The Legend of thePrice-Gouging Insurer

November 2002

Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ bobh@iii.org ♦ www.iii.org

Presentation Outline• Overview

URBAN LEGENDS OF THE HARD MARKET• Insurers are Making a Killing• Commercial Insurance is More Expensive than Ever• Rate Hikes are to Make Up for 9/11 Losses• Rate Hikes are Mostly Due to Bad Investments• There’s No Connection Between Litigiousness & Rates• Insurers are Drowning in Capital• Insurers are “Redlining” Businesses post-9/11• The Federal Terrorism Backstop will Solve Everything• Investors are Satisfied with P/C Stock Performance• Q&A

PRICING:Past, Present &

Future

CIAB Rate SurveyThird Quarter 2002

Rate Increases By Size of AccountRate Increases By Size of AccountNoNo

Change Up 1Change Up 1--10% 1010% 10--20% 2020% 20--30% 3030% 30--50% 50%50% 50%--100% >100%100% >100%

Small (<$25K) 8% 17% 46% 19% 2% 0% 0%

Med ($25-$100K)* 6% 8% 23% 44% 13% 2% 0%

Large (>$100K)** 6% 6% 14% 38% 21% 2% 0%

*1% indicated a decline of between 1% and 10%.

**1% indicated a decline of between 10% and 20%; 12% indicated don’t know or don’t handle this type of account

Source: Council of Insurance Agents and Brokers

CIAB Rate SurveyThird Quarter 2002

Rate Increases By Line of BusinessRate Increases By Line of BusinessNoNo

Change Up 1Change Up 1--10% 1010% 10--20% 2020% 20--30% 3030% 30--50% 50%50% 50%--100% >100%100% >100%

Comm. Auto 6% 18% 37% 24% 12% 0% 0%

Workers Comp 9% 16% 27% 23% 13% 2% 0%

General Liability 8% 13% 38% 28% 9% 1% 0%

Comm. Umbrella 4% 9% 12% 27% 27% 11% 5%

D&O 4% 9% 21% 16% 18% 16% 3%

Comm. Property 8% 9% 30% 23% 21% 5% 0%

Business Interr. 13% 17% 31% 20% 6% 2% 0%

Surety Bonds 16% 13% 17% 20% 2% 0% 1%

Med Mal 5% 3% 5% 6% 17% 11% 19%

Source: Council of Insurance Agents and Brokers

Average Price Change of Commercial Insurance Renewals

(Pre-9/11)

9.5%

13.5%

8.8%

10.0%

12.0%

11.0%

8.9%

6.1%

9.5%

8.0%

8.3%

7.9%

9.0%

-1.6%

-1.2%

-0.4%

-7.0%

-6.0%

-11.0%

-6.0%

-10.0%

-7.0%

-3.0%

1.4%

0.8%

3.5%

3.2%

3.2%

2.8%

4.1%

-2.1%

-2.8%

-1.8%

0.2%

-5.0%

-4.4%

-3.5%

-4.3%

-6.6%

-4.1%

-2.0%

-13%

-11%

-9% -7% -5% -3% -1% 1% 3% 5% 7% 9% 11%

13%

E&S

Umbrella

Workers' Comp

Commercial Property

CMP

General Liability

Commercial Auto

Spring 2001 Fall 2000 Spring 2000 Fall 99 Spring 99 Fall 98Source: Conning

Average Price Change of Commercial Insurance Renewals

17.5%

18.0%

22.5%

19.0%

17.9%

15.2%

14.2%

15.6%

13.7%

12.0%

14.0%

10.3%

11.6%

12.3%

10.5%

0% 5% 10% 15% 20% 25%

Workers' Comp

Commercial Property

CMP

General Liability

Commercial Auto

Spring 2002 Fall 2001 Spring 2001Source: Conning

100110120130140150160170180190200210220230240250260

89 90 91 92 93 94 95 96 97 98 99 00 01 02*

Rate On Line Index(1989=100)

Source: Guy Carpenter * III Estimate

Prices rising, limits falling: ROL up significantly

DEBUNKING URBAN LEGENDS OF THE HARD MARKET

Legend #1:Insurers are Exploiting the Current Hard Market and

Making a Killing

P/C Net Income After Taxes1991-2002 ($ Millions)

$14,178

$5,840

$19,316

$10,870

$20,598$24,404

$36,819

$30,773

$21,865$20,559

-$6,970

$9,278

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000$20,000

$25,000

$30,000

$35,000

$40,000

91 92 93 94 95 96 97 98 99 00 01 02**I.I.I. estimate based on first half 2002 data.Sources: A.M. Best, ISO, Insurance Information Institute.

