State Risk and Insurance Management Association

1. State Risk and Insurance Management Association Casualty Market Update

2. Casualty Market Update Casualty Market Defined • GL/AL, Workers’ Compensation, Umbrella & Excess Liability • Professional Lines – D&O, EPLI, Misc. Prof. Lines • Medical Malpractice

3. Casualty Market Update • Trends Prior to 9/11 • Impact of 9/11 • Effect of 9/11 • New Market Realities • Market Factors - 2002 and Beyond • Review by Coverage Line • Going Forward

4. Casualty Market Update Trends Prior to 9/11 • AL Settlements up 27% per year from 1994 to 1999 • Average GL jury award by 11% per year 1994 to 2000 • Median Personal Injury award up 26% in 2000 • Median EPL verdict up 44% ($151,000 to $218,000) between 1999 and 2000 • Mean Medical Malpractice Award increased from $362,000 to $1,000,000 between 1994 and 2000 • Statistics from Jury Verdict Research

5. Workers’ Comp Combined Ratios

6. Casualty Market Update Impact of 9/11 • Liability losses est. 5 to 10 billion • Workers’ Comp est. 4 to 5 billion • D&O/E&O est. 1 billion??? • Aviation losses est. 3 to 6 billion

7. Casualty Market Update Effect of 9/11 • High Level of Uncertainty • Industry didn’t know the true cost of products sold • Exposure to events not contemplated or charged for • Aggregation/concentration of exposures • Too much credit for good experience • Over reliance on investment income

8. Casualty Market Update New Market Realities • Restricted Capacity • Increased Pricing • Reductions in Coverage • Loss of Markets • Intro. of Underwriting Discipline • New Capital

9. Casualty Market Update New Market Realities (cont.) • Quotes max. of 30 days prior to effective date • Terrorism and mold exclusions • Terrorism Coverage • Non-renewal notices • Concentration of Risk (WC and Property) Analysis • Focus on high profile, urban risks • Defense Inside Limit/SIR • Layered Programs

10. Casualty Market Update Market Factors – 2002 Beyond • No Government Terrorist Bill • Low interest rates • Lower realized capital gains • Mushrooming unrealized investment losses • Continued adverse reserve development • Higher claim settlements

11. Casualty Market Update Review by Coverage Line General/Automobile Liability • 30 to 50% increases the norm/minimum for 2002 • Continued rate firming through 2003 • Segregation of coverage • Push to include defense costs inside/inside • Limited market place for State Governments

12. Casualty Market Update Review by Coverage Line Workers Compensation • Loss of Scheduled Credits/Deviated Rates • Loss sensitive/cash flow programs • Increased interest in “Group” programs Excess Workers Compensation • Dramatic Increases - Retention/Premium • Loss Limit vs Statutory Coverage • Concentration of employees

13. Casualty Market Update Review by Coverage Line Excess Liability • 50 to 100% increase the norm for 2002 • Continued rate firming through 2003 • Limited market place for State Governments • Elimination of Professional Liability coverage extensions • New Markets (Bermuda) • Contingency capital arrangements

14. Casualty Market Update Review by Coverage Line Professional Lines • Higher retentions • Strong rate increase 100% not uncommon • Continued rate firming through 2003 • Greater scrutiny of EPLI exposure • Munis – 16% of employment/28% of EPL lawsuits • Munis #1 for total compensatory damages (EPL) last three years

15. Casualty Market Update Review by Coverage Line Medical Malpractice • Shrinking market • Combined ratio expected to push 135% for 2001 • Continued increases in claim severity • Hugh increases (200%+) in 2001 • 2002 rate increases 30 to 50% • Expecting some stabilization in 2003

16. Casualty Market Update Going Forward • Seek to differentiate your risk • Focus on risk management practices • Start early • Understand the underwriting information needed • Target select markets • Start early • Create realistic expectations • Understand risk financing capacity • Start early • Be open to alternatives