CPCU I-Day 2002
Scottsdale, AZ
November 20, 2002
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist
Insurance Information Institute

110 William Street

New York, NY 10038
Tel: (212) 346-5520

Fax: (212) 732-1916
 bobh@iii.org
 www.iii.org

Terrorism
Toxic
Mold?
Trial
Lawyers Tycoons

•
Terror
 ‘Traditional’ Terrorism and repercussions of 9/11

Economic Terrorism = Trial Lawyers
• Tragedy

Corporate Governance

Civil Justice System Run Amok

Lies & Misinformation Spread by Industry Critics
• Turmoil

Mold

Credit

Investments
 Profitability
 Pricing
 Underwriting

($ Millions)
2002 2001 Change
Net Written Prem.
182,434 162,855 +12.0%
Loss & LAE 134,336 129,301 +3.9%
Net UW Gain (Loss) (11,285) (18,781) -39.9%
Net Inv. Income
Net Income (a.t.)
Surplus*
Combined Ratio
17,831
4,639
282,871
105.0
18,749
2,789
289,649
111.1
-4.9%
+66.3
-2.3%
-6.1 pts.
*Comparison with year-end 2001;

P/C Net Income After Taxes
1991-2002 ($ Millions)
$40,000
$35,000
$30,000

2001 was the first year ever with a full year net loss

2002 First Half ROE = 3.3%
$36,819
$30,773
$25,000
$20,000
$15,000
$14,178
$19,316
$20,598
$24,404
$21,865
$20,559
$10,870
$9,278
$10,000
$5,000
$0
$5,840
-$5,000
-$10,000 -$6,970
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.

25%
20%
15%
10%
5%
0%
-5%
19
87
19
88
19
89
19
90
19
91
US P/C Insurers
Diversified Finl.
19
92
19
93
19
94
19
95
19
96
All US Industries
Comm. Banks
19
97
19
98
Life
Source: Insurance Information Institute; Fortune
19
99
20
00
20
01

20%
15%
There is an enormous gap between the industry’s cost of capital and its rate of return
10%
5%
0%
US P/C insurers have missed their cost of capital by an average 6.7 points since 1991
-5%
19
91
19
92
19
93
19
94
19
95
19
96
19
97
Source: The Geneva Association, Ins. Information Inst.
19
98
19
99
20
00
20
01
20
02
ROE Cost of Capital

0.4%
2000
2.9%
4.3%
3.8%
2.2%
8.0%
New Mexico
Nevada
Arizona
Utah
California
US
0% 2% 4% 6%
Source: NAIC, Insurance Information Institute
8% 10%

-12.0%
2000
6.3%
3.8%
3.8%
13.9%
20.4%
Utah
California
Nevada
Arizona
US
New Mexico
-20% -10% 0% 10%
Source: NAIC, Insurance Information Institute
20% 30%

Impact of Recession on P/C Premiums and Profitability (1970-2001)
14%
12%
10%
8%
6%
4%
2%
7.5%
Recession Years (1970; 74-75; 80-82; 90-91;2001)
Non-Recession Years (all other years, 1970-2001)
4.1%
5.7%
8.6%
4.6%
6.8%
4.3%
9.0%
4.6%
9.6%
11.4%
4.2%
0%
-0.4%
-2%
-1.8%
-4%
Inflation (CPI) NWP Growth
(unadj.)
Real NWP
Growth
ROE--P/C
Insurers*
ROE--All
Industries*
ROE--Banks*
*GAAP return on equity, adjusted for inflation; Bank data 1952-2001; Div. Fin. 1987-2001
Source: Insurance Information Institute
ROE--
Diversified
Financial*

25%
20%
15%
2000: 5.1%
2001: 8.1%
2002: 12.0(est.)
The underwriting cycle went
AWOL in the 1990s.
It’s Back!
10%
5%
0%
*Estimate based on first half 2002 results.
Source: A.M. Best, Insurance Information Institute

120
115
110
2001 = 115.7
2002E = 105.0*
105
100
95
*Based on first half 2002 results
Sources: A.M. Best; III
Combined
Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.7
2000s: 110.4

Reinsurance All Lines Combined Ratio
170
160
150
140
130
120
2001’s combined ratio was the worst-ever for reinsurers
110
100
90
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002*
*First Half 2002 figures.
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

$10
$0
($10)
($20)
($30)
($40)
($50)
($60)
P-C insurers paid $53 billion more in claims
& expenses than they collected in premiums in 2001
*Annualized estimate based on first half 2002 data.
Source: A.M. Best, Insurance Information Institute