2001 was the first year ever with a full year net loss

2002 First Half ROE = 3.3%

-5%

0%

5%

10%

15%

20%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

*

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2002*

*2002 figures are estimates; p/c figure based on first-half 2002 data.Source: Insurance Information Institute; Fortune

-5%

0%

5%

10%

15%

20%

25%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

US P/C Insurers All US Industries LifeDiversified Finl. Comm. Banks

ROE: Financial Services Industry Segments, 1987–2001

Source: Insurance Information Institute; Fortune

P/C insurance has consistently underperformed other segments of the financial services industry

-5%

0%

5%

10%

15%

20%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

ROE Cost of Capital

ROE vs. Cost of Capital:US Non-Life 1991 – 2002

Source: The Geneva Association, Ins. Information Inst.

There is an enormous gap between the industry’s cost of capital and its rate of return

14.6

pts

7.9.

pts

US P/C insurers have missed their cost of capital by an

average 6.7 points since 1991

World’s Most Dangerous Lines of Insurance(Combined Ratio + 1 Std. Deviation)

135.6135.1

133.9133.3

131.6129.3

121.8119.3

118.7117.1

116.3115.1114.6

112.9111

109.7109.1

107106.6

103.4102.9

101.7101.3

10084.1

73.3

70 80 90 100 110 120 130 140 150

EarthquakeMed Mal

Other LiabilityReinsurance

HomeownersAllied Lines

AircraftComm. Multi PerilComm. Auto Liab.

Workers CompFarm Multi PerilCommercial--All

Ocean MarineFire

All LinesPP Auto Liab

Personal--All LinesComm Auto PD

Boiler & MachineGroup A&HOther A&H

Priv Pass PDInland Marine

FidelityOther

SuretyBurglary & Theft

Source: Insurance Information Institute, calculated from A.M. Best combined ratio data.

407.3

4.4%3.5%

2.5%

5.7%

8.3%

4.8%5.6%

2.2%

1.0%

-0.6%-1.6%

-0.3%

5.0%

1.1%

3.1%2.4%

3.0%2.7%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1998

1999

:I19

99:II

1999

:III19

99:IV

2000

:I20

00:II

2000

:III20

00:IV

2001

:I20

01:II

2001

:III20

01:IV

2002

:I20

02:II

2002

:III20

02E

2003

FReal GDP Growth

Source: US Department of Commerce, Blue Economic Indicators 10/02, Insurance Information Institute.

Economy is experiencing sluggish growth following the

recession of 2001

(first recession since 1990/91)

Impact of Recession on P/C Premiums and Profitability (1970-2001)

7.5%

5.7%

-1.8%-0.4%

4.3% 4.6% 4.2%4.1%

8.6%

4.6%

6.8%

9.0% 9.6%

11.4%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Inflation (CPI) NWP Growth(unadj.)

Real NWPGrowth

ROE--P/CInsurers*

ROE--AllIndustries*

ROE--Banks* ROE--DiversifiedFinancial*

Recession Years (1970; 74-75; 80-82; 90-91;2001)

Non-Recession Years (all other years, 1970-2001)

*GAAP return on equity, adjusted for inflation; Bank data 1952-2001; Div. Fin. 1987-2001Source: Insurance Information Institute

ROE for Major Commercial Lines (2001 vs. 2002E)

-2.6% -2.4%

0.7%

-2.4%

1.1%

-5.1%

-16.2%

6.3%

2.1%

5.5%

-0.6%

-12.5%

14.0%

8.1%

-2.7%

0.4%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

CommercialLines

Comm Auto WorkersComp

CommercialMulti Peril

GeneralLiability

Med Mal Fire &Allied Lines

InlandMarine

2001 2002E

Source: Conning

Most major commercial lines lag well behind the Fortune 500

historical return of 13% -14%

Legend #2:Insurance is More

Expensive than Ever and is Squeezing Businesses and

Families Alike

Net Written Premium as % of GDP

3.8% 3.7%3.6% 3.6%

3.6% 3.5% 3.4%3.3%

3.2%3.1%

3.0%3.2%

2.0%2.2%2.4%2.6%2.8%3.0%3.2%3.4%3.6%3.8%4.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and A.M. Best data.

