liability trends, issues and jury verdicts: impact on insurance liability and excess casualty...

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 EconomistInsurance 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

-10%

-5%

0%

5%

10%

15%

20%

25%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Current $ Real $

Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute

Strength of Recent Hard Markets by Real NWP Growth

Real NWP Growth During Past 3 Hard Markets

1975-78: 8.6%

1985-87: 14.5%

2001-03F: 8.8%

1975-78 1985-87 2001-03

*2003 figure is estimate on first half result.

P/C Net Income After Taxes1991-2003* ($ Millions)

$14,178

$5,840

$19,316

$10,870

$20,598

$24,404

$36,819

$30,773

$21,865$20,559

-$6,970

$2,903

$14,496

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

91 92 93 94 95 96 97 98 99 00 01 02 03*

*First half 2003Sources: A.M. Best, ISO, Insurance Information Institute.

2001 was the first year ever with a full year net loss

2002 ROE = 1.0%

2003 ROE = 9.7%*

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03F

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2003E*

*2003 p/c estimate based on first half data.Source: Insurance Information Institute; Fortune

-5%

0%

5%

10%

15%

20%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E

ROE Cost of Capital

ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2003E

Source: The Geneva Association, Ins. Information Inst.

The gap between the industry’s cost of capital and its rate of return is narrowing

14.6

pts

10.2

pts

US P/C insurers missed their cost of capital by an average 6.9 points from 1991 to 2002

1.8

pts

95

100

105

110

115

120

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

P/C Industry Combined Ratio

2001 = 115.7

2002 = 107.2

2003First Half = 99.8

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.7

2000s: 111.0

Sources: A.M. Best; ISO, III *Based on First Half 2003 results.

110.

5

105.

0 113.

6

119.

2

104.

8

100.

8

100.

5

114.

3

106.

5

121.

3

97.9

108.

8 115.

8

106.

9

108.

5

106.

5

105.

8

101.

6

105.

6

107.

7

110.

0 115.

7

107.

2

99.8

162.

5

126.

5

90

100

110

120

130

140

150

160

170

91 92 93 94 95 96 97 98 99 00 01 02 03*

Reinsurance All Lines Combined Ratio

Combined Ratio: Reinsurance vs. P/C Industry

*First half 2003 figures for full industry from ISO; 1st half reinsusrance figures from RAA.

Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

2001’s combined ratio was the worst-ever for reinsurers; 2003 was bad as well.

2003: Big improvement in first half

($60)

($50)

($40)

($30)

($20)

($10)

$0

$101

97

51

97

61

97

71

97

81

97

91

98

01

98

11

98

21

98

31

98

41

98

51

98

61

98

71

98

81

98

91

99

01

99

11

99

21

99

31

99

41

99

51

99

61

99

71

99

81

99

92

00

02

00

12

00

22

00

3

Underwriting Gain (Loss)1975-2003*

*2003 figure of $5.42 billion is annualized based on first quarter underwriting loss of $2.71 billionSource: A.M. Best, Insurance Information Institute

$ B

illi

ons

Based on first half results, 2003 will likely be a much better year in terms of underwriting losses.

First half losses totaled $2.71 billion or $5.42 billion on an annualized basis

10.1

%

8.0%

2.1% 2.5%

0.2%

6.1% 7.

3% 8.1%

11.2

%

14.7

%

1.3%

9.0%

5.1% 6.

4% 7.3%

5.7%

7.4%

7.6%

-1.1

%

14.0

%

-2.1

%

10.7

% 12.0

%

-5%

0%

5%

10%

15%

92 93 94 95 96 97 98 99 00 01 02 03p

Health Benefit Costs WC

Med Claim Costs Rising Sharply

Source: NCCI; William M. Mercer, Insurance Information Institute.

Health care inflation is affecting the cost of medical care, no matter

what system it is delivered through

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

135.6135.1

133.9133.3

131.6129.3

121.8119.3

118.7117.1

116.3115.1114.6

112.9111

109.7109.1

107106.6

103.4102.9

101.7101.3

10084.1

73.3

70 80 90 100 110 120 130 140 150

EarthquakeMed Mal

Other LiabilityReinsurance

HomeownersAllied Lines

AircraftComm. Multi PerilComm. Auto Liab.

Workers CompFarm Multi PerilCommercial--All

Ocean MarineFire

All LinesPP Auto Liab

Personal--All LinesComm Auto PD

Boiler & MachineGroup A&HOther A&H

Priv Pass PDInland Marine

FidelityOther

SuretyBurglary & Theft

Source: Insurance Information Institute, calculated from A.M. Best combined ratio data 1992-2001.

407.3

(IN)SOLVENCY ISSUES

Seismic Shift in P/C Insurer Ratings

-30

-25

-20

-15

-10

-5

0

5

10

1998 1999 2000 2001 2002

Upgrades / Downgrades: North America

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Decline in Average Rating

Aa3

A1

A2

A3

Shift in IFS Ratings Distribution (by Group)

• Ratings in persistent, accelerating decline.

• Aaa ratings appear an endangered species.

• Mainly commercial insurers and reinsurers.

Is 2003 the trough?

