State of the Insurance Market February 15, 2012

1. State of the Insurance MarketFebruary 15, 2012 William Deeb, Aon Insurance Services David Eiser, Munich Re Dan Howell, Alliant Insurance Services

2. Presentation Outline: Insurance Market Results 2011 New Capacity and Placement trends Structure and role of new capacity Renewal Structure Trends Top of the Stack � how to differentiate your risk 2012 Renewal Forecast for CA public entities Discussion forum 2

3. Insurance Market Results 2011 P&C Insurer Net Income was down 71% Combined ratio jumped from 103% in 2010 to 108% in 2011 Workers� Compensation ratio is 118% Underwriting loss of $35 BN through 2011 Q3 is largest since 2001 Policyholder Surplus at $539 BN is down 4.6% Large Catastrophe losses of 2011 considered an earnings event rather than a capital event At $105 BN insured catastrophe losses worldwide, 2011 is second worst year on record (worst = 2005) 3

4. P&C Underwriting Gain (Loss) 4

5. P&C Net Income (after taxes) 5

6. New Capacity and Placement Trends

7. Casualty Overview 7

8. Casualty Overview Capacity remains a key factor in pricing More than $2.5 billion available for U.S. Risks and $1.3 billion to any one insured Some capacity restricted by industry Limits and deductible/retention levels are expected to remain stable Coverage design and endorsement language is expected to remain stable Record high level of capacity is expected to remain stable 8

9. Casualty Overview Workers' compensation rates on average have risen between 2.5 percent and 5 percent this renewal season, with the higher premiums mainly on the West Coast. "Increasing medical-loss ratios have been the main cost factor here, outweighing any pricing benefit from added payroll numbers." An increase in severity and frequency numbers have led to rate increases of between 5 percent and 10 percent for commercial automobile liability lines. One positive factor for insureds comes from driving-tracking technologies, such as GPS, have now produced enough data to lead to rate decreases for clients, as they can be linked to better drivers and also help to expedite claims quicker. Finally, umbrella lines are yielding premium increases of between 2 percent and 10 percent, while excess lines have produced only marginal increases. 9

10. Primary Casualty � Quarterly Year-Over-Year Change In Average Rate 10

11. 11

12. Property Overview 12

13. Property Overview We expect broad coverage to be available. Capacity will continue to be stable. Limits will be stable. All of this is barring any large industry wide loss 13

14. Property Overview RMS Version 11 will put additional pressure on rating for many insurers and reinsurers. Increase pressure may result in some insureds electing different retentions or using alternative markets. Now the good news�.. 14

15. Property Overview RMS 11 changes have focused on wind damage which concentrates biggest increases on Texas and Eastern Seaboard. No changes in Cal Quake Rating model which will dramatically help mitigate pricing increases in California 15

16. Property � Quarterly Year-Over-Year Change In Average Rate 16

17. Change in Commercial Rate Renewals � 2011 Q3 17

18. Top of the Stack � How to differentiate your Risk

19. Characteristics of a soft market: Reinsurers buy brokers lunch Characteristics of a hard market: Brokers buy reinsurers lunch How Will We Know? 19

20. The submission is the most critical aspect in the process of obtaining maximum underwriter interest. The objective: Make the Underwriter�s job as easy as possible. Know the Underwriter: Each (re)insurer has a different risk appetite. Think Ahead 20

21. Insurance: Business Summary: This sets the tone for the submission and should cover at least the following: Why are you a good risk? �Key operational or management changes � future impact Fully Completed Application Website Financial Information � information about the financial integrity of the risk. Claim & Exposure Information � good quality data. Prefer 10 years if available. Additional Information - any other pertinent information that gives the insurance company reason to look favorably at your operation. Important Components 21

22. Reinsurance: Business Summary : overview of the placement, terms and conditions. Operational changes. Underwriting Administration Claims Administration � in house/TPA Coverage Document/ By Laws/ Member Agreement Treaty Experience Aggregate loss and exposure data � 10 years if available. Actuarial report (most current) Large claim explanations. Annual Financial Report Additional Information - Any other pertinent information that helps the Reinsurer understand the business. Important Components (cont�d) 22

23. Inflation Impact 23

24. 2012 Renewal Forecast for CA public entities Your (or your pool�s) losses matter � Below projections are for stable risks with good experience Liability: With new market entrants, should be abundant capacity and stable pricing. Possible EPL claims pressure due to economic conditions. CA Workers� Comp: is seeing big price increases on primary. Excess market changes may push up cost over time, and medical and drug costs grow. Property: big losses in 2011 haven�t yet pushed up rates for best all risk accounts. Mild inflation factors. CA Earthquake rates may follow catastrophe market. 24

25. Decrease in size ? increase in risk There has been discussion about whether decreased budgets have altered the risk profile of some public entities Reduced services Doing more with less Layoffs and stress on remaining workforce Are risks being avoided, transferred or ignored? See �Decreased Coffers, Increased Risk � What�s a Public Entity to Do?� @ plusweb.org 25

26. Discussion forum 26