Insurance costs as a % of GDP shrank by 31% during the 1990s

and remains at very low levels

Commercial Lines Net Written Premium as % of GDP

2.3%2.1%

2.1%2.0%

1.9% 1.9%1.9%

1.8% 1.7%

1.6%1.5%

1.5%1.5%1.6%

1.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02E

Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and A.M. Best data.

Commercial insurance premiums as a % of GDP fell 35% between 1988 and 2000 and remains far

below late 1980’s levels

More Cover for Less Money: Terms & conditions broadened

significantly during the soft market, even as prices fell

Cost of Risk per $1,000 of Revenues: 1990-2002E

$6.10$6.40

$8.30$7.70

$7.30

$6.49

$5.70$5.25

$5.71$5.20$4.83

$5.55

$7.22

$4

$5

$6

$7

$8

$9

$10

90 91 92 93 94 95 96 97 98 99 00 01E 02E

Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.

•Cost of risk to corporations fell 42% between 1992 and 2000•Estimated 15% increase in 2001, 30% in 2002• About half of 2002 increase due to 9/11

Cost of risk is still less than it was a decade ago!

Average Expenditures on Auto Insurance: US

668 69

1 706

704

683 687

723

784

855

$600

$650

$700

$750

$800

$850

$900

1995

1996

1997

1998

1999

2000

2001

*

2002

*

2003

*

*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute

Countrywide auto insurance are expected to rise 8-10% in 2003

Average Expenditures on Homeowners Ins.: US

418

440 45

5

481 48

8 500 51

2

553

603

$400

$450

$500

$550

$600

$650

1995

1996

1997

1998

1999

2000

*

2001

*

2002

*

2003

*

*III EstimatesSource: NAIC, Insurance Information Institute

Average HO expenditures are expected to rise by 8-10% in 2003

Auto & Homeowners Insurance Expenditures as a% of Median Household Income

1.3%

2.0%

1.2%

1.9%

1.2%

1.9%

1.2%

1.8%

1.2%

1.7%

1.2%

1.6%

1.2%

1.8%

1.2%

0.0%

0.5%

1.0%

1.5%

2.0%

1994 1995 1996 1997 1998 1999 2000 2001

Auto Homeowners

The cost of auto and homeowners insurance relative to the typical

household’s income has remained stable over the years

Homeowners Insurance Expenditure as a % of Median Home Price*

$107

,200

$115

,800

$121

,800

$128

,400

$133

,300

$139

,000

$147

,800 $1

63,6

00

$110

,500

0.39%

0.38% 0.38%

0.37% 0.37% 0.37%

0.36%

0.35%

0.34%

$100,000

$125,000

$150,000

$175,000

$200,000

94 95 96 97 98 99 00 01 020.3%

0.3%

0.4%

0.4%

0.4%Median Sales Price of Existing HomesHO Insurance Expenditure as a % of Sales Price

Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC.

HO

Expenditure as %

of Sales PriceMed

ian

Hom

e Sa

les P

rice

The cost of homeowners

insurance relative to the

price of a typical home is falling!

Change in Cost of Homes vs. Change in Cost of Homeowners Insurance

$3,300

-$2

$5,300

$22

$6,000

$15

$6,600

$26

$4,900

$7

$5,700

$12

$8,800

$12

$15,800

$41

-$2,000$0

$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000

1995 1996 1997 1998 1999 2000 2001 2002*

Change in Cost of Median Existing HomeChange in Average Homeowners Insurance Expenditure

Recent increases in the cost of homeowners insurance are

minuscule in comparison to the soaring cost of homes

*August 2002Source: Insurance Info. Inst. calculations based on data from Natl. Association of Realtors, NAIC.

Legend #3:Insurers are Raising Rates

to Make up for 9/11 Losses

95

100

105

110

115

120

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00

02**

P/C Industry Combined Ratio

2001 = 115.7

2002E = 105.0*

Combined Ratios

1970s: 100.31980s: 109.21990s: 107.72000s: 110.4

*Based on first half 2002 results

Sources: A.M. Best; III

110.

5

105.

0 113.

6 119.

2

104.

8

100.

8

100.

5

114.

3

106.

5

117.

