Who Wants to be an E&O Underwriter in This Environment?

1. Who Wants to be an E&O Underwriter in This Environment?

2. Singin’ The PL Blues MODERATOR: • Damiano Servidio, Vice President, Zurich North America PANELISTS: • Victoria Mace, MBA, Senior Vice President, Swiss Reinsurance America Corporation • Phillip Norton, PhD, President, Professional Liability Division, Arthur J. Gallagher Risk Management Services, Inc. • Kimberly Pihlstrom, JD, CPCU, RPLU, Senior Vice President, OneBeacon Professional Insurance

3. Agenda • Disciplines Most Affected by the Current Economic Crisis • Changing Claims Exposures • Underwriting Responses • Predictions • Questions & Answers

4. E&O Classes Most Impacted Real Estate Related Lawyers (small firms) Real Estate Agents/Brokers Title/Escrow Agents Mortgage Brokers/Bankers Appraisers Securities Related Lawyers (large firms) Mortgage Bankers Financial Advisors Fund Advisors/Trustees Investment Banks • Credit Crisis(ponzi schemes, fraud, bankruptcies) • Accountants • Funds/Private Equity • Banks

5. Lawyers E&O Changing Claims Exposures • Claims activity definitely increasing • Volume relationships • Failure to disclose conflict of interest • “Dabbling” in new and unfamiliar areas of practice • Closing disbursements to 3rd Parties • Fee disputes between law firms and clients • Risky behavior more prevalent • Lawyers specializing in certain areas most susceptible to claims

6. Lawyers E&OUnderwriting Responses Required • Are there changes in firm’s areas of expertise? • What is the client selection process? • Is there a process in place to review the work of less experienced attorneys? • Does the firm sue for fees? • Does the firm clearly define the scope of its representation? • Does the firm document its advice? • How financially stable is the firm?

7. Real Estate Related ServicesChanging Claims Exposures • Fewer claims because of fewer transactions??? • Are all real estate related lines experiencing fewer claims??? • Pointing the finger at the agent when home values decrease • Failure to disclose/discover defects in the property • Claims in conjunction with foreclosures • Failure to disclose increased assessments • Lockbox claims, especially with bank owned properties

8. Real Estate Related ServicesUnderwriting Responses • What has been the agency’s gross revenue trend? • Has the geographic area been hit hard by the real estate crisis? • Is the agency engaged in mortgage brokering? • Does the agency engage in dual agency sales? • Does the agency allow suits for collection of commissions or fees? • Are agencies experienced in their area(s)? • REOs especially

9. Banks Changing Claims Environment • failure to fund loan commitments • cross claims on loans or mortgage foreclosures • lender liability in corporate insolvencies • underwriting/due diligence on loans/mortgages sold • Underwriter Responses • focus on the quality of the loan portfolio (NPL’s, commercial real estate, local economy, industry concentrations, etc.)

10. Funds/Investment Advisors Changing Claims Environment Lack of feeder fund due diligence (ponzi schemes) Inadequate disclosures of investment risks Underwriting Responses Assess fund leverage, exposure to mortgage securities (especially commercial real estate), junk bonds, derivatives, and complex investments Compare current investments and historical performance with stated objectives Consider sales channels

11. Accountants Changing Claims Environment • Undetected fraud/ponzi schemes • Financial restatements (accounting irregularities, overvaluation of illiquid assets) • Bankruptcies/bank failures Underwriting Responses • Assess whether firm is involved in attestation services • Consider credit quality of firm’s client base/ “going concern” risk management procedures

12. Market Forecast • Real estate related • Securities related • Other professional liability

13. Connecting E&O Trends to the Stock Market ? Market Crash April 2000 Market Crash October 2008 Sept 11, 2001

14. Predictions Some drivers are stabilizing/improving: GDP grew 3.5% last quarter Stock market is improving from DJI low of 7,062 Adjusted national home price index rising Growth in residential mortgage delinquencies slowing But: Sept. unemployment rate 9.8% (expected peak Q1/10) Commercial real estate loan quality is deteriorating Bank failures continue (115 failures YTD) Rate of corporate bankruptcies remains high

15. Predictions Lawyers: Claims tied to real estate work will level off by mid-2010 But claims related to risky behaviors (new areas, conflicts) will start to increase and securitized practice areas will take longer to improve Real Estate Related Services: Loss activity should stabilize by Q2/10 But will vary based on local economy Insureds exposed to commercial real estate will deteriorate further Accountants Improvement in attest work claims will take longer due to bankruptcy and bank failure exposure

16. More Predictions Funds Loss activity should improve as bond and equity markets improve (but commercial REIT’s will be under pressure) Community Banks: Construction loans/commercial real estate and corporate bankruptcies will continue to be problematic, causing increased lender liability claims and suits from investors in real estate loans sold.

17. Counterpoint • Sub-prime claims are winding down

18. Another Angle Supporting Leveling Off

19. Questions&Answers

20. Many thanks to … • Damiano Servidio • Victoria Mace • Phillip Norton • Kimberly Pihlstrom