0

5

10

15

20

25

30

Aaa Aa A Baa <Baa

1998 2003

Source: Moody’s

P/C Company Insolvency Rates,1993 to 2002

Source: A.M. Best; Insurance Information Institute

1.20%

0.58%

0.21%0.28%

0.79%

0.60%

0.23%

1.02% 1.03%

1.33%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

•Insurer insolvencies are increasing•10-yr industry failure rate: 0.72%

•Failure rating for B+ or better rating: 0.49%•Failure rate for D through B rating: 1.29%

383030

10-yr Failure Rate

= 0.72%

Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)

Unidentified17%

Impaired Affiliate3%

Overstated Assets2%

Change in Business

3%

CAT Losses3%

Reinsurer Failure0%

Rapid Growth10%

Discounted Ops8%

Alleged Fraud3%

Deficient Loss Reserves

51%

Source: A.M. Best, Insurance Information Institute

Reserve deficiencies account for

more than half of all p/c insurers

insolvencies

$ Billions, Calendar Year Basis

$2.3 $2.2 $1.2

($8.5)

($1.5)

($7.5)($6.7)($10.0)

$22.7

$0.3

($3.7)($0.3)

$9.9

($15)

($10)

($5)

$0

$5

$10

$15

$20

$25

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

P/C Insurance Industry Prior Year Reserve Development*

*Negative numbers indicate favorable development; positive figures represent adverse development.Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities

Adverse reserve development of about $23 billion accounted for most of the

industry’s 2002 underwriting loss and “ate” much of the industry’s $37 billion

increase in earned premiums

Points (Reduced)/Increased

0.5

(2.4)

5.2

6.3

(0.4)

-3

-2

-1

0

1

2

3

4

5

6

7

1998 1999 2000 2001 2002

Combined Ratio:Impact of Reserve Changes (Points)

Source: ISO, A.M. Best, MorganStanley.

Adverse reserve development totaling an estimated $23 billion

added more than 6 points to the p/c combines ratio in 2002

LIABILITY ISSUES:Dollars and $ense

Cost of U.S. Tort System($ Billions)

Source: Tillinghast-Towers Perrin. 2005 forecasts from Tillinghast.

$129 $130$141 $144 $148

$159 $156 $156$167 $169 $180

$205

$298

$0

$50

$100

$150

$200

$250

$300

$350

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

Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!

Per capita “tort tax” expected to rise to $1,000 by 2005, up from $721 in 2001

Even a modest reduction in tort costs would be more stimulative than the $674 billion Bush tax/spending plan

Tort Costs as a % of GDP*

0.4%

0.6%

0.8%

0.8%

0.8%

0.9%

1.0%

1.1%

1.1%

1.3%

1.7%

1.9%

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%

Denmark

U.K.

France

Japan

Canada

Switzerland

Spain

Australia

Belgium

Germany

Italy

U.S.

*1998 (latest available)Source: Tillinghast-Towers Perrin

High tort costs put the U.S. economy at a significant disadvantage.

Highest Indemnity Award for aSingle Bodily Injury

$124.0

$10.8

$7.3

$7.2

$5.9

$5.8

$5.5

$5.0

$4.3

$3.4

$3.3

$3.2

$2.0

$1.9

$1.4

$0.6

$0.6

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

U.S.

Switzerland

Australia

Germany

Belgium

UK

France

Canada

Italy

Spain

Hong Kong

Japan

Austria

Sweden

Norway

Denmark

Portugal

Sources: Swiss Re; 2003 Marsh Limits of Liability Survey

Geography Matters

U.S. awards are gargantuan compared to those in other countries

Personal, Commercial & Self (Un) Insured Tort Costs*

$17.0

$49.1 $57.2$17.1

$51.0

$70.9

$5.4

$20.1

$29.6

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

1980 1990 2000

Commercial Lines Personal Lines Self (Un)Insured

Bil

lion

s

Total = $39.5 Billion

*Excludes medical malpracticeSource: Tillinghast-Towers Perrin



Where the Tort Dollar Goes(2000)

Source: Tillinghast-Towers Perrin

Awards for Non-Economic

Loss22%

Claimants' Attorney Fees

17%Awards for

Economic Loss20%

Defense Costs16%

Administration25%

Tort System is extremely inefficient:

Only 20% of the tort dollar compensates victims for economic losses

At least 58% of every tort dollar never reaches the victim

There is a Glimmer of Hopefor Tort Reform

Best Chance for Tort Reform in Years

• Medical MalpracticeStates—already happening: 20+ states have caps

Federal reform discussed in Congress but bill failed in Senate

• Class Action ReformClass Action Fairness Act

Presently 2 or 3 votes short in the Senate. Vote in October????

• Asbestos ReformFairness in Asbestos Injury Resolution of 2003; Sept. vote?

• Punitive Damages—What’s ReasonableSupreme Court ruled favorably in Campbell v. State Farm

Summary of Class ActionLegislation: H.R. 1125 & S. 274

• Interstate class actions can be removed to fed courts if:Amount of suit exceeds $5 million, and

Plaintiffs and defendants are from different states

• Prohibits fed court from approving settlement if:Members would receive non-cash settlement or must expend funds to receive

settlement.

Member must pay sums to class counsel resulting in net loss

Greater sums paid to members closer to court

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?

10:1 ??

145:1

500:1

0

100

200

300

400

500

1996 2003 The Future?