4

108.

8 115.

8

106.

9

108.

5

106.

5

105.

8

101.

6

105.

6

107.

7

110.

0 115.

7

105.

0

126.

5

162.

5

90

100

110

120

130

140

150

160

170

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002*

Reinsurance All Lines Combined Ratio

Combined Ratio:Reinsurance vs. P/C Industry

*First Half 2002 figures.Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

2001’s combined ratio was the worst-ever for reinsurers

($60)

($50)

($40)

($30)

($20)

($10)

$0

$1019

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

02

Underwriting Gain (Loss)1975-2002*

*Annualized estimate based on first half 2002 data.Source: A.M. Best, Insurance Information Institute

$ B

illio

ns

P-C insurers paid $52 billion more in claims & expenses than they collected in premiums

in 2001

Outlook for Commercial Lines:2002 - 2004

121.

7 130.

2

115.

8

118.

5

153.

3

100.

3

116.

6 125.

3

111.

9

103.

6

155.

3

98.8

113.

2 120.

2

108.

3

99.1

158.

1

95.2

113.

0

113.

6

106.

7

99.5

165.

0

92.8

90

100

110

120

130

140

150

160

170

WorkersComp

GL & Prod.Liab

CommercialAuto

CommercialPackage

Med Mal InlandMarine

2001 2002E 2003F 2004F

Sources: A.M. Best, Conning & Co.

12% After Tax ROE Requires Underwriting Profit

Source: Dowling & Partners

-5.8 %-2.1 %1.7 %5.4 %9.1 %12.8 %16.5 %20.3 %24.0 %27.7 %250 %

-4.9 %-1.5 %1.8 %5.2 %8.5 %11.9 %15.2 %18.6 %21.9 %25.3 %225 %

-4.0 %-1.0 %2.0 %4.9 %7.9 %10.9 %13.9 %16.9 %19.8 %22.8 %200 %

-3.6 %-0.8 %2.0 %4.9 %7.7 %10.5 %13.3 %16.2 %19.0 %21.8 %190 %

-3.3 %-0.6 %2.1 %4.8 %7.5 %10.1 %12.8 %15.5 %18.2 %20.9 %180 %

-2.9 %-0.4 %2.2 %4.7 %7.2 %9.8 %12.3 %14.8 %17.3 %19.9 %170 %

-2.5 %-0.2 %2.2 %4.6 %7.0 %9.4 %11.8 %14.1 %16.5 %18.9 %160 %

-2.2 %0.1 %2.3 %4.5 %6.8 %9.0 %11.2 %13.5 %15.7 %17.9 %150 %

-1.8 %0.3 %2.4 %4.4 %6.5 %8.6 %10.7 %12.8 %14.9 %16.9 %140 %

-1.5 %0.5 %2..4 %4.4 %6.3 %8.2 %10.2 %12.1 %14.0 %16.0%130 %

-1.1 %0.7 %2.5 %4.3 %6.1 %7.8 %9.6 %11.4 %13.2 %15.0 %120 %

-0.7 %0.9 %2..5 %4.2 %5.8 %7.5 %9.1 %10.7 %12.4 %14.0 %110 %

-0.4 %1.1 %2.6 %4.1 %5.6 %7.1 %8.6 %10.1 %11.5 %13.0 %100 %

112.5 %110.0 %107.5 %105.0 %102.5 %100.0 %97.5 %95.0 %92.5 %90.0%P : S

Accident Year Combined Ratio

0%

5%

10%

15%

20%

25%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

*Estimate based on first half 2002 results.Source: A.M. Best, Insurance Information Institute

Growth in Net Premiums Written (All P/C Lines)

2000: 5.1%

2001: 8.1%

2002: 12.0(est.)

The underwriting cycle went AWOL in the 1990s.

It’s Back!

Reserve Deficiency, by Line(AY 1992-2001, as of 12/01)

-$0.8-$1.8

-$4.1

-$6.2

-$9.1

-$3.8

-$0.8

-$17.8 -$18.0

-$1.9

-$20-$18-$16-$14-$12-$10

-$8-$6-$4-$2$0

HO PPA Liab CA Liab WC CMP Med Mal*Special

LiabOtherLiab*

XS LiabReins

ProdLiab*

*Occurrence and claims madeSource: Morgan Stanley

Estimated Deficiency

Total Excluding A&E: $64 Billion

A&E Deficiency: $55 Billion

Total Including A&E: $120 Billion

10.1

%

8.0%

-1.1

%

2.1% 2.5%

0.2%

6.1% 7.