World’s Most Dangerous Lines of Insurance
(Combined Ratio + 1 Std. Deviation)
Earthquake
Med Mal
Other Liability
Reinsurance
Homeowners
Allied Lines
Aircraft
Comm. Multi Peril
Comm. Auto Liab.
Workers Comp
Farm Multi Peril
Commercial--All
Ocean Marine
Fire
All Lines
PP Auto Liab
Personal--All Lines
Comm Auto PD
Boiler & Machine
Group A&H
Other A&H
Priv Pass PD
Inland Marine
Fidelity
Other
Surety
Burglary & Theft
84.1
121.8
119.3
118.7
117.1
116.3
115.1
114.6
112.9
111
107
106.6
103.4
109.7
109.1
102.9
101.7
101.3
100
135.6
135.1
133.9
133.3
131.6
129.3
80 90 100 110 120 130 140
Source: Insurance Information Institute, calculated from A.M. Best combined ratio data.
150
407.3

12% After Tax ROE Requires
Underwriting Profit
P : S
100 %
110 %
120 %
130 %
140 %
150 %
160 %
170 %
180 %
190 %
200 %
225 %
250 %
Source: Dowling & Partners
Accident Year Combined Ratio
90.0% 92.5 % 95.0 % 97.5 % 100.0 % 102.5 % 105.0 % 107.5 % 110.0 % 112.5 %
13.0 %
14.0 %
15.0 %
16.0%
16.9 %
17.9 %
18.9 %
19.9 %
20.9 %
21.8 %
22.8 %
25.3 %
27.7 %
11.5 %
12.4 %
13.2 %
14.0 %
14.9 %
15.7 %
16.5 %
17.3 %
18.2 %
19.0 %
19.8 %
21.9 %
24.0 %
10.1 %
10.7 %
11.4 %
12.1 %
12.8 %
13.5 %
14.1 %
14.8 %
15.5 %
16.2 %
16.9 %
18.6 %
20.3 %
8.6 %
9.1 %
9.6 %
10.2 %
10.7 %
11.2 %
11.8 %
12.3 %
12.8 %
13.3 %
13.9 %
15.2 %
16.5 %
1.1 %
0.9 %
0.7 %
0.5 %
0.3 %
0.1 %
-0.2 %
-0.4 %
-0.6 %
-0.8 %
-1.0 %
-1.5 %
-2.1 %
2.6 %
2..5 %
2.5 %
2..4 %
2.4 %
2.3 %
2.2 %
2.2 %
2.1 %
2.0 %
2.0 %
1.8 %
1.7 %
4.1 %
4.2 %
4.3 %
4.4 %
4.4 %
4.5 %
4.6 %
4.7 %
4.8 %
4.9 %
4.9 %
5.2 %
5.4 %
5.6 %
5.8 %
6.1 %
6.3 %
6.5 %
6.8 %
7.0 %
7.2 %
7.5 %
7.7 %
7.9 %
8.5 %
9.1 %
7.1 %
7.5 %
7.8 %
8.2 %
8.6 %
9.0 %
9.4 %
9.8 %
10.1 %
10.5 %
10.9 %
11.9 %
12.8 %
-0.4 %
-0.7 %
-1.1 %
-1.5 %
-1.8 %
-2.2 %
-2.5 %
-2.9 %
-3.3 %
-3.6 %
-4.0 %
-4.9 %
-5.8 %

$ Billions
30
25
20
15
10
5
0
$7.5
$2.7
$4.7
$22.9
CAT Losses for 2001 Set a Record
•
20 events (lowest since 1969)
• 1.5 million claims
• 9/11: $20.3B = 51,000 claims
$5.5
$16.9
$8.3 $7.3
$2.6
$10.1
$8.3
$4.3
$28.1
$4.1
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

Health care inflation is affecting the cost of medical care, no matter what system it is delivered through
15%
10%
5%
0%
-5%
91 92 93 94 95 96 97
Health Benefit Costs WC
98 99 00
01P 02E
Source: NCCI; William M. Mercer, Insurance Information Institute.