Rat

io o

f Pun

itiv

e A

war

d to

Com

pens

ator

y

Sources: Insurance Information Institute

In Campbell v. State Farm (2003) the Supreme Court ruled in a 22-year old Utah case that punitive awards that were 145 to 1 were

excessive (actual damages in the case, which involved insurer bad faith were $1

million)

In BMW of North America v. Gore (1996)the Supreme Court ruled in an Alabama case that

punitive awards that were 500 to 1 were excessive (actual damages in the case, which involved the repainting of a car, were $4,000 but the jury awarded the plaintiff $2 million)

In Campbell v. State Farm the Court added that “…few awards exceeding a single- digit ratio between punitive and compensatory damages will satisfy due process…Single digit multipliers are

more likely to comport with due process, still achieving the State’s deterrence and

retribution goals…”

Categories of Liability With Highest % of Punitive Awards

31%

20% 19%

10%

6% 5%

9%

0%

10%

20%

30%

40%

BusinessNegligence

VehicularLiability

PersonalNegligence

ProductsLiability

PremisesLiability

PoliceNegligence

OtherLiabilities

Source: Jury Verdict Research; Insurance Information Institute.

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

Median Punitive Award for Most Frequent Categories of Liability, 2001

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

$90,000

$133,400$134,500

$0

$50,000

$100,000

$150,000

$200,000

VehicularLiability

PersonalNegligence

PoliceNegligence

PremisesLiability

BusinessNegligence

Overall ProductsLiability

Source: Jury Verdict Research; Insurance Information Institute.

$1,300,000

P/C COST DRIVERS

Macro Factors

$0

$50

$100

$150

$200

$250

$300

$350

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*

U.S. Policyholder Surplus: 1975-2003*

Source: A.M. Best, Insurance Information Institute *First Half

$ B

illi

ons

Surplus (capacity) peaked at $336.3 Billion in mid-1999 and fell by 15.5% ($52 billion) to $284.3 billion at year-end 2002 (a trough?)

•Surplus during the first half of 2003 rose by $28.2B or 9.9% to $312.5B

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

$47 Billion

Capacity of Lloyd’s Market

£8.9

£10.9£10.2 £10.0

£10.3 £10.2£9.9 £10.1

£11.1

£12.2

£14.4

£8

£9

£10

£11

£12

£13

£14

£15

93 94 95 96 97 98 99 00 01 02 03

After remaining stable at around GBP10bn, Lloyd’s capacity has increased by over 40% in the last three years.

2003 capacity is GBP14.4bn, 18% higher than 2002.

Source: Lloyd’s

Number of Captive Formations & Liquidations 1993 to 2002

294

305

250

245

316

462

238

289

243 29

0

150

113

103

102 13

5

154

156

170 20

2

311

0

100

200

300

400

500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

New Captives Liquidated CaptivesSource: AM Best, Tillinghast-Towers Perrin

Hard market fueling captive formation

Corporate collapses and captive consolidations fueled the upward trend in captive liquidations in 2002.

100110

120130140

150160

170180190

200210220

230240

250260

89 90 91 92 93 94 95 96 97 98 99 00 01 02*

Rate On Line Index(1989=100)

Source: Guy Carpenter * III Estimate

Prices rising, limits falling: ROL up significantly

Gross Premiums Breakdown: Net vs. Ceded

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

1997 1998 1999 2000 2001E 2002E

Net Premiums Written Reinsurance Ceded

In B

illi

ons

Ceded: 13.6%

Source: A.M. Best.

$43

$274

$46

$278

$53

$284

$62

$300

$72

$327

$61

$389Ceded: 14.3%

Ceded: 15.8%Ceded: 17.2%Ceded: 18.0%

Ceded: 13.6%

Cession rate fell from 18.0% in 2001 to 13.6% in 2002 (est). Less reinsurance is available.

10.1

%

8.0%

2.1% 2.5%

0.2%

6.1% 7.

3% 8.1%

11.2

%

14.7

%

1.3%

9.0%

5.1% 6.

4% 7.3%

5.7%

7.4%

7.6%

-1.1

%

-2.1

%

10.7

% 12.0

%

-5%

0%

5%

10%

15%

92 93 94 95 96 97 98 99 00 01 02

Health Benefit Costs WC

Med Claim Costs Rising Sharply

Source: NCCI; William M. Mercer, Insurance Information Institute.

Health care inflation is affecting the cost of medical care, no matter

what system it is delivered through

$0

$9

$18

$27

$36

$45

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03E

Net Investment Income

History

1997 Peak = $41.5B

2000= $40.7B

2001 = $37.7B

2002 = $36.7B

2003E = $36.5B

Bil

lion

s

(US

$)

Investment income fell 2.8%in 2002 but rose 2.1% in first half of 2003

Note: 2003 estimate is based on annualized first half investment income of $18.268 billion.Source: A.M. Best, Insurance Information Institute

-$5.6 Billion

-30%

-20%

-10%

0%

10%

20%

30%

40%

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

*As of October 3 , 2003.Source: Ibbotson Associates, Insurance Information Institute

Total Returns for Large Company Stocks: 1970-2003*

2002 was 3rd consecutive year of decline for stocks

Will it be the last?

S&P 500 up 17.1% so

far this year

Property/Casualty Insurance Industry Investment Gain*

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.6

$45.6

$57.9

$51.9

$56.9

$0

$10

$20

$30

$40

$50

$60

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.

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

THE U.S. LEGAL SYSTEM:IS IT OUT OF CONTROL?

TRENDS, CONDITIONS & OUTLOOK

TORT-ure

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

New

New

New

2002 Top Ten Verdicts

Source: LawyersWeekly USA, January 2003.

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

States With the Most Top 10 Jury Awards1995-2002

18

1312

7

54 4

0

5

10

15

20

NY CA TX MO FL GA AL

Source: Lawyers Weekly USA; Insurance Information Institute.