3% 8.1%

11.2

% 12.7

%

6.8%

1.3%

-2.1

%

4.8% 5.2% 6.

6%

5.9%

8.4%

4.9%

11.0

%

8.1%

-5%

0%

5%

10%

15%

91 92 93 94 95 96 97 98 99 00 01P

02E

Health Benefit Costs WC

Med Claim Costs Rising Sharply

Source: NCCI; William M. Mercer, Insurance Information Institute.

Health care inflation is affecting the cost of medical care, no matter

what system it is delivered through

U.S. InsuredCatastrophe Losses

$7.5$2.7 $4.7

$22.9

$5.5

$16.9

$8.3 $7.3$2.6

$10.1 $8.3$4.3

$28.1

$4.1

05

1015202530

89 90 91 92 93 94 95 96 97 98 99 00 01 02*

*Estimate through October 2002.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims.Source: Property Claims Service, Insurance Information Institute

$ BillionsCAT Losses for 2001 Set a Record

•20 events (lowest since 1969)•1.5 million claims

•9/11: $20.3B = 51,000 claims

Legend #4:Insurers’ Reckless

Investment Strategies are the Primary Reason Why Rates

are Rising Today

$0

$9

$18

$27

$36

$45

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Net Investment Income

Facts

1997 Peak = $41.5B

2000= $40.7B

2001 = $37.7B

2002E = $35.8B

Source: A.M. Best, Insurance Information Institute

Bill

ions

(US$

)

Investment income in 2002 is expected to fall 5% due primarily to historically low interest rates

0%

2%

4%

6%

8%

10%

12%

14%

16%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

*

3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note

Interest Rates: Lower Than They’ve Been in Decades

*Average for week ending November 1, 2002.Source: Board of Governors, Federal Reserve System; Insurance Information Institute

1. Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund.

2. 66% of the industry’s invested assets are in bonds

-30%

-20%

-10%

0%

10%

20%

30%

40%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

*

Large Company Stocks*As of November 1, 2002.Source: Ibbotson Associates, Insurance Information Institute

Total Returns for Large Company Stocks: 1970-2002*

Headed for 3rd consecutive year of decline for stocksLast happened 1939-1941Stocks account for just 21% of p/c insurer investments

P/C Industry Investments,by Type (as of Dec. 31, 2001)

Other5%

Bonds66%

Real Est. & Mortgages

1%

Common Stock21%

Cash & ST Secs.6%

Preferred Stock1%

Bond Holdings, by TypeIndustrial & Misc. 32.5%Special Revenue 30.5%Governments 18.0%States/Terr/Other 15.4%Public Utilities 3.1%Parents/Subs/Affiliates 0.5%

Source: A.M. Best, Insurance Information Institute

Common stock accounts for about 1/5 of invested

assets

Investment Gain, by Segment*

*As a % of net earned premium. Investment gains consists primarily of interest, dividends andrealized capital gains and losses.

Source: A.M. Best; Insurance Information Institute estimate

7.0%

6.5%

5.7% 6.2%

5.9%

5.7%

5.6%

5.0%

5.2%

4.5%

17.3

%

15.4

%

12.5

% 14.3

%

14.1

%

15.5

%

15.6

%

13.7

%

15.3

%

13.1

%

12.4

%

11.2

%

9.3% 10

.4%

10.0

%

10.6

%

10.4

%

9.1% 10

.1%

8.7%

0%

5%

10%

15%

20%

92 93 94 95 96 97 98 99 00 01

Personal Lines Commercial Lines All Lines

Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing

Investment gains returning to pre-bubble levels

Property/Casualty Insurance Industry Investment Gain*

$ Billions

$35.4

$42.8$47.2

$52.3

$43.9

$17.3

$57.9

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

94 95 96 97 98 99 00 01 2002 (1stHalf)

*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.Source: Insurance Services Office; Insurance Information Institute estimate

Investment gains are simply returning to “pre-bubble” levels

Institutional Investor Market in Corporate Equities

by Market Value of Holdings, as of December 31, 2001All Others

$459.56%

Insurers$1,120.4

15%

State & Local Gov't

Retirement Plans

$1,215.716% Private

Pension Funds$1,902.3

25%

Mutual Funds$2,836.8

38%

Source: Insurance Information Institute from Federal Reserve Flow of Funds Report