Reserve Deficiency, by Line
(AY 1992-2001, as of 12/01)
HO PPA Liab CA Liab WC CMP Med Mal*
Special
Liab
$0
-$2
-$4
-$6
-$8
-$10
-$12
-$14
-$16
-$18
-$20
-$0.8
-$1.8
-$4.1
*Occurrence and claims made
Source: Morgan Stanley
-$6.2
-$9.1
Estimated Deficiency
Total Excluding A&E:
A&E Deficiency:
Total Including A&E:
-$3.8
$64 Billion
$55 Billion
$120 Billion
-$0.8
Other
Liab*
XS Liab
Reins
-$17.8
-$18.0
Prod
Liab*
-$1.9

Outlook for Personal Lines:
2002 - 2004
PERSONAL AUTO HOMEOWNERS
125
120
115
110
105
100
99.5
101.1
103.5
109.5
107.9
105.5
103.7
103.9
101.0
109.4
108.2
111.4
121.7
114.2
104.9
102.2
95
90
97 98 99 00 01 02E 03F 04F
Sources: A.M. Best, Conning & Co.
97 98 99 00 01 02E 03F 04F

Outlook for Commercial Lines:
2002 - 2004
2001 2002E 2003F 2004F
170
160
150
140
130
120
110
100
90
Workers
Comp
GL & Prod.
Liab
Sources: A.M. Best, Conning & Co.
Commercial
Auto
Commercial
Package
Med Mal Inland
Marine

120%
110%
100%
90%
80%
70%
60%
50%
19
91
Arizona Direct Loss Ratio
Trends, Selected Lines
Auto, WC:
Headed in the wrong direction?
19
92
19
93
19
94
19
95
19
96
19
97
19
98
Auto Homeowners Workers' Comp
19
99
20
00
Source: NAIC, Insurance Information Institute

$10,000
Key Auto Insurance Stats for AZ
1997 vs. 2002*
+3.1%
1997 2002*
$8,719
$8,987
$8,000
$6,000
$4,000
+34.1%
$2,950
$2,200
+30.9%
$2,389
$3,128
$2,000
$0
Bodily Injury PD Liability Collision
* Average for 4 quarters ending with the second quarter of 2002.
Source: Insurance Services Office, Insurance Information Institute
+1.2%
$592 $599
Comprehensive

Key Auto Insurance Stats for US
1997 vs. 2002*
$10,000
+11.0%
$7,917
$8,790
$8,000
1997 2002*
+35.0%
$6,566
$6,000
$4,863
$4,000
+21.3%
$1,955
$2,372
+18.7%
$2,186
$2,595
$2,000
+19.5%
$774
$925
$0
Bodily Injury PD Liability PIP
* Average for 4 quarters ending with the second quarter of 2002.
Source: Insurance Services Office, Insurance Information Institute
Collision Comprehensive

5%
4%
3%
4.5%
Increases in auto theft and robbery will add pressure to the cost of auto and homeowners insurance
2.4%
2%
1%
0%
-1%
1.6%
1.3%
-2%
Auto Theft Robbery Burglary Murder
0.3%
Larceny
-0.8%
Rape
-1.7%
Agg.
Assault
Source: FBI; Insurance Information Institute.

$350
$300
$250
$200
Surplus Peaked at $336.3 Billion in 1999
• Surplus decreased 8.7% in 2001 to $289.6
Billion.
• Surplus fell 2.3% in the 1 st half of 2002
• Surplus is now lower than at year-end 1997.
$150
$100
$50
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners
Equity” or “Net Worth” in non-insurance organizations
$0
75 77 79 81 83 85 87 89 91 93 95 97 99 01
*As of June 30, 2002
Source: A.M. Best, Insurance Information Institute

Capital Raising by P/C Insurers
Since September 11, 2001*
Capital Raising by P/C Insurers Since 9/11 Totals $53.2B
$30,000
$25.4 Billion
$27.9 Billion
$25,000
$4,872 14 Pending 38 Pending
$20,000
$16,437
$15,000
$10,000 $20,492
40 Completed 33 Completed
$5,000
$11,442
$0
2001
Completed Pending
*As of September 13, 2002.
Source: Morgan Stanley, Insurance Information Institute.
2002*

Capital Myth: P/C Insurers Have $300
Billion to Pay Terrorism Claims
Total PHS = $298.2 B as of 6/30/01
= $282.9 B as of 6/30/02
"Target"
Commercial*
$100 billion
33%
Only 33% of industry surplus backs up “target” lines
Personal
$150 billion
50%
Other
Commercial
$50 billion
17%
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claims
Source: Insurance Information Institute

