Why Do Specialty/Niche Companies Outperform Their Peers? A Long Term Player’s Perspective

1. Why Do Specialty/Niche Companies Outperform Their Peers?A Long Term Player’s Perspective May 17, 2005 Michael F. McManus Senior VP & Actuary Chubb Specialty Insurance

2. Chubb Specialty Insurance • $3 Billion in 2004 net written premium • 25% of Chubb’s overall premium volume • Major products include: • Directors & Officers Liability • Fiduciary Liability • Errors and Omissions Liability • Employment Practices Liability • Crime and Financial Fidelity The views, information and content expressed herein are those of the author and do not necessarily represent the views of any of the insurers of The Chubb Group of Insurance Companies. Chubb did not participate in and takes no position on the nature, quality or accuracy of such content. The information provided should not be relied on as legal advice or a definitive statement of the law in any jurisdiction. For such advice, an applicant, insured, listener or reader should consult their own legal counsel.

3. Chubb Specialty – Long Term Value Proposition • Leverage Chubb’s strong balance sheet by offering: • Broad coverage • Superior claims service • Superior risk selection, based on intimate customer knowledge of larger insureds obtained in face to face meetings • Achieved through having specialty underwriting expertise at point of sale (50 branch offices in U.S. and another 20 outside the U.S.)

4. Schedule P-Other Liability-Claims Made

5. Actuarial Role in Chubb Specialty in1980’s and Early1990’s • Until late 1980’s, no actuarial involvement (other than reserve analysis) because of low frequency, high severity nature of business and small premium volume • Original products filed on (a) rate basis, so pricing was very judgmental • As specialty lines grew larger and became more visible with regulators, manual rate filings were required, which required actuarial support • Profitability analysis was fairly basic and at a high level (because results were good) • Analysis mainly performed on program business

6. Specialty World Changed in Late 1990’s • Variety of factors led to deterioration in results in the late 1990’s: • Increased competition • Persistent rate decreases over several years • Granting of entity coverage for D&O • Proliferation of prepaid multiyear policies • Cheap reinsurance led to excessive policy limits • Bursting of stock market bubble • Corporate governance scandals

7. Greater Need for Actuarial Support • Impact of these trends not fully realized until 2000/2001 because of long tail • Deterioration in results led to need for much greater actuarial involvement • Chubb acquisition of Executive Risk in 1999 led to addition of a much more robust actuarial function (staff of 8) • Much more involvement in product development and profitability analysis at detailed level • Driven by very granular data gathering process and fully integrated I/T system with good quality data

8. Key Actuarial Deliverables for Chubb Specialty Today • Regular profitability analysis is integrated with underwriting and claims management in joint accountability process • This drives ongoing refinements in underwriting strategy and accountability to senior management • Administer robust price monitoring system that is driven by actuarial calculations of rate changes • Careful tracking of nonrenewal strategies and quantification of benefit on rate needs • More recently added tracking of new business pricing adequacy

9. So Can a Large Specialty Company Outperform Its Peers? • Strategic advantage of being a large specialty player with critical mass and granular data • Very limited sources for industry data on claim frequency and severity trends or advisory loss costs • Has not prevented new competitors from entering market in last few years • Time will tell who will prevail! OR