Insurance Market Report 2002 The New Uncertainties Allen

Insurance Market Report 2002 The New Uncertainties Allen F. Hyman Managing Director Marsh Industry Practices

September 11, 2001

September 11, 2001: New Dimensions of Risk n Targets of risk n Financial size of risks n Concentrations/Aggregations of risk n Spread of risk

September 11, 2001: New Dimensions of Risk n Target – Who is vulnerable? n Size n Concentrations/Aggregations n Spread

September 11, 2001: New Dimensions of Risk n Target n Size – Probable maximum loss – Wide range of estimates n Concentrations/Aggregations n Spread

The Worst Terrorist Attacks: Insured Property Losses Event Country Amount ($USB) Year WTC, Pentagon US 20 -35* 2001 Nat. West bombing UK . 9 1993 Manchester, car bombing UK . 7 1996 London, financial district bombing UK . 7 1992 WTC bombing US . 5 1993 * Includes business interruption

September 11, 2001: New Dimensions of Risk n Target n Size n Concentrations/Aggregations – Workers compensation – Other lines n Spread

September 11, 2001: New Dimensions of Risk n Target n Size n Concentrations/Aggregations n Spread

September 11, 2002: Lines Affected n Property – Physical damage, $10 -15 B – Business interruption, $10 -$20 B n Third-party liability, $10 -$20 B n Aviation, $10 -15 B n Life / Disability, $5 -10 B n Workers compensation, $5 -$10 B

September 11, 2001: Responses n Insurance markets n Insurance buyers and their brokers n Governments

September 11, 2001: Responses n Insurance marketplace – Exclusions – Stand-alone market n Insureds n Governments

September 11, 2001: Responses n Insurance marketplace n Insureds – Risk control n Governments

September 11, 2001: Responses n Insurance marketplace – Exclusions – Stand-alone market n Insureds – Risk control n Governments – Relief legislation – Pools – “Catastrophe rate load”

One Thing That Hasn’t Changed: The Question of Insurability n Is terrorism insurable by private sector? – Degree of uncertainty? n Need to quantify exposures – Computer modeling – Account for new variables 8 Northridge “Blind-thrust” faults 89 -11 Concentrations/ Aggregations of risk

As if 9 -11 Wasn’t Bad Enough. . . n. Enron

Property/Casualty Insurance Industry Overview

Changes to Policyholders Surplus: Signaling a Hard Market Data Source: A. M. Best Company Start of Hard Market 2001 (est. ) 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 Start of Hard Market

A Historical Perspective The Pain Threshold

Market Symptoms n 1976 – Affordability – Gov’t a relatively unknown as exposed – Civil Rights – Workers Compensation – Immunity – GL too broad

Market Symptoms n 1983 -85 – Availability – Affordability – Cash Flow Underwriting – Interest Rates - high – Combined ratios – high – Rejection of classes of business – Insurance became political

Market Symptoms n 2001 – Years of soft market – Record Dow indicators – High combined ratios – Reinsurance shift – Coverage constriction – Retention increases – Limit reductions – 9/11

Premium Increases 720% 122% avg

Timeliness of Final Quote

Terms of Retention (Increase or Decrease) 91% avg

Change In Limits Increase -14. 5% avg incl “no change” -32% for those who had a change

Did you have terrorism coverage before?

Was terrorism offered at renewal?

Did you buy terrorism?

Consolidated P/C Industry Net Income (US$B) Data Source: A. M. Best Company

Net Premium Growth (% Change) Data Source: A. M. Best Company

Consolidated P/C Industry Combined Ratio Data Source: A. M. Best Company

Insurer Financial Performance (US$B) Data Source: A. M. Best Company

Policyholders Surplus (US$B) Data Source: A. M. Best Company

Where Have All the Profits Gone? Volatile Variables n Investment income – Low interest rates n Catastrophe losses

P/C Insurers’ vs. Reinsurers’ Combined Ratio Data Source: A. M. Best Company

Impact of Catastrophe Losses on Combined Ratio (est. ) Data Source: A. M. Best Company

The Worst Catastrophes (including liability awards) Event Country 1. Tobacco industry award 2. World Trade Center attacks 3. Asbestos 4. Hurricane Andrew 5. Northridge earthquake 6. Alaska oil tanker spill 7. Silicone breast implants 8. Typhoon Mireille 9. Winter storms Lothar-Martin 10. Hurricane Daria US US Japan Europe Amount ($USB) 145 40 -70 30 -60 18. 6 13. 8 9. 0 5 -7 6. 0 5. 7 Year 1999 2001 1990 s+ 1992 1994 1976 1990 s 1991 1999 (Continued)

The Worst Catastrophes (including liability awards) Event Country 11. Hurricane Hugo 12. Auto fuel tank explosion 13. Autumn storm 14. Hurricane Vivian 15. Hurricane Georges 16. Intrauterine devices 17. Tank car chemical leakage 18. Piper Alpha oil rig explosion 19. Leaking chemical pipe 20. Kobe earthquake Puerto Rico US Europe US/Caribbean US US UK US Japan Amount ($USB) 5. 5 4. 9 4. 3 4. 0 3. 5 3. 0+ 3. 0 2. 8 2. 7 2. 6 Year 1989 1999 1987 1990 1998 1969 -75 1997 1988 1970 s/1980 s 1995

Medical Inflation Annual change in average total health benefit cost, 1987 -2001 (%) NOTE: Results for 1987 -1998 are based on cost for active and retired employees combined. The change in cost from 1998 -2001 is based on cost for active employees only.