Total: $7,534.7 billion

Insurers, like all large institutional investors, have significant stock holdings

Crisis in Corporate Governance Affecting Even Blue Chip Portfolios

•Crisis has affected both equity and bond markets

Legend #5:There is No Relationship

Between Litigiousness and Rising Insurance Costs

(A Trial Lawyer Favorite)

Average Jury Awards1994 vs. 2000

419759

187 333

1,140 1,1851,744

1,1681,727

269698

3,482 3,566

6,817

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Overall BusinessNegligence

VehicularLiability*

PremisesLiability

MedicalMalpractice

WrongfulDeath

ProductsLiability

($00

0)

1994 2000

Source: Jury Verdict Research; Insurance Information Institute.

Cost of U.S. Tort System($ Billions)

Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for 2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast.

$129 $130 $141 $144 $148 $159 $156 $156 $167 $169 $179$198 $204

$298

$0

$50

$100

$150

$200

$250

$300

$350

90 91 92 93 94 95 96 97 98 99 00 01* 02E* 05F

Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!

Tort costs equaled $636 per person in 2000!

Expected to rise to $1,000 by 2005

Commercial Lines Tort Costs($ Billions)

$17.0

$57.2$5.0

$28.2

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1980 2000

Insured Self-Insured

Bill

ions

Total $22.0 Billion

Source: Tillinghast-Towers Perrin

Total $85.4 Billion

Where the Tort Dollar Goes(2000)

Source: Tillinghast-Towers Perrin

Awards for Non-Economic

Loss22%

Claimants' Attorney Fees

17%Awards for

Economic Loss20%

Defense Costs16%

Administration25%

Tort System is extremelyinefficient:

Only 20% of the tort dollar compensates victims for economic losses

At least 58% of every tort dollar never reaches the victim

Average Cost per $1 Million Liability Coverage2001 vs. 2002

$3,8

01

$3,8

30 $5,3

17

$5,3

68

$5,5

31

$8,2

13

$5,4

11

$4,8

78

$5,6

09 $6,4

64

$6,0

54 $7,6

06

$7,1

06

$12,649

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

$10,000$11,000$12,000$13,000

$0 - $200M $201M-$500M

$501M-$1B $1B-$5B $5B-$10B $10B+ All

Firm Revenue Size

($00

0)

20012002

Source: Marsh, 2002 Limits of Liability Report

Excess litigiousness is raising the cost of liability coverage for businesses of all sizes

EXAMPLES

Medical MalpracticeAsbestos

“Toxic” Mold

103.

7 108.

1

97.6 99

.7

106.

0

107.

9 115.

7

129.

5 133.

5

153.

3

108.

8 115.

7

106.

9

108.

4

106.

4

105.

8

101.

6 105.

6

107.

8

110.

0 115.

7

127.

9

90

100

110

120

130

140

150

160

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Medical Malpractice All Lines Combined Ratio

Medical Malpractice Combined Ratio

Source: AM Best

Trial lawyers have destroyed commercial viability of med mal. The future holds:Increased mutualizationLocal market collapsesHC Providers seeking govt. protection

Medical Malpractice: Underwriting Losses

$ Millions

-$230.8-$147.8

-$1,135.9

-$344.1

$111.6 $14.4

-$289.3-$388.0

-$804.9

-$1,529.2-$1,839.0

-$3,001.8-$3,500

-$3,000

-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

$500

90 91 92 93 94 95 96 1997 1998 1999 2000 2001

Source: Insurance Information Institute calculations based on data from A.M. Best.

Med Mal underwriting losses exploded by $2.7 billion or 938% between 1996 and 2001!

Non-Malignant Asbestos Claimants File Most Claims, Get Most $$$

DISTRIBUTION OF CLAIMS

1991-2000

ALLOCATION OF COMPENSATION

1991-2000Lung & Other

Cancers7%

Non-malignant

90%

Meso-thelioma

3%

Source: RAND, Tillinghast-Towers Perrin

Lung & Other

Cancers18%

Non-malignant

65%

Meso-thelioma

17%

Who Will Pay for theUS Asbestos Mess?