Average Price Change of
Personal Lines Renewals
5%
6%
7%
8%
Homeowners
2%
2%
4%
4%
9%
9%
6%
Personal Auto
3%
-1%
1%
0%
1%
-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
2003* 2002* 2001* Fall 2000 Spring 2000 Fall 99 Spring 99 Fall 98
*III estimates
Source: Conning, III

$900
$850
$800
Countrywide auto insurance are expected to rise 8-10% in 2003
81
9
81
8
78
5
78
9
792
$750
$700
63
7 65
1
66
8
72
7
69
1 70
6
$650
61
8
$600
59
6
1992 1993 1994 1995 1996 1997
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute
70
4
1998
68
3
1999
68
7
2000
2001*
72
3
784
2002*
855
2003*

$650
$600
$550
$500
$450
$400
$350
$300
41
8
Average HO expenditures are expected to rise by 8-10% in 2003
55
3
51
2
48
1
48
8 50
0
38
0
44
0
39
2
45
5
39
8 41
1
1995 1996 1997 1998
*III Estimates
Source: NAIC, Insurance Information Institute
1999
41
8
2000* 2001* 2002*
60
3
2003*

$200,000
$175,000
$150,000
$125,000
Homeowners Insurance Expenditure as a % of Median Home Price*
0.39%
Median Sales Price of Existing Homes
HO Insurance Expenditure as a % of Sales Price
0.38% 0.38%
0.37% 0.37% 0.37%
0.36%
0.4%
0.4%
0.35% 0.4%
0.34%
0.3%
$100,000 0.3%
94 95 96 97 98 99 00 01 02
Source: Insurance Information Institute calculations based on data from National Association of
Realtors, NAIC.

$10
$9
$8
$7
$6
$6.10
$6.40
$8.30
$7.70
$7.30
$6.49
• 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
$5.70
$5.71
$5.25
$5.20$4.83
$5.55
$7.22
$5
$4
90 91 92 93 94 95 96 97 98 99 00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.

Third Quarter 2002
Rate Increases By Line of Business
No
Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%
Comm. Auto 6% 18% 37% 24% 12% 0%
Workers Comp 9% 16% 27% 23% 13% 2%
General Liability 8% 13% 38% 28% 9% 1%
Comm. Umbrella 4% 9% 12% 27% 27% 11%
0%
0%
0%
5%
D&O 4% 9% 21% 16% 18% 16%
Comm. Property 8% 9% 30% 23% 21% 5%
Business Interr. 13% 17% 31% 20% 6% 2%
Surety Bonds 16% 13% 17% 20% 2% 0%
3%
0%
0%
1%
Med Mal 5% 3% 5% 6% 17% 11% 19%
Source: Council of Insurance Agents and Brokers

(1989=100
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
89 90 91
Source: Guy Carpenter
92 93
Prices rising, limits falling:
ROL up significantly
94 95 96 97 98 99 00 01 02*
* III Estimate

Commercial Lines Net Written
Premium as % of GDP
2.4%
2.2%
2.0%
1.8%
1.6%
2.3%
2.1%
2.1%
2.0%
Commercial insurance premiums as a % of GDP fell 35% between
1988 and 2000 and remains far below late 1980’s levels
1.9%
1.9%
1.9%
1.8%
1.7%
1.8%
1.6%
1.5%
1.5%1.5%
1.6%
1.4%
1.2%
1.0%
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.

$45
$36
$27
Investment income in
2002 is expected to fall 5% due primarily to historically low interest rates
$18
$9
Facts
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002E = $35.8B
$0
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
Source: A.M. Best, Insurance Information Institute

16%
14%
12%
10%
8%
6%
4%
2%
0%
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
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
*Average for week ending November 1, 2002.
Source: Board of Governors, Federal Reserve System; Insurance Information Institute
2002*

40%
30%
20%
10%
0%
-10%
-20%
-30%



Headed for 3 rd consecutive year of decline for stocks
Last happened 1939-1941
Stocks account for just 21% of p/c insurer investments
*As of November 15, 2002.
Source: Ibbotson Associates, Insurance Information Institute

Cash & ST Secs.
6%
Real Est. &
Mortgages
1%
(as of Dec. 31, 2001)
Common Stock
21%
Common stock accounts for about 1/5 of invested assets
Other
5%
Bond Holdings, by Type
Industrial & Misc. 32.5%
Special Revenue 30.5%
Governments 18.0%
States/Terr/Other 15.4%
Public Utilities 3.1%
Parents/Subs/Affiliates 0.5%
Preferred Stock
1%
Source: A.M. Best, Insurance Information Institute
Bonds
66%

