Lloyd’sRealistic Disaster Scenarios

14th October 2004

Background to Lloyd’s

In existence since 1688

World's leading insurance market

66 syndicates

Over 160 brokers

Capacity of approximately £15.0 billion

Profile of the Lloyd’s Market

Source: Lloyd’s

45 Managing Agents

66 Syndicates

£15.0bn Capacity

AM Best: A-S&P: A

45 Managing Agents

66 Syndicates

£15.0bn Capacity

AM Best: A-S&P: A

45 Managing Agents

66 Syndicates

£15.0bn Capacity

AM Best: A-S&P: A

CLIENTS

BUSINESS FLOW

Reinsureds

Personal

Commercial

168Lloyd’sBrokers

Service Companies

4Members’

Agents

MEMBERS

53 Corporate

Groups

2,048IndividualsMembers(Unlimited

liability)

637 Conversions

(Limited liability)

CAPITAL PROVISION

Lloyd’s Franchisor

A

Profile of Lloyd’s Capacity & Managing Agents

Capacity Movement

66

164

4568

02468

10121416

1997 1998 1999 2000 2001 2002 2003 2004

£ Bn

0

50

100

150

200

Market Capacity No. of syndicates No. of Managing Agent

Lloyd’s Realistic Disaster Scenarios(RDSs)

Lloyd’s RDSs were introduced in 1995

Requiring syndicates to carry out disaster planning

Based on a range of hypothetical scenarios

Scenarios mainly based on historical disasters

“Failure of North Sea Complex” – from Piper Alpha

“Marine Collision” – from Exxon Valdez

“Japanese Earthquake” – from 1923 Great Kanto Event

RDS Overhaul Project

Two year RDS Overhaul Project

Improve consistency of risk assessment

Raise Loss Modelling standards in the market

Collaborative Process

Market Experts Group

Lloyd’s Market Association – Marine RDS

AIR, EQECAT and RMS Florida Windstorm

California Earthquake

Overhaul to be Completed in April 2005

Will take account of feedback received in 2004

Why Overhaul the RDSs?

To provide a more reliable and accurate measurement of risk, based on a more comprehensive and consistent approach

To measure the market’s and syndicates’ exposures to a series of major catastrophes RDS assumptions and practices varied widely

Significant variations observed in “Aggregate” to “Gross Loss” relationships

Wide variations in methodologies

To provide a better understanding of Lloyd’s aggregate risk profile For catastrophes

As an input to capital setting and allocation decisions

As an input in managing Central Fund exposures

RDS Guidance and Instruction Issued in April 2004

Replaces previous “Regulatory Bulletins” with a comprehensive guide to the assessment of catastrophe exposures

Key sections include Definitions

Calculation Principles

Recommended Best Practice

“Event Subset” Submissions

Scenarios and Events

Available on Risk Management Website www.lloyds.com/riskmanagement

REALISTIC DISASTER SCENARIOS APRIL 2004

Guidance and Instructions

SINGLE RISK SCENARIOS

1 USA Windstorm

2 Marine Event

3 North Sea – Loss of Major Complex

4 Aviation Collision

5 Major Risk Loss

6 Satellite Risks

7 Liability Risks

8 Political Risks

9 Alternative RDS: A

10 Alternative RDS: B

AGGREGATING SCENARIOS

11 Second Event

12 Florida Windstorm

13 California Earthquake

14 New Madrid Earthquake

15 European Windstorm

16 Japanese Earthquake

17 Terrorism

Scenarios and Events

Marine RDS Syndicates must return two scenarios

Collision in Prince William sound

Major Cruise Vessel Incident

Increased guidance for both scenarios

Specification of losses to the International Group of P&I Associations Reinsurance Programme.