Source: Tillinghast-Towers Perrin; Insurance Information Institute

US Insurers30%Asbestos

Defendants39%

Foreign Insurers

31%

Estimated Total US Settlements & Expenses = $200 billion

$78 billion $60 billion

$62 billion

U.S.: Documented Toxic Mold SuitsFormer

Owners of Sold Homes

10%Bad Faith

Against Insurers

50%Builder for

Construction Defects

20%

HO Associations for Improper Maintenance

20% Source: www.toxlaw.com; Guy Carpenter

1,000 Cases

2,000 Cases

5,000 Cases

2,000 Cases

TX: Mold Claim Frequency*(# claims per 1,000 policyholders)

1.73.2

2.74.1

6.7

11.7

18.4

23.6

0

5

10

15

20

25

00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3 01:Q4

Source: Texas Department of Insurance; Insurance Information Institute estimates.

The frequency of mold claims rose 1,286% between 2000:I and 2001:IV

TX : Average Cost per PolicyholderDue to Mold (per year)

$23.32$48.57 $64.05

$114.39

$242.31

$404.36$444.35

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3

Source: Texas Department of Insurance; Insurance Information Institute estimates.

Texas “Mold Tax”: Up to $444 per Policyholder per Year

The average cost per policyholder increased 1,805% between 2000:I and 2001:III

Legend #6:Insurers are Awash in Cash and Have More Money than They Know What to Do With

Capital Raising by P/C InsurersSince September 11, 2001*

$20,492

$11,442

$16,437$4,872

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2001 2002*

($ M

illio

ns)

Completed Pending

$25.4 Billion$27.9 Billion

*As of September 13, 2002.

Source: Morgan Stanley, Insurance Information Institute.

14 Pending 38 Pending

40 Completed 33 Completed

Capital Raising by P/C Insurers Since 9/11 Totals $53.2B

$0

$50

$100

$150

$200

$250

$300

$350

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Policyholder Surplus: 1975-2002*

*As of June 30, 2002Source: A.M. Best, Insurance Information Institute

Bill

ions

(US$

)

Surplus (capacity) peaked at $336.3 Billion in mid-1999 and has fallen by 15.9% ($53.4 billion) to $282.9 billion since then.

•Surplus fell 2.3% in the 1st half of 2002

•Surplus is now lower than at year-end 1997.

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Capital Myth: P/C Insurers Have $300 Billion to Pay Terrorism Claims

"Target" Commercial*$100 billion

33%

Other Commercial$50 billion

17%

Personal$150 billion

50%

Total PHS = $298.2 B as of 6/30/01= $282.9 B as of 6/30/02

*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute

Only 33% of industry surplus backs up “target” lines

Legend #7:Insurers are “Redlining”

Businesses in the Wake of 9/11

Sept. 11 Industry Loss Estimates($ Billions)

Life$2.7 (7%)

Aviation Liability

$3.5 (9%)

Other Liability

$10.0 (25%)

Biz Interruption$11.0 (27%)

Property -WTC 1 & 2$3.5 (9%)

Property - Other

$6.0 (15%)

Aviation Hull$0.5 (1%)

Event Cancellation

$1.0 (2%)

Workers Comp

$2.0 (5%)

Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute

89.9

%

85.5

%

81.1

%

69.2

% 84.2

%

51.1

%

73.3

%

65.1

%

85.0

%

82.4

%

79.2

%

67.2

% 82.5

%

49.2

%

69.9

%

63.6

%

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

100%

Genera

l

Liabilit

y

Disabil

ity

Casualt

yW

orkers

Com

pBus

iness

Inter

r.Pro

perty

Dam

age

Equip./M

achin

ery

Prior to 9/11/01 Currently

Insurance Coverage in Lower Manhattan

Source: Downtown Alliance

Over 95% of businesses in Downtown were able to continue

coverage in the wake of 9/11

WC Residual Market Shares

*Insurance Information Institute estimateSource: NCCI

Residual Market Shares

5%9%

16%18%17%17%

21%22%24%

26%

16%

11%7%

4% 3% 4%6%

9%

23%

0%

10%

20%

30%

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02*

•The vast majority of employers are finding coverage in the private market

•Residual market share is growing but is still just 1/3 of the share in 1993.