Investment returns have shrunk, but are still important. “Heavy
Lifting” must be done through underwriting & pricing
20%
15%
10%
5%
Investment gains returning to pre-bubble levels
0%
92 93 94 95 96 97 98 99 00
Personal Lines Commercial Lines All Lines
*As a % of net earned premium. Investment gains consists primarily of interest, dividends and realized capital gains and losses.
Source: A.M. Best; Insurance Information Institute estimate
01

Property/Casualty Insurance
Industry Investment Gain *
$60
$50
$47.2
$ Billions
$57.9
$52.3
$51.9
$56.9
$42.8
$43.9
$40
$30
$35.4
$20
$10
Investment gains are returning to
“pre-bubble” levels $17.3
$0
94 95 96 97 98 99 00 01 2002
(1st
Half)
*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.
Source: Insurance Services Office; Insurance Information Institute estimate

Accounting Problems are Getting
Many Companies into Trouble
• Enron was tip of an iceberg
•
Major implications for insurers (p/c and life)

Financial Restatements Filed
300
250
200
150
100
The number of financial restatements is rising even thought the number of publicly traded companies is falling.
116
160
50
0
1997 1998*
*Approximate
Sources: Huron Consulting Group
215
1999*
233
2000
270
2001

P/C Performance Volatile, but Better than S&P 500 Lately
P/C S&P 500
0%
-10%
-20%
-30%
-40%
-50%
50%
40%
30%
20%
10%
-25.7%
21.0%
43.4%
-9.1%
1999 2000
*Through November 15, 2002.
Source: SNL Securities, Insurance Information Institute
-1.2%
-10.9%
2001
-4.0%
-19.7%
2002*

-31.75%
Total Return 2002 YTD Through October 25, 2002
-20.89%
-18.83%
-11.29%
-8.22%
-3.12%
-1.07%
L/H
All
P/C
Nasdaq
S&P 500
Multiline
Brokers
-35% -30% -25% -20% -15% -10% -5% 0%
Source: SNL Securities, Insurance Information Institute

$180
$160
$140
$120

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
349
382
468
433
1998: 565 deals valued at $165.4 B
295
$100
$80
$60
$40
$20
243 246
171
188
149
221
7.1 6.9 8.6 5.0 8.5
12.5
27.0
40.8
56.2
$0
41.7
55.7
300
41.5
109
6.6
89 90 91 92 93 94 95 96 97 98 99 00 01 02*
600
500
400
300
200
100
0
Value of Deals Number of Deals
Source: Compiled from Conning & Company reports.

• Asbestos
• “Toxic” Mold
• Lead
•
Arsenic Treated Lumber
•
Construction Defects
• Guns
• Genetically Modified Foods (Corn)
• Nursing Homes/Med Mal
•
Pharmaceuticals & Medical Devices
•
Security exposures (workplace violence, post-9/11 issues)
• What’s Next?
• Slavery
•
Sept. 11??

Average Jury Awards
1994 vs. 2000
$7,000
$6,000
1994 2000
6,817
$5,000
$4,000
$3,000
3,482
3,566
$2,000
$1,000
$0
419
1,168
759
1,727
187 269 333
698
1,140 1,185
Overall Business
Negligence
Vehicular
Liability*
Premises
Liability
Medical
Malpractice
Wrongful
Death
Source: Jury Verdict Research; Insurance Information Institute.
1,744
Products
Liability

Cost of U.S. Tort System
($ Billions)
$350
$300
Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!
$298
Tort costs equaled $636 per person in 2000!
$250
$200
$150
Expected to rise to $1,000 by 2005
$129 $130
$141 $144 $148
$159 $156 $156
$167 $169
$179
$198 $204
$100
$50
$0
90 91 92 93 94 95 96 97 98 99 00 01* 02E* 05F
Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for
2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast.

