top 5 $2.00 $1.76 $1.80 $1.61 $1.60 $1.44 $1.40 $1.20 $1.00 $0.86 $0.80 $0.71 $0.60 $0.40 $0.16 $0.18 $0.21 $0.21 $0.20 $0.06 $0.00 e r e a c ion erv. C uip. n ct S nce q a NPOs th ra Trade u Fin Telecom m/Pharm nsp. ail nal e a Heal Ins io Constru Tr Ret Ch Trans. E ucat ole/ h Ed W Source: Marsh, 2003 Limits of Liability * Non-Nuclear Excess Layer Hit With Leveraged Impact of Increase in Trend

Assumptions: Primary Limit of $1 M Ground Up Trend of 7.0%

Total Primary Excess % Loss Total Primary Excess Claim Loss Loss Loss Trend Loss Loss Loss

1 0.900 0.900 0 7.0 0.963 0.963 0 2 1.000 1.000 0 7.0 1.070 1.000 0.070 3 2.000 1.000 1.00 7.0 2.140 1.000 1.140 Total 3.900 2.900 1.00 4.173 2.963 1.210

Loss Trend: % 7.02.2% 21.0% Trend in excess layers is 3 times the ground-up trend and nearly 10 times the primary trend Why Substantial Rate Increases are Necessary

z High loss ratios of 150+ indicate need for triple digit rate increases z Except in very isolated instances, no tort reform on the horizon z Medical severities increasing z Poor investment performance

z Pricing & underwriting must do all the “heavy lifting” z Costs could be driven up further by:

− Increase in erratic behavior of juries

− Increasing frequency/severity trend

− Spike in severity in recent years

− Newly (re)emerging exposures

− Political shift in Congress/states Insurance Information Institute On-Line

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