Legend #8:Federal Backstop Alone Will

Solve Capacity Problems

Most Businesses Have Little or No Terrorism Coverage

Lenders vs. Commercial Mortgage Holders•Cigna/Durst/4 Times Square/$5 mill for cover•GMAC require purchase on 40,000 properties w/$100 billion in loans across US. Purchased

Separate Coverage

8%

Sublimited Coverage

24%

Full Coverage14%

No Coverage54%

Source: Prudential Securities: 2002 Insurance Buyers Survey, July 2002.

Lack of coverage underscores need for

federal backstop

Structure of Proposed Federal Backstop (as proposed/interpreted as of 11/1/02)

$0

$25

$50

$75

$100

Year 1 Year 2 Year 3

($ B

illio

ns)

* Industry retention based on direct premiums written.Source: U.S. Congress, Insurance Information Institute.

10%

Indu

stry

Co-

Rei

nsur

ance

ab

ove

7% R

eten

tion

Max Loss

$15 billion$12.5 billion

$10 billion

10%

Indu

stry

Co-

Rei

nsur

ance

ab

ove

10%

Ret

entio

n

10%

Indu

stry

Co-

Rei

nsur

ance

ab

ove

15%

Ret

entio

n

Fede

ral G

over

nmen

t cov

ers 9

0%

abov

e 7%

ret

entio

n to

$10

0B m

ax

Fede

ral G

over

nmen

t cov

ers 9

0%

abov

e 10

% r

eten

tion

to $

100B

max

Fede

ral G

over

nmen

t cov

ers 9

0%

abov

e 15

% r

eten

tion

to $

100B

max

7% Retention* 10% Retention* 15% Retention*

Government recoups payouts below $10B in Year 1, $12.5 Year 2, $15B Year 3 with 3% max surcharge on policy premium.

Industry Losses Under Proposed Federal Backstop Using 9/11 Scenario

(as proposed/interpreted as of 10/18/02)

$8.75$12.50

$18.75$1.125

$10.

575

$15.

75

$18.

00

$0

$5

$10

$15

$20

$25

$30

Year 1 Year 2 Year 3

($ B

illio

ns)

Industry Retention Surcharge Layer Co-Reinsurance Layer

Source: Insurance Information Institute.

$1.75B Industry Co-Share

Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPW

$2.0B Industry Co-Share

$0.925B Industry Co-Share

$0.125B Industry Co-Share

Total Ind. Loss: $10.875B $14.25B $19.675B

ME

NH

MACT

PA

WVVA

NC

LATX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJ

RI

MDDE

AL

VT

NY

DC

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SD WI

INOH

MT

CA

NVUT

WY

CO

PR

Terrorism Exclusions

Exclusions Approved,Mandatory Fire Following

No Terrorism Exclusion

Exclusions Approved,Fire Following NOT Mandatory

Terror exclusions approved in 45 states + DC and PR

Legend #9:Wall Street Investors Should

be Satisfied With Insurer Stock Performance

P/C Performance Volatile, but Better than S&P 500 Lately

-25.7%

43.4%

-1.2% -4.3%

21.0%

-9.1% -10.9%

-20.6%

-50%-40%-30%-20%-10%

0%10%20%30%40%50%

1999 2000 2001 2002*

P/C S&P 500

*Through November 1, 2002.Source: SNL Securities, Insurance Information Institute

Insurer Stocks:Outperforming the S&P 500, but

Negative Returns Still Disappoint

-3.55%

-4.33%

-11.25%

-13.67%

-23.37%

-21.52%

-30.23%

-35% -30% -25% -20% -15% -10% -5% 0%

Nasdaq

S&P 500

Multiline

L/H

All

P/C

Brokers

Source: SNL Securities, Insurance Information Institute

Total Return 2002 YTD Through November 1, 2002

Insurance Mergers and Acquisitions

7.1 6.9 8.6 5.0 8.5 12.527.0

40.856.2

41.755.7

6.6

41.5

243 246

171 188149

221

349382

433

109

300

295

468

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

89 90 91 92 93 94 95 96 97 98 99 00 01 02*

Val

ue o

f M &

As (

$Bill

ions

)

0

100

200

300

400

500

600

Num

ber

of M

& A

s

Value of Deals Number of Deals

Source: Compiled from Conning & Company reports.

1998: 565 deals valued at $165.4 B

Number of M&As was down 39.4% during the first half of 2002 vs. first half 2001.Value of deals was down 80.8%.None of the top deals were in the

P/C sector

Insurance Information Institute On-Line

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