2001 Top Ten Verdicts
Value
$3 Billion
$1 Billion
$480 Million
$312.8 Million
$ 256 Million
$116 Million
$114.9 Million
$108.2 Million
$107.8 Million
$94.5 Million
Source: LawyersWeekly USA, January 2002.
Issue
Tobacco
Land Contamination
Private Airplane Crash
Nursing Home
Police Auto Crash
State
California
Louisiana
Florida
Texas
Colorado
Intellectual Property Theft Virginia
Medical Malpractice New York
Inheritance Dispute Texas
Medical Malpractice
Real Estate
New York
California

($ Billions)
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
Source: Tillinghast-Towers Perrin
Insured
Total $22.0 Billion
$5.0
$17.0
1980
Self-Insured Total $85.4 Billion
$28.2
$57.2
2000

Where the Tort Dollar Goes
(2000)
Tort System is extremely inefficient:
Claimants'
Attorney Fees
17%

Only 20% of the tort dollar compensates victims for economic losses

At least
58% of every tort dollar never reaches the victim
Awards for
Non-Economic
Loss
22%
Defense Costs
16%
Awards for
Economic Loss
20%
Administration
25%
Source: Tillinghast-Towers Perrin

Medical Malpractice
Asbestos
“Toxic” Mold

160
150
140
130
120
110
100
Trial lawyers have destroyed commercial viability of med mal. The future holds:

Increased mutualization

Local market collapses

HC Providers seeking govt. protection
90
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Medical Malpractice All Lines Combined Ratio
Source: AM Best

Who Will Pay for the
US Asbestos Mess?
Estimated Total US Settlements & Expenses = $200 billion
Asbestos
Defendants
39%
$78 billion $60 billion
US Insurers
30%
$62 billion
Source: Tillinghast-Towers Perrin; Insurance Information Institute
Foreign
Insurers
31%

Non-Malignant Asbestos Claimants
File Most Claims, Get Most $$$
DISTRIBUTION OF CLAIMS
1991-2000
Mesothelioma
3%
Lung &
Other
Cancers
7%
ALLOCATION OF COMPENSATION
Lung &
Other
Cancers
18%
1991-2000
Nonmalignant
90%
Source: RAND, Tillinghast-Towers Perrin
Mesothelioma
17%
Nonmalignant
65%

Great Pyramid of Mold
Source: Insurance Information Institute

U.S.: Documented Toxic Mold Suits
Former
Owners of
Sold Homes
10%
1,000
Cases
Bad Faith
Against
Insurers
50%
Builder for
Construction
Defects
20%
2,000
Cases
5,000
Cases
2,000
Cases
HO
Associations for Improper
Maintenance
20% Source: www.toxlaw.com
; Guy Carpenter

TX: Mold Claim Frequency*
(# claims per 1,000 policyholders)
25
The frequency of mold claims rose
1,286% between 2000:I and 2001:IV
18.4
23.6
20
15
11.7
10
6.7
4.1
5
3.2
2.7
1.7
0
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.

TX : Average Cost per Policyholder
Due to Mold (per year)
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
Texas “Mold Tax”: Up to $444 per Policyholder per Year
$23.32
The average cost per policyholder increased 1,805% between 2000:I and 2001:III
$48.57
$64.05
$114.39
$242.31
$404.36
$444.35
00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3
Source: Texas Department of Insurance; Insurance Information Institute estimates.

TX: Average Cost Per Mold Claim*
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
The average cost of mold claims rose number of mold claims rose 152% between
00:Q1
2000:I and 2001:II
$13,719
$15,402
00:Q2
$24,024
00:Q3
$28,061
$36,213
00:Q4 01:Q1
*Includes loss and loss adjustment expenses.
Source: Texas Department of Insurance; Insurance Information Institute estimates.
$34,538
01:Q2

TX: Cumulative Total Losses from Mold
Claims*
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
Mold claim costs rose
$14
560% in 2001 vs. 2000
$44 $83
$ Millions
$153
$299
$546
$820
$1,007
00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3 01:Q4
*Includes loss and loss adjustment expenses.
Source: Texas Department of Insurance; Insurance Information Institute estimates.

Source: New York
Times Magazine ,
August 12, 2001

• Ed McMahon filed $20 million suit against insurer & mold remediation contractor
•
Says mold sickened him, his wife and staff
• Says mold killed Muffin the family dog
• Alleges breach of contract, negligence and intentional infliction of emotional distress
“ Ed McMahon Sues Over Toxic Mold Invasion ,” -
USA Today, April 11, 2002
•
Nearly 100 articles between
April 10 and May 17, 2002!