•79% (63/80) of Top 10 awards came from just 7 states between 1995-2002

•23 States have had no award in the top 10

Business Leaders Ranking of Liability Systems for 2003

Best States1. Delaware2. Nebraska3. Iowa4. South Dakota5. Indiana6. North Dakota7. Utah8. Virginia9. Minnesota10. New Hampshire

Worst States41. New Mexico42. South Carolina43. Hawaii44. California45. Arkansas46. Texas47. Louisiana48. Alabama49. West Virginia50. Mississippi

Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute.

The Nation’s Judicial Hellholes

Source: American Tort Reform Association; Insurance Information Institute

City of St. Louis, MO

CALIFORNIA

Alameda County

Los Angeles County

San Francisco County

Orleans Parish, LA

I

Madison County, IL

TEXAS

Jefferson County

Hidalgo County

Starr County

Mississippi’s 22nd Judicial

District

Verdicts of $100+ Million

Source: Marsh, 2001 Limits of Liability Report

17 18

27

0

5

10

15

20

25

30

1998 1999 2000

1994-2000

14%12%

10%8% 8%

4%

25%

17%

11% 11%9%

0%

5%

10%

15%

20%

25%

30%

Alaba

ma

Idah

o

New M

exico

Alask

a

S. Dak

ota

Utah

S. Car

olin

a

W. V

irgin

ia

Haw

aii

Verm

ont

U.S. A

vg.

% of Jury Awards with Punitive Damages, by Jurisdiction

Source: Jury Verdict Research, Current Award Trends in Personal Injury (2002 edition)

1995-2001

10%9%

7%

4%

6%

8%9%

13%13%

0%

2%

4%

6%

8%

10%

12%

14%

Haw

aii

S. Dak

ota

W. V

irgin

ia

Mon

tana

S. Car

olin

a

Texas

Wisc

onsin

Ken

tuck

y

U.S. A

vg.

% of Jury Awards with Punitive Damages, by Jurisdiction*

*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.


19% 19%

3% 3%

12%

27%

20%

17%

4%3%

0%

5%

10%

15%

20%

25%

30%

New Y

ork

Penns

ylvan

ia

Louisi

ana

Mas

sach

usett

s

Texas

CT/IA/K

S

Nebra

ska

Okl

ahom

a

Tenne

ssee

U.S. A

vg.

% of Jury Awards of $1 Million or More, by Jurisdiction (1995-2001)*

Top Five Bottom Five

*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.


Average Jury Awards1994 vs. 2001

419 187 333759

1,185 1,1401,744

1,365

323789

1,7272,288

3,902

9,113

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Overall VehicularLiability

PremisesLiability

BusinessNegligence*

WrongfulDeath

MedicalMalpractice

ProductsLiability

($00

0)

1994 2001

*Figure is for 2000 (latest available)Source: Jury Verdict Research; Insurance Information Institute.

Trends in Million Dollar Verdicts*

4%

10%

8%

21%

21%

36% 42

%

4%

11%

11%

27%

25%

43%

59%

6%

10% 17

%

44% 47

% 54%

68%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

VehicularLiability

PersonalNegligence

PremisesLiability

BusinessNegligence

GovernmentNegligence

MedicalMalpractice

ProductsLiability

95-97 98-99 2000-2001

*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.

Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants

Probability of Plaintiff Verdict is Rising

Source: Jury Verdict Research, 2002 Current Award Trends

1994 1997 2001

Premises Liability 43% 45% 57%

Business Negligence NA 57% 66%

Vehicular Liability 58% 59% 68%

Products Liability 39% 39% 56%

Excess Layer Hit With Leveraged Impact of Increase in Trend

Assumptions: Primary Limit of $1 M

Ground Up Trend of 7.0%

ClaimTotal Loss

Primary Loss

Excess Loss

% Loss Trend

Total Loss

Primary Loss

Excess Loss

1 0.900 0.900 0 7.0 0.963 0.963 02 1.000 1.000 0 7.0 1.070 1.000 0.0703 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

7.0% 2.2% 21.0%Loss Trend:Trend in excess layers is 3 times the ground-up

trend and nearly 10 times the primary trend

Factors Driving Severity

More Sophisticated & Innovative Plaintiff’s Bar Trial Bar is Flush With Cash

Rush to file cases before reform legislation Medical Inflation Venue—Judicial “Hellholes” in these states:

TX, MS, AL, CA, NY, FL, IL, LA Class Actions Erosion of Tort Reform/Acceptance of “Junk Science” as Fact Jury Desensitization to Money/Deep Pockets Syndrome Sensationalized Media Coverage (e.g., Mold) Concern over Corporate Image—Cos. Quick to Settle Some US Corporations do Really Dumb Things (Enron,etc.)

Why Are Awards Getting Bigger?

EXAMPLES

CASE STUDY 1:

SILICOSIS

Silica: An Emerging Problem

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.

Overexposure to respirable crystalline silica can

cause a disabling and sometimes fatal lung disease

known as silicosis.

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 By Claimant (1997-2003)

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

93 153 505 6541,371

5,142

15,342

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1997 1998 1999 2000 2001 2002 2003*

• Leading industrial sand producer U.S. Silica today faces more than 22,000 silica claims!

• Some 15,342 plaintiffs have named the company in lawsuits so far in 2003 - triple the number seen in 2002!

Some 87% of the lawsuits filed are from Mississippi and Texas!

