Thomas L. Ghezzi, FCAS, MAAA

2003 CAS Seminar on Reinsurance

Commercial Umbrella

This document was designed for discussion purposes only. It is incomplete, and not intended to be used, without the accompanying oral presentation and discussion.

June 1-3, 2003

Sheraton Society Hill

Philadelphia, Pennsylvania

Executive Summary

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3

Commercial umbrella has been affected adversely by the factors affecting commercial auto and general liability

Significant “problem areas” include Construction defect and mold New asbestos defendants Expanding UM laws Terrorism

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Profitability of Commercial Umbrella declined significantly through the 1990s

Primary causes include Rate reductions High inflation New causes of loss Generally static terms and conditions.

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Recent large price increases and coverage improvements have been achieved.

Average rate level on Commercial Umbrella business has improved substantially

Terms and conditions had been improved.

Loss ratios peaked in 1999 and have improved since then It is likely that the industry still operated

at a loss in 2002.

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Profitability varies significantly by business segment

Regional or “supported” business has performed consistently better than national accounts or “unsupported” business

Particularly difficult classes include Fortune 1000 Heavy construction Heavy habitational Heavy products Heavy automobile

Market Overview

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Umbrella coverage basics

Umbrella policy is excess of multiple underlying coverages Generally automobile liability, general

liability and employers liability Can include other liability exposures

Underlying limits have generally been $1 million per occurrence or higher Trend toward higher underlying limits

especially on commercial automobile

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Umbrella basics, continued

Forms include Follow form excess - generally larger

risks Standard umbrella - generally smaller

risks

Leading writers AIG, Chubb, Kemper, Royal, Zurich

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Accident year projections for eight national accounts and four regional programs

National

0%

50%

100%

150%

200%

250%

1997 1998 1999 2000 2001 2002

Accident Year

Lo

ss

Rati

o

Regional

0%

50%

100%

150%

200%

250%

1997 1998 1999 2000 2001 2002

Accident Year

Lo

ss R

ati

o

Ratios rose through 1999, and improved steadily since then

Regional accounts significantly lower and less volatile than the national greater underwriting

discipline absence of large,

complex risks more likely

“supported business”

Observations

Source: Casualty Actuarial Society presentation, Spring 2002, and Tillinghast analysis of other programs.

Average = - - x - -

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Adding a large national carrier for years before 1997, we calculate an approximate industry composite loss ratio for 1992-2002

Ultimate Loss Ratios

0%

50%

100%

150%

200%

250%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

A ccident Year

Lo

ss R

ati

o

Nat 1 Nat 2

Nat 3 Nat 4

Nat 5 Nat 6

Nat 7 Nat 8

Reg 1 Reg 2

Reg 3 Reg 4

Avg

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Following years of rate reductions, significant increases began in 2000

Sources: (1) For 1997 and later, from Travelers Insurance Company web site; 1992-1996 based on Tillinghast analyses.

(2) Published by Conning and Company.

(3) Based on Tillinghast analyses.

Comm Comm Reinsurer Umb (3)

Lines (1) Umb (2) Nat/Spec. Reg'l92-96 -5%/yr -8%/Yr -3%/yr1997 -5.1 -6.7 -2.21998 -3.7 -1.8 -0.61999 1.8 -3.5 -3.0 NC2000 9.9 0.8 13.1 4.02001 14.3 9.9 38.0 9.02002 17.9 22.4 60.0 20.0

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Survey information published by the Council of Insurance Agents and Brokers provides additional insights into recent rate activity

(1) Source: Council of Insurance Agents and Brokers (CIAB).

Based survey of producers tracking quarterly renewal premiums relative to premiums on expiring policies. Percentages shown are weighted averages of CIAB data, using the mid-points of rate change ranges provided.

ObservationsThe CIAB surveys

indicate the rate increases

continued a trend that started before Sept. 11

policy terms tightened with higher deductibles, lower limits, and greater exclusions

the market is very tight on contractors

“the umbrella market has gone wild”

growth in self-insurance, alternative markets, “going bare”

Average

Time UmbrellaPeriod Rate Change (1)

3Q-2001 33.8%

4Q-2001 59.3%

1Q-2002 51.9%

2Q-2002 56.5%

3Q-2002 36.9%

4Q-2002 35.7%1Q-2003 26.5%

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Adjusting the composite loss ratios for estimated rate changes allows us to evaluate umbrella loss trends over the last decade

Ultimate Loss Ratios

0%

50%

100%

150%

200%

250%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

A ccident Year

Lo

ss R

ati

o

A vg

On-Level

Fit:92-02

Fit:92-99

Fit 92-02: Avg Annual Rate of Change = 7.8%

Fit 92-99: Avg Annual Rate of Change = 13.4%

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This trend analysis implies several changes have taken place in this time period

Steep trends through 1999 Umbrella loss trends of +13.4% from

1992 to 1999 Likely due to coverage expansions,

leveraged effect of underlying trends, etc.

Moderation in trends since 1999 Likely due to stricter terms Increased attachment points Change in mix of business

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Umbrella coverage is exposed to issues experienced by General Liability and Automobile Liability coverages

Terrorism

Construction defect

Mold

Sexual misconduct

Expansion of UM laws

EIFS

Asbestos litigation

Observations

In the case of umbrella, the leveraged effect magnifies their impact on profitability.

Many markets are avoiding risks with related exposures, or are imposing high attachment points, low limits and policy exclusions.

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The current climate calls for improved underwriting processes

Best in Class Underwriting Process includes the following Exposure analysis Loss control analysis Re-rate the primary policies if unsupported Dedicated underwriting staff Consistent terms & conditions throughout

placement

Financial analysis of the insured & carriers

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There also needs to be a greater focus on claims processes

Claims Management issues include the following Prompt notification of losses Underlying claims adjustment Allocation of expenses Claims expertise Know litigious climates TPA involvement

Historical Market Performance

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Notes: Least profitable/Most unprofitable Middle profitability Most profitable/Least unprofitable

Relative assessment of market segments indicates better historical performance for small to mid-sized risks, with underlying coverage

Type of Exposure Rating CommentsSmall & Mid Market Supported

Unsupported

More focused underwriting Knowledge of risk

Less ability to assess risksFortune 1000 Difficult to avoid problematic

exposures and policy expansionsHeavy Auto Trucker risk is large

Automobile trends are significantHigh Value/High Profile Terrorism risk

Heavy Products andConstruction

Asbestos litigation Construction defect

Heavy Habititional Construction defect and mold issues

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Source: Tillinghast analysis of information published by A.M.Best

Estimated Umbrella Loss Ratios(Auto and General Liability weighted 50/50)

Observations

COLOR denotes estimated umbrella loss ratio: Red: Highest third; Yellow: Middle third; Green: Lowest third.

PATTERN - Solid: Both auto and GL in the same category; Shaded: One of the two coverages in the category.

Loss Ratio Market ShareRange Auto GL

Highest Third: 82% - 123% 55% 62%Middle Third: 71% - 81% 31% 26%Lowest Third: 38% - 71% 14% 12%

Based on loss ratios for auto liability and GL, we estimate loss ratios among states for umbrella