Source: New York Daily News , September 10, 2001

•A contractor, wears a special suit as she checks for mold in the floor of a house in Flour
Bluff, TX. Mold is becoming a concern for area homeowners.
•Piece of air conditioning duct board from a house infested with mold. Air conditioning reduces humidity and makes it harder for mold to grow, but increased use of paper products in homes, coupled with sealing of buildings for energy efficiency, encourages mold growth. Air conditioners then help to spread the spores. The family has sued their insurance company for money to clean and rebuild the house.
Source: Corpus Christi Caller Times

•
•This woman blames mold growing in her
Flour Bluff,
TX, house for some of her family's ailments. A suit against their insurance company goes to trial Nov. 5.
•A family believes the mold in their home was causing nosebleeds and respiratory problems for their children.
They now live in a hotel room.
Source: Corpus Christi Caller Times

A man points to mold growth on the tiles of his
bathroom. Mold is able to grow as long as it has a cellulosebased food source and water.
Source: Corpus Christi Caller Times

1. There is a strong correlation between credit standing and loss ratios in both auto and homeowners insurance.
2. There is a distinct and consistent decline in relative loss ratios (which are a function of both claim frequency and cost) as credit standing improves .
3. The relationship between credit standing and relative loss ratios is statistically irrefutable .
4. The odds that such a relationship does not exist in a given random sample of policyholders are usually between 500, 1,000 or even 10,000 to one.
Source: Insurance Information Institute.

70
60
50
40
30
20
10
0
61.88
Interpretation:
45.96
31.65
Drivers age 16-20 are 2 to 3 times more likely to be involved in auto accidents. Should this be ignored with better, more experienced drivers subsidizing teenagers?
OF COURSE NOT!
29.95
26.19
22.59
20.81
18.3
16-20 21-24 25-34 35-44 45-54 55-64 65-69 Overall
Source: National Highway Traffic Safety Administration, Traffic Safety Facts 2000.

Major Auto Company Analysis of Credit and Loss Ratio*
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
1.27
1.20
1.07
0.88
0.78
Interpretation:
Those with poorest credit scores generated losses more than double that of those with the best scores
0.68
0.62
0.58
0.58
0.58
0.56
0.5
>5
00
50
1-
55
0
55
1-
60
0
60
1-
65
0
65
1-
70
0
70
1-
75
0
75
1-
80
0
80
1-
85
0
Score Range
*Average loss ratios for new auto policies written over a 3-year period.
85
1-
90
0
90
1-
95
0
95
1-
99
7

•
Credit discount lowered annual premium by 14.7%
•
Policyholder saved nearly $300
•
Credit was single largest discount
•
Opponents of credit will force people to pay more for coverage
Safety/Anti-
Theft Discount
19%
Good Driver
Discount
24%
Total Annual Savings from Discounts: $820
$154
$196
$174
$296
Credit-
Related
Discount
36%
Multipolicy
Discount
21%
*Annualized savings based on semi-annual data from example
Source: Insurance Information Institute

Banning the use of credit information will:
• Force good drivers and responsible homeowners to subsidize those with poor loss histories by hundreds of millions of dollars each year.
• Decrease incentives to drive safely
•
Decrease incentives to properly maintain cars and homes
• Force insurers to rely on less accurate types of information, such as DMV records.
•
Make non-standard risks more difficult to place
•
Increase size of residual market pools/plans

1. Insurers have been using credit since early 1990s
 Credit has been used in commercial insurance for decades
2. Insurance scores do not use the following information:
 Ethnicity

Gender
 Address
Nationality Religion
Handicap
Age
Marital Status Familial Status Income
3. Insurance scoring is revenue neutral
4. Increased use of credit information is a fact of life in the
21 st century ( Why?
: Works for trust-based relationships)

Loans Leases Rentals Insurance

Utilities Background Checks Empl. Screening

NEXT: Preferred airport screening for frequent fliers
Source: Insurance Information Institute

500
400
300
800
733 733
700
600
723
711 708 711 716
721 722
Interpretation:
Credit score is not significantly correlated with income
200
<$15 $15-19 $20-29 $30-39 $40-49 $50-74 $75-99 $100-124 >=$125
Income ($000)
Source: American Insurance Association. Sample of 470,470 policyholders

1. Personal Responsibility

Responsibility is a personality trait that carries over into many aspects of a person’s life

It is intuitive and reasonable to believe that the responsibility required to prudently manage one’s finances is associated with other types of responsible and prudent behaviors, for example:

Proper maintenance of homes and automobiles
 Safe operation of cars
2. Stability

It is intuitive and reasonable to believe that financially stable individuals are like to exhibit stability in many other aspects of their lives.
3. Stress/Distraction

Financial stress could lead to stress, distractions or other behaviors that produce more losses (e.g., deferral of car/home maintenance).
*This list is neither exhaustive nor is it intended to characterize the behavior of any specific individual.
Source: Insurance Information Institute