CASE STUDY 2:

“TOXIC” MOLD

$0

$50

$100

$150

$200

$250

Wa

ter

Da

ma

ge

Pa

id L

os

se

s*

($M

illio

ns

)

0

5000

10000

15000

20000

25000

30000

Cla

im C

ou

nt

Paid Losses

Claim Count

Source: Texas Department of Insurance; Insurance Information Institute

* Data are for TDI Cause 61: Discharge – Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss.

Texas: Mold Losses/Claims Are Finally Moderating*

California: Surging Water Claim Frequency and Costs:

Symptom of Growing Mold Problem

$224.1

$298.9$316.5

$441.6

$496.3

$562.4

24%

36%

27%

32%33%

31%

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

1997 1998 1999 2000 2001 2002

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

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

Source: Insurance Information Network of California; Insurance Information Institute

•Water losses paid rose 151% from 1997 to 2002 and 77% since 1999

•Water claims accounted for less than 1/4 of all HO claims in 1997, now they for 1/3.

California may be in a drought, but homeowners say they’re drowning

Where are the Next Battlefields for Mold?

• Homeowners issue probably crested in 2002• Migration to commercial area affects many lines:

Commercial Property Commercial LiabilityProducts Liability Builders Risk/Construction DefectsWorkers Comp…

• Hot Spots: Apartments/Condos/Co-ops Office Structures (e.g., IBM) Schools Municipal BuildingsCars? (GM case in NC)

• Trend toward class actions since science doesn’t support massive individual non-economic damagesMuch 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:

Builders, Contractors, Developers, Sub-Contractors, Material Suppliers, Product Manufacturers, Architects & Engineers.

• Construction defect claims include:Subsidence, collapse, cracks in walls & foundations.Leaking roofs, windows, doors, foundations.Dry rot of wood or other building materials, pest

infestations.Mold, code violations, improper specification of building

materials.

• Hotspots:California, Nevada, Colorado, Texas, the Carolinas, Florida,

New York.

Construction Defect Litigation Destroying CA Condo Market

$1.87

$2.95

$1.00

$1.25

$1.50

$1.75

$2.00

$2.25

$2.50

$2.75

$3.00

1998 2000

Source: ISO, Insurance Information Institute

Condo construction in parts of CA has come to a virtual stop.

Insurer costs rose 58% in just 2 years!

Ratio of Losses Paid Out to Premiums Taken In

“Right-to-Cure” laws now in 5

states: AZ, CA, NV, TX, WA

16 considering such laws.

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)

32 33 33

56%

64%

47%

0

10

20

30

40

50

60

70

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

%

Obese (BMI>30)

Overweight (BMI 25.0-29.9)

Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition

Examination Survey (NHANES); Insurance Information Institute

Nearly 2/3 of US adults are overweight or obese, up

from 47% in the late 1970s

15

2331

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

Source: Behavioral Risk Factor Surveillance System; Insurance Information Institute

<10%

15%-19%

≥20%

Obesity epidemic: only Colorado has an obesity

prevalence of less than 10%

Prevalence of Overweight and Obesity Among Children and Adolescents

15%

7%

4%

11%

15%

11%

5%6%

0

2

4

6

8

10

12

14

16

NHANES I (1971-74) NHANES II (1976-80) NHANES III (1988-94) NHANES (1999-2000)

Ages 6-11

Ages 12-19

%

Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition

Examination Survey (NHANES); Insurance Information Institute

In the past two decades the percentage of overweight children has more than

doubled and the percentage of adolescents who are overweight has tripled

Obesity More Prevalent than Smoking, Heavy Drinking or Poverty

12%

25%

58%

70%67%

0

10

20

30

40

50

60

70

80

Obese Aging from 30to 50

Living inPoverty

CurrentSmoker

Heavy Drinker

• More Americans are obese/overweight than smoke or drink heavily combined.

• More Americans are obese/overweight than live in poverty

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 Product dangerous/defective and caused health hazard

• Personal Injury Obesity, overweight, diabetes, heart condition, high blood pressure, stroke

• Negligence Knew product was hazardous to health; knew product was addictive?

• Strict Liability Extreme hazard

• Failure to Warn Failed to disclose that product associated with various diseases

• Breach of Warranty Product not as healthy as purported

• Misrepresentation Health claims valid?

• Negligent/reckless marketing or distribution

Market product w/o stating health risks; market to children (like in gun suits)

• Advertising Liability Advertising misled consumers (esp children)

• Government Subrogation E.g. Tobacco settlement w/states; fast food “sin” tax

CASE STUDY 4:

REALITY TV

2003: Media AttentionReality TV

“Bachelor Pad a Mess” Yahoo News, September 24, 2003

“Irish Reality Show is More Like a Nightmare” New York Times, June 23, 2003

“Hospital Patients Sue Reality TV Show for Fraud New Jersey Law Journal, July 23, 2003

“Reality Shows Spark Insurer Fears” National Underwriter, February 10, 2003

“Growing Rowdier, TV Reality Shows are Attracting Suits” New York Times, January 7, 2003

Legal Realities: TV LawsuitsReality TV lawsuits address such issues as:

• Personal injury• Legality of waivers signed by show participants• Defamation/Humiliation• Use of hidden cameras• Misrepresentation• Alleged rigging of shows• Breach of contract• Copyright• Property Damage at Filming Venues

Reality TV shows are breaking new ground, but for program producers the risks

are increasing

Source: Broadcasting & Cable, Insurance Information Institute

CASE STUDY 5:

DRAM SHOP/VICARIOUS LIQUOR LIABILITY

Dram Shop LiabilityDefinition:• 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:There is more publicity regarding liabilityAlcohol servers and management are more aware of

liabilityMore alcohol establishments obtain liablity insuranceThere are fewer low-price drink promotionsMore servers check ID

Source: Mothers Against Drunk Driving (MADD) and Alcohol-Related Injury & Violence (ARIV)

2003: Media AttentionDram Shop Liability In the Papers

“Perry Mason Moment, A $39 Million Verdict: Outback Restaurant Loses Dram Shop Action” National Law Journal, July 7, 2003

“Eatery Pays Millions For Drunk Driver” The Guardian (Charlottetown), June 21, 2003

“DUI Suit Settled For $21 million; Man in Crash That Killed 3 Drank at TGI Fridays" The Courier-Journal (Louisville, KY), June 20, 2003

“Bar Ordered to Pay $1 million in Death of Patron: Denim & Diamonds Plans to Appeal Verdict in Lawsuit" Kansas City Star, April 15, 2003

Alcohol-Related Crash Fatalities1992-2002

Sources: US Dept. of Transportation, National Highway Traffic Safety Administration

* Preliminary data

17,8

58

17,4

73

16,5

80

17,2

47

17,2

18

16,1

89

16,0

20

15,9

76

17,3

80

17,4

48 17,9

70

14,500

15,000

15,500

16,000

16,500

17,000

17,500

18,000

18,500

92 93 94 95 96 97 98 99 00 01 02*

• In 2002, 17,970 people died in alcohol-related crashes, up 3% from 17,448 in 2001.

• Alcohol-related crash fatalities accounted for 42% of all crash fatalities in 2002.

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)

Source: Trends in Employment Practices Liability, LRP Publications.

($ 000)

$128.0

$140.9$150.8

$146.6

$182.5$175.0

$200.0

$100

$120

$140

$160

$180

$200

$220

1996 1997 1998 1999 2000 2001 2002

Median Compensatory Award for Discrimination Cases

Source: Jury Verdict Research

$85

$114$128

$150

$200

$222

$0

$50

$100

$150

$200

$250

1994 1995 1996 1997 1998 1999

Th

ousa

nd

s

Median Compensatory Award by Type of Discrimination Case

Source: Jury Verdict Research

$100,000$121,951

$150,000

$175,001

$268,926

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

Sex Race Overall Disability Age

EPL FACTORSNew lawsConfusing languageCourt broadening decisionsHeightened public awarenessWorkplace demographicsRacists, biggots & dummies

Median Age of Labor Force:On the Rise

Source: Bureau of Labor Statistics

34.835.9

38.7

40.7

30

35

40

45

1978 1988 1998 2008 Projected

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

CASE STUDY 7:

CYBER RISK

The Cost of Worms & Viruses($ Billions)

Source: USA TODAY, September 3, 2003

$10bn

$9bn

$80m

$1bn

$590m to $2bn

$2.6bn

$0 $2 $4 $6 $8 $10 $12

Melissa virus (1999)

Slammer worm (2003)

Nimda virus (2001)

Code Red I and II worms (2001)

Klez worm (2002)

Love Bug virus (2000)

• Estimated cleanup and lost productivity costs of worms and viruses can add up to billions of dollars!

• Microsoft being sued as product liability case

Nature & Distribution of Costs Associated With Computer Crime

Source: 2003 CSI/FBI Computer Crime and Security Survey

Theft of Proprietary

Info37%

Denial of Service

33%

Virus14%

Insider Abuse of Net

Access6%

Financial Fraud

5%

Other2%

Laptop Theft3%

Total cost of computer crimes and other

information security breaches is high: $201.8 million in

2003 for 251 firms responding to survey

Cyber-Risk Gaps in Insurance Coverage

Source: Ernst & Young 2003 Global Information Security Surveyof 1,400 organizations from 66 countries

33%

34%

22%

7%

0 5 10 15 20 25 30 35 40

Risks covered bygeneral policies

Do not haveinsurance

Do not know theanswer

Insured by aspecific policy

Despite increasing risks, only 7% of respondents knew they had specific insurance geared to

cyber-risks!

CASE STUDY 8:

TERRORISM

Sept. 11 Industry Loss Estimates($ Billions)

Life$2.7 (7%)

Aviation Liability$3.5 (9%)

Other Liability

$10.0 (25%)

Biz Interruption$11.0 (27%)

Property -WTC 1 & 2$3.5 (9%)

Property - Other

$6.0 (15%)

Aviation Hull$0.5 (1%)

Event Cancellation

$1.0 (2%)

Workers Comp

$2.0 (5%)

Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute

Status of 9/11 Death Claims (Through August 2003)

Claim Filed and Compensation Sought (1,035)

34%

Claim Filed but No

Compensation Sought (205)

7%

No Claim Filed (1,776)

59%

Source: September 11 Victims Compensation Fund; Insurance Information Institute

Out of 3,016 9/11 deaths (excl. hijackers), only 34%of claimants had sought

compensation by Aug. 29, 2003. The deadline is Dec. 22.

Will many choose litigation?

•Fund has paid $623.1 million to date

•Total could exceed $3 billion

Industry Losses Under Proposed Federal Backstop Using 9/11 Scenario

(as interpreted on date of enactment, Nov. 26, 2002)

$8.75$12.50

$18.75$1.125

$10.

575

$15.

75

$18.