Marine collision in Prince William Sound

US$ 50m

US$ 550m

Oil Pollution

Owned Entries

US$ 1,050m

US$ 1,550m

US$ 2,050m

US$ 50m

US$ 550m

Owned Entries

US$ 1,050m

US$ 1,550m

US$ 2,050m

US$ 437.5m

US$ 187.5m

Co

ins

ura

nce

25

%

Co

ins

ura

nce

25

%

Co

ins

ura

nce

25

%

Co

ins

ura

nce

25

%

Layer 1

Layer 2 Layer 2

Layer 3

Layer 1

Layer 4

Protection and Indemnity

Layer 1

Layer 2 Layer 2

Layer 3

Layer 1

Layer 4

Protection and Indemnity

POOL RETENTION POOL RETENTION

Tanker Owner Cruise Vessel

Oil Pollution

US$ 600m

California EarthquakeEXPOSURE DISTRIBUTION EVENT FOOTPRINTS

Catastrophe Loss Modelling Software – Florida Windstorm & California Earthquake

Three agencies - AIR, EQECAT & RMS

Working with the three catastrophe modelling agencies has enabled us to:

Specify new events tightly, by industry loss level

US$70bn and $54bn respectively Based on Commercial (including Industrial) and Residential losses

Specify 2 events of similar magnitude

Better coverage of risk (e.g. LA and San Francisco)

Derive Average Damage Factors

Feasible events cannot destroy all properties

Florida Windstorm and California Earthquake

County level “Footprints” “Aggregate” to be based on county exposures in “Footprint”

County level damage factors Derived from discussions with AIR, EQECAT and RMS

Prompt for additional lines of business to include Marine, Specie/Fine Art, Personal Accident, Aviation, Liability

Exclusion of classes viewed as “impossible” to model Contingent Business Interruption Aviation Hull in Earthquake

RMS “Roll-up” exercise

Pilot study with five managing agents

Combining Event Loss Table output To validate choice of new RDS events

To assess feasibility of combining syndicate results

Analysis split by broad business categories Direct & Facultative

Treaty

Binder

RMS “Roll-up” exercise – California EQ

RMS Industry Loss

Llo

yd

's S

am

ple

Lo

ss

D&F

D&F Benchmark Events

RMS “Roll-up” exercise

RMS Industry Loss

Llo

yd

's S

am

ple

Lo

ss

TREATY

Treaty Benchmark Events

RMS “Roll-up” exercise

RMS Industry Loss

Llo

yd

's S

am

ple

Lo

ss

BINDERS

Binder Benchmark Events

Terrorism RDS

Terrorism RDS

2-tonne conventional bomb attack on Empire State Building

Damage zones and levels specified in scenario

TRIA and non-TRIA events

Specification of deaths, injuries and BI

Fire-following, Number of Events and CBRN Guidance

Focus on data resolution

Address-level best for urban accumulations

Guidance for proportions in 10001, 10016 and 10018

Terrorism RDS

Data Resolution

Source: Munich Re. Topics Geo 2003

RDS Results Playback

Visits

Each Managing Agent visited by two or more Risk Executives

General questions asked concerning: Data capture and resolution of data

Identifying relevant policies

Loss calculation and expected values

The return process & quality assurance

Modelling methods

Review of one RDS scenario from start to finish

RDS Results Playback

Packs

Every syndicate receives a pack prepared solely for their own use.

Contains syndicate specific analysis on: Aggregate, Gross, Net and Final Net losses

Losses in relation to capacity and hence Franchise Performance Guidelines

Ranking within the market

Includes analysis on modelling types at both market and syndicate level for each scenario.

Graphical representation of Losses, Average Damage Factors (ADFs) and Ranking.