($ Billions)
Other
Liability
$10.0 (25%)
Life
$2.7 (7%)
Property -
WTC 1 & 2
$3.5 (9%)
Property -
Other
$6.0 (15%)
Aviation
Liability
$3.5 (9%)
Workers
Comp
$2.0 (5%)
Biz
Interruption
$11.0 (27%)
Event
Cancellation
$1.0 (2%)
Aviation Hull
$0.5 (1%)
Consensus Insured Losses Estimate: $40.2B
Source: Insurance Information Institute

(updated through September 13, 2002)
Top 20 Groups (pre-tax, net of reinsurance, $ millions)
3500
3000
2500
2,
91
3
2,
44
2
2,
40
0
2,
31
6
NOTES:
*Includes $474 mil for American Re
**Includes $289 mil for Converium
***Insurer is bankrupt
2000
1500
1000
500
1,
32
3
96
0
95
2
94
1
90
0
84
0
82
0
76
9
67
7
65
0
64
5
60
6
60
0
55
0
46
8
46
2
44
0
41
2
40
0
0
L lo y d
's
Mu n ic h
R e*
B er k
H at h
S w is s
R e
A ll ia n z
XL
A io i
S t.
P a u l
Z u ri ch
**
N is sa n
A
IG
C it ig ro u p
H ar tf o rd
Source: Morgan Stanley, Insurance Information Institute as of September 13, 2002.
A
C
E
C h u b b
T ai se i*
*
*
E
R
C
A xa
C
N
A
L ib er ty
Mu t.
IN
G
R oy al
&
S u n
P ar tn er
R e

10 Costliest Disasters in U.S. History
( by insured loss, 2001 $)
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
$40.2
$19.6
$16.3
$5.9
$ Billions
$3.2
$2.9
$2.5
$2.4
$2.1
$2.0
*Estimate includes propertyand business interruption losses as well as liability, workers comp, life, aviation and other coverages.
Source: Insurance Services Office, Insurance Information Institute.

$20,000
by insured property loss*)
$20,300
$ Millions, Adjusted to 2001 Price Level
Oklahoma City bombing in 1995 cost insurers
$145 million, killed 166, 467 injured
$15,000
$10,000
9/11/01

3,056 Killed

4,000 Injured
4/24/93

1 Killed

54 Injured
6/15/96

0 Killed

228 Injured
2/26/93

6 Killed

725 Injured
$5,000
$907 $744 $725
$0
9/11 Terrorist
Attacks
Bomb Near
NatWest Tower in London
IRA Car Bomb
Near
Manchester
Mall
Bomb in WTC
Garage
*Includes business interruption and aviation hull losses.
Source: Swiss Re; Insurance Information Institute.
4/10/92

3 Killed

91 Injured
$671
Bomb in
London
Financial
District

Industry Losses Under Proposed Federal
Backstop Using 9/11 Scenario
Total Ind. Loss: $10.875B
$30
$14.25B
$19.675B
$25
$20
$2.0B
Industry
Co-Share
$15
$10
$5
$0.125B
Industry
Co-Share
$1.125
$8.75
$1.75B
Industry
Co-Share
$12.50
$0.925B
Industry
Co-Share
$18.75
$0
Year 1 Year 2 Year 3
Industry Retention Surcharge Layer Quota Share Layer
Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPW
Source: Insurance Information Institute.

Property Rating Factors
• Iconic/Trophy Structures
•
Easy-access/public structures
• Structures with govt/mil association
•
Risks whose destruction would severely impact public
(e.g., utilities, infrastructure, transport, energy, etc.)
• Risks proximate to any of the above vulnerable to collateral damage.
Workers Comp Rating
Factors
• All of those for property, plus:
•
Buildings with high concentrations of workers (e.g., office towers)
• Businesses in certain industries attractive to terrorists (e.g., chemical, energy, haz. materials, sports/entertainment, aviation)
•
Nuclear, Bio, Chem. exposure
*Sample factors. List is not exhaustive and underwriting practices and philosophy will vary by insurer.
Source: Willis, Insurance Information Institute

• On balance, results favorable to insurance industry
•
Chance for Tort Reform
• Asbestos Reform
•
Federal Med Mal Tort Legislations
• War: Probability enhanced—increases uncertainty
•
Investment Impact Unclear

Corp governance still unresolved (e.g., no SEC head)

Big budget deficits could bring higher interest rates as econ recovers
•
Fed vs. State Reg: Likely No Action
•
Tax Issues (e.g., corporate income tax, tax havens)????

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