00

$0

$5

$10

$15

$20

$25

$30

Year 1 Year 2 Year 3

($ B

illi

ons)

Industry Retention Surcharge Layer Co-Reinsurance Layer

Source: Insurance Information Institute.

$1.75B Industry Co-Share

Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPE




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

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

*III EstimateSource: A.M. Best

28.2

31.0 31.3

29.730.3

28.9

26.225.1

24.123.2

22.2

24.8

26.0

29.0

2.7

2.32.3

3.2

5.3

6.5

2.2

2.2

$20

$25

$30

$35

89 90 91 92 93 94 95 96 97 98 99 00 01 02*

Pri

va

te C

arr

ier

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

$6.0

$6.5

$7.0

Sta

te F

un

ds

Private Carriers

State Funds

$ Billions

WC Combined Ratios

Source: A.M. Best, NCCI

*Includes dividends to policyholdersAccident year is developed to ultimate as 12/31/02;Note: CY figures from AM Best; AY figures from NCCI

Calendar Year vs. Ultimate Accident Year Countrywide—Private Carrier*

123 122

109

10197

100

122

110

121

102

107

121

129

137

125

107

101

108

115117 118

9795

100

112

133

9095

100105110115120125130135140

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

Per

cent

Calendar YearAccident Year

2.9 pts due to 9/11

+1.0% +1.7%+5.8%

+5.7%+6.4%

+7.3%+7.8%

+7.7%+7.0%

-3.1% -2.8%+4.9%

5

7

9

11

13

15

17

Accident Year

WC Indemnity Claim Costs Has Accelerated Since 1995

Indemnity Claim Cost (000s)

Annual Change 1991-1995: +0.3%

Annual Change 1996-2002p: +6.8%

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 servicesExcludes the effects of deductible policies

Source: NCCI

+6.8%+1.3%

+5.1%+6.4%

+7.3%+5.7%

+7.4%

+7.6%

+10.7%

+12.0%

-2.1%+9.0%

6

7

8

9

10

11

12

13

14

15

16

Accident Year

WC Medical Claim Costs Accelerating Too

Medical Claim Cost (000s)



Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002Based on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies

Source: NCCI

4.5%3.6%

2.8% 3.2% 3.5%4.1%

4.6% 4.7%

5.1%

6.4%7.3%

5.7%

7.4% 7.6%

10.7%

12.0%

0%

2%

4%

6%

8%

10%

12%

14%

1995 1996 1997 1998 1999 2000 2001 2002

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Rising Far Faster than Medical CPI

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

7.3

pts

WC medical severity is rising 2.7 times faster than the

medical CPI

Med Costs Share of Total Costs is Increasing Steadily

Indemnity60%

Medical40%

Source: NCCI (based on states where NCCI provides ratemaking services).

Indemnity52%

Medical48%

Indemnity47%

Medical53%

1982

1992

2002p

Workers’ Comp: Residual Market Premiums & Combined Ratios

177164 169 166

159

126111

102 96 93 98 102112 117 118 116 116

142

$1.2

$2.1

$2.8

$3.5

$4.4$4.8

$4.1

$2.0

$1.0$0.6

$0.3$0.3$0.4

$1.1

$4.0$3.1

$0.6

$2.6

$0

$1

$2

$3

$4

$5

$6

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02*

Res

idua

l Mar

ket

Pre

miu

ms

($

Bill

ions

)

0

20

40

60

80

100

120

140

160

180

200

Co

mb

ined

Ratio

*Incomplete PY Projected to UltimateNote:Excludes Maine 1988-92.Source: NCCI

Expect residual market plans/pools to continue grow as market hardens

and threat of terrorism persists

WC Residual Market Shares

Source: NCCI

Residual Market Shares

5%

9%

16%18%17%17%

21%22%24%

26%

16%

11%

7%4% 3% 4%

6%9%

23%

0%

10%

20%

30%

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

Residual market plans/pools are

nowhere near where they were a decade ago

LIABILITY:

OVERVIEW OF PRIMARY & EXCESS MARKETS

UPDATE ALL

Average Total Limits Purchased by All Firms* ($ Millions)

*Includes underlying primary limits

Source: Limits of Liability 2003, Marsh, Inc.

$77.9

$85.8$83.2

$85.9$88.7

$99.1

$105.0$101.8

$95.7

$87

$50

$60

$70

$80

$90

$100

$110

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

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

$136 $128

$50$35 $30

$44$56

$108

$144

$190

$0$20$40$60$80

$100$120$140$160$180$200

Mill

ion

sLiability Limits – Industry Rankings:

Average Limits Purchased, 2003*

Top Five Bottom Five

*As of January 1

**Non-nuclear Source: Limits of Liability 2003, Marsh, Inc.

Average Underlying Limits(Attachment Points)

*Source: Marsh, 2003 Limits of Liability Report

$ Millions

$2.0$1.9$1.9

$1.8

$1.0

$1.2

$1.4

$1.6

$1.8

$2.0

$2.2

2000 2001 2002 2003

Average Underlying Limits(Attachment Points)

*Source: Marsh, 2003 Limits of Liability Report

$ Millions

$3.0

$4.0

$2.0$1.9$1.9$1.8

$3.2

$2.7

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

2000 2001 2002 2003Average Auto Liability (@500 Vehicles) GL @ $1B Revenue

Average Limits by Revenue Class 2000-2003 ($ Millions)