RDS ResultsModelling Type Analysis

Modelling type - Market

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

TRIA Event

Non-TRIA Event

Liability

Tampa Bay

Miami

Specific J apanese Earthquake

Specific New Madrid Earthquake

San Francisco

Los Angeles

Specific European Windstorm

Alternative RDS A

North Sea Complex

Alternative RDS B

USA Windstorm

Second Event

Major Risk Loss

Sunk/Damaged Cruise Liner

Marine Collision in P rince William Sound

Percentage of Gross Loss by Modelling type

Licensed Softw are(AIR/EQECAT/RMS) Modelled Internally Maximum Line Market Share Premium Derived

Four-Stormed is Forearmed

14 October 2004

How Hurricanes are Formed Thunderstorms drift over warm ocean

waters. Warm air from the storm and ocean

surface combine and begin rising, creating low pressure.

Trade winds blowing in opposing directions cause the storm to start spinning.

The rising warm air causes pressure to decrease at higher altitudes.

Air rises faster and faster to fill this low pressure, in turn drawing more warm air off the sea and sucking cooler, drier air downwards.

As the storm moves over the ocean it picks up more warm, moist air. Wind speeds start to increase as more air is sucked into the low pressure centre.

It can take hours or several days for a depression to grow into a fully-formed hurricane.

Lloyd’s 2004 Realistic Disaster ScenariosDistribution of Florida Property Values

Hurricane Charley – The facts

Hurricane Charley made landfall at Sanibel Island, Florida, late on the afternoon of 13 August 2004.

Maximum sustained winds were near 145 mph after upgrading to a Category 4 storm, causing severe damage and flooding in coastal areas.

Hurricane Charley had been expected to make landfall near Tampa, 120 miles to the north, but shifted course at midday and brushed low-lying islands.

Charley was responsible for the death of 27 people in Florida.

RDS 2004 - Pinellas Hurricane Event Footprint

Estimation of track of Hurricane Charley

Hurricane Frances – The facts

Hurricane Frances made landfall at Sewall’s Point in Martin County, Florida, at 05:00 GMT on Sunday 5th September.

Maximum sustained winds were near 105 mph and Frances dropped more than 33cm of rain along Florida’s east-central coast.

Insured losses will be limited because much of the damage has been caused by flooding, which is covered by the National Flood Insurance Program.

Frances was responsible for the death of 23 people in Florida.

RDS 2004Miami-Dade Hurricane Event Footprint

Estimation of track of Hurricane Frances

Tracks of Hurricane Charley & Hurricane Frances

Source: Guy Carp.com.

Cat-i Reports Hurricane Frances Update- Report 10,

September 7, 2004

Hurricane Ivan – The facts

Hurricane Ivan made landfall just west of Gulf Shores in Baldwin County, Alabama at 07:00 GMT on Thursday 16th September.

Maximum sustained winds were near 130 mph when it came ashore and subsequently moved inland and weakened.

Ivan was responsible for the death of at least 50 people in the United States in addition to over 70 people in the Caribbean.

Tracks of Hurricanes Charley, Frances & Ivan

Source: Guy Carp.com.

Cat-i Reports Hurricane Ivan Update- Report 13,

September 17, 2004

Hurricane Jeanne – The facts

Hurricane Jeanne made landfall near Hutchinson Island just east of Stuart in Martin County, Florida at 04:00 GMT on Sunday 26th September.

Maximum sustained winds were near 120 mph (Cat 3) when it came ashore and subsequently moved inland and weakened.

Jeanne was responsible for the death of at least 3,000 people in Haiti mainly due to flooding and 8 people in Florida.

Track of Hurricane Jeanne

Source: Guy Carp.com.

Cat-i Reports Hurricane Jeanne Update- Report 7,

September 27, 2004

Tracks of the Four Hurricanes

Source: Guy Carp.com.

Cat-i Reports Hurricane Jeanne Update- Report 7,

September 27, 2004

Industry Loss Estimates

RMS EQECAT AIR

Charley USD 6-8bn USD 5-10bn USD 6-10bn

Frances USD 3-6bn USD 2-5bn USD 5.6-8.7bn

Ivan USD 3-6bn USD 4-10bn USD 3-6bn

Jeanne USD 4-8bn USD 6-14bn USD 5-9bn