* Percent Change 2003 over 2002.Source: Marsh, 2003 Limits of Liability Report

$45 $5

9 $88

$148

$256

$337

$37 $5

3 $78

$129

$237

$335

$92

$146

$241

$338

$50 $7

0

$48

$94

$256

$376

$61

$0

$50

$100

$150

$200

$250

$300

$350

$400

$0 - $200 M $201 - $500M

$501M - $1B $1 - $5B $5 - $10B $10+ B

2000 2001 2002 2003

-17.8%* -10.2%* -11.4%* -12.8%* -7.4%*

-0.6%*

Russian Roulette? Many risks skimping on coverage to save money

Average Limits Purchased and Loss Experience ($ Millions)


$93

$199

$84

$203

$75

$207

$96

$207

2000 2001 2002 2003

Once Burned, Twice Shy: Firms suffering $5+ million loss buy

176% more coverage

Firms Not Experiencing $5

Million Loss

Firms Experiencing $5

Million Loss

Excess Liability Market Capacity


$1.425$1.575

$1.710

$2.045$1.941$2.011

$1.721

$1.405$1.334

$1.432

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Bil

lio

ns Capacity has dropped 30% since peaking in 2000

PRICING IN LIABILITY MARKETS

Insurance is the Biggest Concern of Small Business Owners

Regulations9%

Competition7%

Labor Qlty.10%

Taxes17%

Poor Sales18%

Labor Costs5%

Inflation2%

Insurance28%

Credit/Int. Rates2%

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 BusinessRate Increases By Line of Business

No Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%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)

Source: Council of Insurance Agents and Brokers; Insurance Information Institute

54%

38% 38%32%

20%

78%

53% 53% 53%

35%

10%

23%

48%

38%

63%

5%

14%

23%

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

D&O Construction Risk GL Terrorism

P/C Soft Spots: % Accounts With Negative Price Change(2nd Qtr 2003)

17%

9%

3%2% 2%

1%

9%

2%

0%

5%

10%

15%

20%

Comm Prop BizInterruption

Terror Comm Auto WC GL EPL Umbrella

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

Property-related coverages are clearly the softest segment

of the p/c market today.

Cost of Risk per $1,000 of Revenues: 1990-2002E

$6.10

$6.40

$8.30$7.70

$7.30

$6.49

$5.70$5.25

$5.71

$5.20$4.83

$5.55

$6.94

$4

$5

$6

$7

$8

$9

$10

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

Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.

•Cost of risk to corporations fell 42% between 1992 and 2000

•Estimated 15% increase in 2001, 25% in 2002

• About half of 2002 increase due to 9/11

Liability: Average Cost per $1,000 of Revenue*2001 to 2003

$1.2

5

$0.6

5

$0.6

7

$0.3

3

$0.1

7

$0.1

1

$0.2

3

$1.9

6

$0.9

4

$2.3

1

$1.3

0

$1.0

3

$0.6

7

$0.4

2

$0.1

7 $0.4

0

$0.7

2

$0.3

8

$0.2

4

$0.2

6

$0.1

3

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$0 - $200M $201M-$500M $501M-$1B $1B-$5B $5B-$10B $10B+ All

200120022003

*Across entire liability program


Average Cost per $1 Million Liability Coverage2001 to 2003

$3,8

01

$3,8

30 $5,3

17

$5,3

68

$5,5

31

$8,2

13

$5,4

11

$4,8

78

$5,6

09

$6,4

64

$6,0

54 $7,6

06

$7,1

06

$6,3

30

$8,5

97 $9,9

64 $11,

933

$13,

949

$16,

882

$11,

614

$12,649

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$0 - $200M $201M-$500M

$501M-$1B $1B-$5B $5B-$10B $10B+ All

($00

0)

200120022003


Casualty Cost of Risk Per $1,000 of Revenue

$2.77$1.78 $2.34

$4.54 $4.34

$5.94

$3.71$3.66

$1.13 $1.05

$0.23

$1.81 $0.54 $0.62 $0.75

$0$1$2$3$4$5

$6$7$8$9

$10

Governmental TransportationServices

Educational,Non-Profits

Construction Personal,BusinessServices,Hotels,

Amusements

Workers Compensation General Liability Auto Liability

Bil

lion

s

Source: Marsh Casualty Cost of Risk 2003

Construction ranks 4th highest of 23 industries in casualty cost of risk, spending on average $6.28 per $1,000 of revenue on its primary casualty program

$0.18 $0.21

$0.86

$1.61$1.76

$1.44

$0.71

$0.21$0.16$0.06

$0.00$0.20$0.40$0.60$0.80$1.00$1.20$1.40$1.60$1.80$2.00

Liability Limits – Industry Rankings: Average Cost/$1000 Revenue

Source: Marsh, 2003 Limits of Liability* Non-Nuclear

Bottom 5 Top 5

Excess Layer Hit With Leveraged Impact of Increase in Trend

Assumptions: Primary Limit of $1 M

Ground Up Trend of 7.0%

ClaimTotal Loss

Primary Loss

Excess Loss

% Loss Trend

Total Loss

Primary Loss

Excess Loss

1 0.900 0.900 0 7.0 0.963 0.963 02 1.000 1.000 0 7.0 1.070 1.000 0.0703 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

7.0% 2.2% 21.0%Loss Trend:Trend in excess layers is 3 times the ground-up

trend and nearly 10 times the primary trend

Why Substantial Rate Increases are Necessary

High loss ratios of 150+ indicate need for triple digit rate increases

Except in very isolated instances, no tort reform on the horizon

Medical severities increasing Poor investment performance

Pricing & underwriting must do all the “heavy lifting” 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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